When I was managing employer 401(k) plans I was frequently asked by employees how much they should contribute to the plan. My answer was always the same, no less than required to get the full company match and as much as you possibly can. Employees have to do their share, but to make a plan successful the plan sponsor must do its part too. That includes, a reasonable (but not too great) selection of funds, an employer match in cash, not company stock and managing the plan with the lowest possible fees and expenses.
Plan fees eat up your earnings growth over time. Consider this example from the U. S. Department of Labor:
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. That 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent. That’s a big deal— and a lot of money for anybody to lose to fees.
The plans I managed had a expense of 0.18%. That’s low and the fact they were very large plans helped a great deal. Smaller plans will have higher expenses. What also helped was using index funds rather than individually managed mutual funds. My favorite is Vanguard funds, but that’s just me.
In addition, there are expenses associated with administering the plan. There are two ways to handle this expense. Plans can hire a record keeper with a fixed negotiated fee, say $x per employee per month which makes the most sense. The other option is to use the services of a bank or investment organization where the fee is a percentage of the assets in the plan. More assets, higher fees but the growing fees are unrelated to the additional work being performed so why should admin fees go up simply because investments grow. Here again though, larger plans have the advantage.
Know what investment and administrative fees are being deducted from your 401(k) account. Employers are allowed to take expenses (not all do) for a wide variety of administration associated with the plan, plan communication for example. Ask for the information each year; you are entitled to it under the law. Question the fees on each investment fund offered in the plan; could using index funds be a better overall value for long-term investors?
As an aside, don’t make the mistake of thinking your are “saving” in your 401(k) plan, you are investing and there is a big difference. Investing takes work, research, understanding and ongoing attention to detail … Like the fees you pay that cut your net return.
For more information on 401(k) plan fees, visit this site from the US Department of Labor. It contains information on your right to information.
Remember, this information is important to you if you have a 401(k) account balance whether you are retired or an active employee.
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When I first started investing in my 401 the only option was company stock. Fortunately that worked out very well for me. As time went on the company opened up the 401 to other options. I did not take advantage of those options until about the last five years I was in the fund. then I took an active role. I was lucky and did very well. I now have a substantial amount of money in my IRA. Paying attentionto what goes onin your fund is very important. You don’t have to gamble with your money. You just have to move it to where it makes the most money. Look at the funds availoable and move into the ones that are to your advantage.
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I would say you we’re very lucky. Fortunately, not having a fair mix of funds is no longer permitted.
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I have one fund with Vanguard that is a Roth IRA. What fund do you suggest in today’s market that would bring me some value. I am very conservative and currently have it in a Prime money market and it is earning very little.
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Sorry, I am not qualified to suggest any specific investments. As you already know, money market funds are not going to get you the growth you need.
Part of the answer will be in how long you have before you will need to use the funds in your account. The longer period the more risk you can take. Vanguard is noted for low cost funds so you might want to look at one of their stock index funds for at least some of your account. No doubt there are other similar funds to consider as well.
I too am conservative when it comes to money, but being overly conservative many years from retirement puts you at risk for not having sufficient income when you do retire.
It’s your money and you have to sleep at night, but you need to consider the longer term objective for your money.
There are also target date retirement funds that put your investment at less risk as you get closer to retirement and do that automatically.
You really need to speak with an investment professional who can assess your situation and make specific recommendations.
Dick
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The example provided by the dol is contorted to overstate the result. It assumes you have saved $25,000 by age 35 and then save no more. Further, it assumes the returns are the same – same risks, same expertise, etc …. Suggesting it is within the participant’s choice and control to select among two investments that are the same all but fees. And, it overstates the prominence of fees ,,, in the larger context. It is just the latest of many suggestions and statements by the dol, going back 15 years that suggest participants are overcharged. All studies confirm fees are a function of plan size – more than any other variable – but the dol rules don’t even mention plan size. As you say, size matters! That is unless you have an agenda to deceive and mislead. The consequence is to spur on the plaintiff’s bar – which will increase the cost to the plan … With little effect. All studies to date suggest few noticed the fee statements – we’ll see if the lawyers took notice.
Finally, they chose indices to compare against actively managed funds because the index was not easily manipulated and easy to understand. -of course, no one cares whether indices are a valid comparison because the focus is solely on fees.
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