Column: New 401(k) fee disclosures call for new strategies
(The author is a Reuters columnist and the opinions expressed are his own.)
By John Wasik
NEW YORK (Reuters) - If you're in a 401(k)-type plan, you soon will receive statements from your employer on how your funds are performing and what they are costing you. You should see a first report by August 30 and receive more detailed quarterly statements by November 14.
Don't throw them out. If you ignore them, it may cost you dearly. The disclosures could be a call to action to improve your retirement prospects.
What can you do with this information, mandated by new U.S. Department of Labor rules? Benchmark and balance. This simple strategy will not only help you improve returns, but align your portfolio to where you are in life.
The first round of disclosures will give you performance data on variable and fixed-rate funds, annuities (if offered) and comparative benchmarks such as the S&P 500 Index. You'll also receive cost information in the form of fund expense ratios, expressed as annual percentages, or cost per $1,000 invested.
How much are you actually paying for your plan? Those expense ratios are helpful; you can use them to find cheaper and better-performing funds. But you may have to wait until later this fall for the quarterly statement that will break out actual dollar amounts you pay for your plan. This is when "net" costs to you are provided, that is, what you're really paying for total plan expenses. Those dollars may be higher than you expect.
Sometimes employers pick up the tab for expenses such as plan administration and recordkeeping, but in most plans you pay those bills. They may be buried in higher fund expenses or, less often, they may show up separately as charges, or not show up at all. (Sometimes so-called revenue-sharing payments to plan providers only show up as reduced performance.)
You'll also see any extra fees you may have paid for services -- if you've been charged for taking a loan out of your account, for example.
Are you paying too much? It will be hard to tell. You'll need some gauges to see if your plan is overpriced.
Your first benchmark is cost comparison. You'll pay an average 1.9 percent expense ratio for small plans and 1.08 percent for large ones, according to the U.S. Government Accountability Office. Larger plans -- over $10 million in assets -- generally have better economies of scale, so they'll charge you less. Plans run by brokers and insurers tend to cost more.
If you want to do some more digging, you can ask your employer for administrative costs. They should have this information, but it's a level of detail that might be confusing.
As a good rule of thumb, whenever you can get total expenses under 1 percent, you're doing well. You can reap the most savings by shifting from actively managed to index mutual or exchange-traded funds. Actively managed stock funds range from 1.5 percent on up, compared with 0.20 percent for a plain-vanilla S&P 500 index fund.
Your savings are easy enough to calculate, using the cost analyzer at the U.S. Securities and Exchange Commission website (here ). Let's say your plan charges you 1.5 percent annually. You have $100,000 and are earning 5 percent a year. After 30 years, you'd have about $275,000, but you would have given up about $158,000 to fees and foregone earnings.
What if you or your employer were to bring total expenses down to 1 percent? You'd be $45,000 richer after the three decades, having paid $112,500 in total expenses. You could do some traveling or pay some unexpected medical expenses with that money.
Sometimes cost alone doesn't tell the whole story, though. I ran another comparison of a bond fund I own in my 401(k) that showed cost of ownership on the same line with total after-tax returns. Even though there were funds that cost half as much, the more expensive fund I owned had more than eight times the total return of some of its peers. I did my analysis on the personalfund.com website, which gives breakdowns of specific fund expenses and costs over 30 years.
Once you've done your expense benchmarking, you need to find some diversified balance in your plan. Consider your age and proximity to retirement. Can you afford broad stock market exposure? Use a simple ratio that matches your age to the percentage of money you hold in bonds and cash. The older you are, the lower your stock allocation. This is a rule-of-thumb formula often advocated by Vanguard Group founder Jack Bogle.
You can always alter your mix based on your risk tolerance, pension situation and other assets. Let's say you have a bond portfolio outside your 401(k) and are eligible for a guaranteed, defined benefit pension. Then you may be able to invest more in stocks.
What's an ideal mix of investments? It depends on your risk profile: aggressive, moderate or risk-averse. To benchmark the balance that's right for you, look at existing portfolios and how they perform in up and down markets. One good place to start is the management company that offers your 401(k) funds. Most have asset allocation tools on their websites, which should be listed in your statement. You can also consider the many portfolios at MyPlanIQ.com.
If your whole plan is expensive, you can try to convince your employer to shop around for a brand new plan. If it does its job as a plan sponsor and, at a minimum, adds index mutual, exchange-traded or institutional-class funds, your savings will be immediate and you will be directly investing instead of lining the pockets of middlemen.
(Editing by Linda Stern and John Wallace)
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