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Protecting your 401(k) from excessive costs

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Many Americans focus their retirement savings plans almost exclusively upon their 401(k) plans through their employer.  But, high fees cost Americans tens of thousands of dollars over the course of their working lives.  Those plans have costs that are deducted from your investment each year.  According to online financial advisor, FutureAdvisor, a working couple could lose over $150,000 in retirement savings just from fees.  Those fees don’t look like much, usually in the neighborhood of half a percent to somewhere around 2 percent but the long term effect of lost returns added to the cost of fees on higher balances can hurt your savings.  For instance, a person with a low balance of less than $50,000 might pay less than $100 a year.  But, by the time an individual has contributed over a lifetime of working, the fees can add up to several thousand dollars a year in cash and lost wealth building opportunity.  In addition, some employees must also take on additional costs such as trading and operating fees to pay for the plan.  You’d think the higher fees might be to compensate for higher earnings but FutureAdvisor found just the opposite.  They found that lower fee funds tended to outperform higher fee equivalents.

Fees are generally higher at smaller companies of 1,000 employees or less, as those companies have less negotiating power with the financial firms but that’s not always the case.  If you’re unsure how much you’re paying in fees or how much a balanced portfolio should cost you within your 401(k), you can browse the listings on to get some sense of the costs.  Last year, federal rules went into place that required plan providers to be more transparent about the fees they charged.  But a recent survey found that the same percentage of people who didn’t know their fees in the year previous to the change continued not knowing their fees afterwards.

This Tuesday, the Supreme Court will hear arguments about excessive 401(k) fees charged by a company.  Employees of Edison International argue that the company has a fiduciary responsibility to act in the best interests of its employees.  According to the suit, employees argue that the company breached this responsibility in six of its fund options.  The court will consider whether plan sponsors have a duty to monitor a plan’s fund offerings beyond a current statute that limits suits to within six years.  A ruling supporting the 401(k) participants would require that employers must use their buying power to get the best deal for their employees. Depending upon the outcome, there may be quite the backlog of suits in the pipeline from others.

In a separate but related story, President Obama wants to strengthen the current requirement that financial advisors recommend only “suitable” products for clients to one of fiduciary responsibility.  Suitable simply means that a broker must believe that a product by suitable for the client.  Fiduciary is a legal standard that would make advisors liable for bad advice or products.  Fiduciary requires that advisors place a client’s interest above their own.  Currently, an advisor can steer clients towards products with high fees and lower returns in order to increase their own compensation.  The White House estimates that conflicted advice costs retirees $17 billion.  According to some research, the current system can cut an individual’s savings by more than 25 percent.  Here’s another story about how you can lose assets you have in your 401(k).

So, if you have a company 401(k) and you suspect you are paying too much in fees, how do you go about making changes at work to provide better choices?  That’s an article from this weekend’s The Wall Street JournalAmong the recommendations is to make the case tactfully.  After all, even in some large companies, the people in charge of making the decision about 401(k) benefits may not know much more than the average American about 401(k) plans.  If your company’s 401(k) plan is listed at FutureAdvisor or BrightScope, you’ll find rating systems that can shore up your arguments and help you do the homework necessary to make your case.


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