Much has been written about the sorry state of retirement readiness in the United States. In fact the most frequently asked question that I get is Can I Retire?
For better or worse, the primary responsibility for accumulating sufficient assets for retirement has been placed upon our shoulders in the form of defined contribution retirement plans such as the 401(k), 403(b), etc. The defined benefit pension plans of our parent’s generation are rapidly fading away.
It is important that you make the most of any workplace retirement plan available to you. New required disclosures about the costs of the plan and the underlying investments were introduced in 2012 and are a good start. However, 401(k) plans are still a mystery to many of the workers who participate in them and sadly to many of the employers sponsoring these plans. Here are 4 signs that your 401(k) plan might be lousy.
By this I mean your 401(k) plan provider or a brokerage firm affiliated with the plan offering their own mutual funds. The most extreme recent example of this is Ameriprise Financial who is being sued by a group of current and former employees for allegedly stuffing the plan offered to company employees with poor performing, high cost funds offered by Ameriprise. To boot they are also accused of taking revenue sharing payments from these funds.
While most examples are not this egregious, it should be a red flag if your plan is stuffed with funds or annuity sub-accounts from the likes of John Hancock or Principal and they also happen to be the provider of your retirement plan. There are often many incentives to be had by servicing brokers and other service providers to offer this type of line-up. While they are making money off of this type of plan, such an arrangement might be costing you big-time.
Single Fund Family Line-ups
For years the broker/registered rep community would offer a line-up filled with funds from the American Funds. These were often the best funds that they could sell and they rightly had a good name.
Just as bad is a line-up dominated by Vanguard or T. Rowe Price funds, or any other single fund family for that matter. Even though I highly respect both companies, no single fund family offers the best option in every asset class.
Expensive share classes
In many cases mutual fund companies offer a variety of share classes for use by various financial advisor channels ranging from fee-only RIAs to brokers and reps seeking compensation from selling the funds. In many cases the fund families offer several retirement plan share classes as well, again with some offering compensation to the advisor directly or to the retirement plan.
Check out the funds offered in your plan via Morningstar or elsewhere to see if there are less expensive share classes of your fund that are available. This even extends to low cost index fund providers like Vanguard who offer share classes which carry a lower expense ratio that the basic Investor share class.
A group annuity plan
This was the traditional fare for plans offered by insurance company providers. They are still around but if your employer’s plan is still in this format it is likely small in size or it has been in a group annuity for awhile.
A group annuity plan generally offers either mutual funds or annuity sub-accounts that are “wrapped” into a group annuity. These are complicated and generally expensive insurance contracts that often don’t bestow any particular benefit on the plan participants. In fact some plans carry surrender charges that make it difficult for employers to change providers.
- If there is a company match it often makes sense to contribute enough to receive the full match. This is free money you shouldn’t leave it on the table.
- Do your homework and say something to those in charge of administering the company’s plan. This may or may not result in things changing, but many employers are more sensitive to this type of input in light of the current trends toward more disclosure and transparency.
- If your plan offers a self-directed brokerage window check this option out. Understand the costs and any limitations involved. Also make sure that you are comfortable choosing your own investments or that you have an advisor to assist you.
- Focus on retirement savings vehicles available outside of your plan including an IRA, maxing out a spouse’s retirement plan (if it’s better than yours), investing in a taxable account, or a low-cost annuity (ideally one with no surrender fees).
- Make sure not to leave your money in this plan when you leave the company, roll it over to an IRA or to a new employer’s plan.
We are increasingly responsible for our own retirement savings. It is important that you understand how to best utilize the retirement plan offered by your employer. A good plan can be an invaluable tool in reaching your retirement savings goals. A lousy, expensive plan can cost you $1,000s in lost retirement savings and might be the difference between retiring in style or settling for less in your Golden Years.
Please feel free to contact me with your retirement planning and investing questions.
Retirement plan sponsors, do you need an independent review of your company’s plan? Do you need help selecting a new plan provider? Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees? Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.
For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) plan options and to get a free trial for their premium services. Please check out our Resources page for links to some additional tools and services that might be beneficial to you.
Update 2/27/13: It has come to my attention that a Tom Gonnella from Lincoln Trust Company has seen fit to use this post in an email to 401(k) advisors promoting their 401(k) platform. While I am flattered on the one hand, please know this was done without my knowledge or consent. I in no way, shape, or form endorse Lincoln Trust Company or its products. I will leave it to you the reader to judge the ethics of Mr. Gonnella and/or his employer in this matter. - Roger Wohlner
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