The Hidden Costs of Your 401(K)

A Personal Note Perhaps you are thinking about retiring or you have had several jobs over the course of your career.  If you worked in corporate America, chances are you have one or even several retirement plans at the companies you have worked.  In our busy lives, we often forget about consolidating these plans or just figure we will leave it alone and come back to it later.  Many individuals feel this is often the best  choice because it’s free, regardless of how poor the investment options may be.      Unfortunately, these plans are not free!  They have many hidden costs and may not be meeting your investment goals.  The New York Times recently had a great article about the costs hidden in 401k plans.  Read below for more information. Warm regards, Catherine Maniscalco Avery CAIM specializes in creating and managing customized and fully diversified investment portfolios for private investors. 203.966.2712  p 203.966.5697  f www.caimllc.com The Hidden Costs of Your 401(k)      Most people believe their 401(k) is free.  It isn’t.  In fact it’s probably costing you tens of thousands in lost retirement money over the course of your career.  So says Ron Lieber in his recent New York Times article: Revealing Hidden Costs of Your 401(k).      Why?       One of the biggest underlying costs involves the mutual funds in these plans. Costs of mutual funds      There are various administrative fees with a workplace plan and they are embedded in the expenses of many of the mutual funds you pick.   The practice, known as revenue sharing, means that fund companies refund some of the expenses to the service provider running your plan to pay for your costs.   The downside of this set-up is that it’s the big savers and people investing in actively managed mutual funds who get punished since people with higher balances and higher expense ratios on their investments end up subsiding their fellow workers. Details      Lieber explains it this way:  Say 20 basis points of a retirement plan participant’s fund expenses go toward administrative costs each year, someone with a $100,000 balance contributes $200, 10 times as much as the $20 paid by someone with an identical allocation, but only a $10,000 balance. Fair & Equitable – or Not?      Some may shrug their shoulders at this.  After all it’s the way mutual funds outside of a 401(k) work too.  Many see the set-up as fair and equitable and a way to encourage younger people and lower paid workers to participate without being scared off by a flat annual fee.      Still others have a problem with this Robin Hood approach and point to the cross-subsidy issue as another example of the current inequities in retirement plans.       “Let’s say an employer sets up a retirement plan that has some expensive actively managed funds that engage in revenue sharing and some cheaper Vanguard index funds …The people in the active funds will be paying the administrative costs for the retirement plans of those who are only in the Vanguard funds,” says Lieber. Labor Dept to Step In      All this should change in 2012 when the Labor Department, which oversees 401(k) plans, makes investment companies itemize all the various expenses employees are paying and separate the underlying mutual fund costs as distinct from the administrative ones.  Workers will also receive account statements that make mutual fund fees clearer and show that revenue sharing is going on.      Lieber concludes that the Labor Department is hopeful that these new disclosure rules will lead to some good old-fashioned consciousness-raising, particularly among smaller employers that often have no idea that any of this is going on behind the scenes. Copyright 2011, CAIM LLC Disclaimer: NO CONTENT PUBLISHED AS PART OF THE CAIM LLC NEWSLETTER CONSTITUTES A RECOMMENDATION THAT ANY PARTICULAR INVESTMENT, SECURITY, PORTFOLIO OF SECURITIES, TRANSACTION OR INVESTMENT STRATEGY IS SUITABLE FOR ANY SPECIFIC PERSON.  TO THE EXTENT ANY OF THE CONTENT PUBLISHED AS PART OF THE BLOG MAY BE DEEMED TO BE INVESTMENT ADVICE, SUCH INFORMATION IS IMPERSONAL AND MAY NOT NECESSARILY MEET THE OBJECTIVES OR NEEDS OF ANY SPECIFIC INDIVIDUAL OR ACCOUNT, OR BE SUITABLE ADVICE FOR ANY PARTICULAR READER.  EACH READER AGREES AND ACKNOWLEDGES THAT ANY SPECIFIC ADVICE OR INVESTMENT DISCUSSED IN THE BLOG MUST BE INDEPENDENTLY EVALUATED BY THE READER AND HIS OR HER ADVISER IN VIEW OF THE READER’S INVESTMENT NEEDS AND OBJECTIVES. For those of you with questions, feel free to call me at 203.966.2712 or visit www.caimllc.com   *Please pass along this newsletter to friends and family*  to spread the word!