If you haven’t brought up the subject of 401(k)s at your holiday office party or year-end chat with managers, now’s the time.
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You could be getting a rotten deal on your 401(k) plan, but not even know it.
Surprisingly, despite a new wave of expense disclosures mandated by the U.S. Department of Labor last year, only 12% of workers surveyed by the LIMRA Secure Retirement Institute, an insurance research organization, “were able to estimate how much they pay in [401(k)] fees.”
So either employees are still befuddled by the idea of vetting their 401(k) plans for expenses, or they don’t think they can do anything about it. Or maybe both.
While I don’t think the DOL’s disclosure forms are all that helpful — they don’t tell you in relative measures when you’re being overcharged — they can open the door to lowering your plan costs. Here are four strategies to ensure a better deal:
* Have your employer hire an independent fiduciary who specializes in defined contribution plans. Nearly any major benefits consultant can track these specialists down.
The key title is “independent fiduciary.” That means they are not brokers, don’t work for a mutual fund or insurance company and are legally responsible for finding the best deal. They are not on commission and will not sell anything except their advice. Their job is to vet middlemen like recordkeepers and fund managers to find the best product and service at the lowest cost.
* Have the fiduciary compare your plan to similar plans and benchmark it. While you or your employer may be able to do this, this is an art form that requires some specialized knowledge.
A service such as Brightscope can give you some comparative information on 401(k) plans they rate, but you’ll really need to know “what’s the best deal we can get on fees and service given the size of our plan and number of employees?” A fiduciary can do that — and they have no stake in the providers they identify.
* Use Market Forces to Get Providers to Compete to Offer the Best Deal. Since there are hundreds of companies offering everything from recordkeeping to mutual fund management, there’s lots of room to negotiate.
In the exchange-traded/mutual fund business alone there’s been a quiet price war going on in recent years. Fund fees have dropped and are still coming down! Who’s waging the battle? All the major players from BlackRock (iShares) to Schwab.
Although most employees toss their fee disclosure documents in the trash, some employers have certainly wizened up to some degree. Here’s what Darla Mercado in Investment News recently said about retirement plan price competition:
“The fee disclosures also have been helpful in the continual slide in 401(k) fees on the asset management side as managers have broadened their share class offerings to accommodate cheaper institutional shares. For instance, this year, ING U.S. launched its R6 share class, and Fidelity Investments released its Z share class, which has no revenue sharing. Fidelity also slashed fees on its target date offering, the Fidelity Freedom Index Funds, to 16 basis points, from 19 basis points, undercutting the Vanguard Group Inc.’s target date fund offering by two basis points. Eventually, those lower investment costs will creep down market.”
The idea here is to cut out as much middleman profit while maintaining a high level of service. A fiduciary can ferret out the fluff in payments made to middlemen through “revenue sharing,” which eats into how much of your retirement money is actually invested.
* Get your fund providers to find the cheapest share class. Mutual fund providers have several classes of shares with different expense levels. It can get really confusing, but a fiduciary can bargain for the cheapest share class, which is often the “R” class noted above. Better yet, find a provider who offers an exchange-traded fund platform or “institutional class” shares at rock-bottom rates.
This is all good news for you the employee, but you have to ask your employer to get on the ball to get things rolling.
They can’t reap savings — which go directly into your retirement kitty in the form of higher nominal returns — unless they take some action.
Talk this up among your fellow employees and managers before the end of the year. It’s a win-win situation for employees and employers alike: Their retirement money is in the same pot.
John F. Wasik is an investor advocate, journalist, speaker and the author of Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist and 13 other books.
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