There are many large and small plans that have fees that are excessive, and either your plan administrator chose to ignore them (probably because their golfing buddy is the advisor), or your greedy advisor forgot to mention the hidden fees. TPAs or third party administrators should also be included. They like to be the innocent bystanders, but they know enough about plans to tell you.

The typical response from a plan administrator, CFO, or executives who know little about 401ks is,”We know what we pay”. That could be further from the truth. Once a company starts a 401k it becomes a right of the employees, and not a benefit. Executives ignore the fact that they are fiduciaries of the plan and personally responsible for the well being of it – that means making sure that the plan is well priced and consistent investment advice is given.

Don’t believe me? Talk to Southern California Edison, Catepillar, and other major companies that have class action lawsuits against them for faulty 401ks.

Employees have the right to know what they pay. Too many insurance companies, and advisors have taken advantage of high fees for too long.

This plan imbalance will cause testing issues which will cause refunds, usually for the executives or highly compensated employees. There are two types of testing involved:  one is called ADP or Average Deferral Percentage, and the other is called ACP or Average Contribution Percentage. Each deferral or contribution is determined by the number of highly compensated employees versus the non-highly compensated employees. The reason for these tests is to ensure that there are no discriminations against the non-highly compensated employees.

When performing the test, all active and terminated employees are taken into account. If the test fails, it is usually from the highly compensated employees, and for the plan to pass testing, refunds will have to be taken by the highly compensated employees for the plan to be in compliance.

The typical answers to cure the testing issues is for the plan to have Safe Harbor. Think of Safe Harbor as a passage way for all employees to defer up to the IRS limit of $16,500 annually. Most Safe Harbor plans need a minimum of 4% that is matched against the employees contribution. Anything less than the 4%, the employees would not be able to defer up to the $16,500 without failing the testing.

Companies that have reduced their matches, have failed testing and this is where your third party administrator or adviser should understand what to do. If they don’t know what to do other than recommending Safe Harbor, then I would look for another adviser or TPA. The answers are within the IRS 410b codes, and it doesn’t take much energy to read them and figure out what to do.

Lack of knowledge in this area especially for a TPA is a troubling sign. Unfortunately, there are no licensing requirements to become a TPA, and many companies are misled on how to administer their plans.

The sad thing is that the employees are the number one asset in a company. Employees are the lifeblood of the company, and too many of these executives think of it as a self-sustaining entity instead of a collection of people. Taking care of these people should be the priority of any company, but unfortunately that is really never the case.

What is the first thing that the employees should look at when looking at their statement? Don’t bother looking at the statement. You will never really know how much you are paying since the original costs are stated on the contract with your company. It is done on purpose with plan companies since there charge fees they do not want you to know about.   Most of these plans are created by insurance companies, and most of these companies are rarely upfront about their fees. Google the article “Retirement Plans From Hell” and you will get a good idea of what is going on with retirement plans.

Spring of 2012 (it was pushed back by the insurance companies twice) is when all plan companies have to reveal their fees. Many of these insurance companies are pushing back the deadline, and scrambling. Some companies are being put in multi-year agreements for lower fees. Even though this seems preposterous, nonetheless the plan administrators are falling for these marketing ploys.

Back to fees, I know of a large grocery store chain that is being charged 25 bps or .0025. This may not seem significant to your statement, but if the company has a 500 million dollar plan it works out to 1.25 million dollars that is being paid to the adviser. That is a log of jobs during this recession, and if people are laid off in your company, you would think that the company would look at cutting these expenses, and saving jobs.

If you don’t know what investments to pick, and what the blend of investments to put in your portfolio the easiest way is to figure out the investment model of the company hosting your plan. I doubt that you would be ever able to talk to the adviser of the plan, and the 800 number they provide you is not that significant. The people on the other end of the phone are not licensed in the securities business, and they can only give general advise to you.

If you work for a large company, you are really lost at sea with your 401k plan. The best way is to keep a conservative philosophy and just save your money.

I recently saw a private school system that dropped their 401k. They were a non-profit organization and should not have been in a 401k in the first place, but a 403b, but that is another subject. I have no idea how a school could neglect the retirement savings for the teachers. This school is one of the “revolutionary” schools, but it seems prehistoric in the benefits they provide –  stupidity to the Nth degree.

1st Danger Sign

One of the danger signs of a poorly managed retirement plan is not seeing the financial adviser. You may have a better chance seeing a UFO or the Loch Ness monster.  When was the last time the adviser took the time and shook your hand? An adviser is getting paid for their services (usually 50 basis points per 1 million in the plan – which equates to $5000 per year) and should speak with the employees at least once a year. Employees should have the ability to call the adviser, ask questions about their retirement goals, and get some sort of feedback. Does this happen in reality? No, but you, the employee, are paying for the lazy adviser to get off their butt and talk to you. Unfortunately, most advisers are interested in managing the personal assets of the owner or executives. This is a type of an adviser that should kicked to the curb.

How The Executives At Your Company Are Clueless

Executives are fiduciaries of the plan, and are responsible for the well-being of the plan. You probably didn’t know that, and neither do the executives. Only when a class action complaint hits the company (with mis-managing the retirement plan) do the executives get a clue. It is similar to  the story of trying to put a stop sign at your corner. Cars never seem to slow at that intersection, and only when a child is injured or killed, does the town administration takes notice and a sign is installed. The thought of using preventative measures is something that is lacking in our society, and will always be lacking. The stupidity of people never surprises me. The sub-prime market and the lack of forward thinking (Gee, how am I going to pay for this house with no money down?) and how it impacted out economy is a perfect example.

The executives need to put a process in place to help the employees with their retirement. That is a fiduciary process that is part of their job, and they are personally liable for the welfare of the plan. Do the executives ever care? No, but wait till they get sued.

The 1-800 Adviser

Another danger sign of a bad retirement plan is one without an adviser. There are many plans that are “direct” meaning that there are no advisers attached to the plan. You have to call the 1-800 number to receive any kind of advice. Companies have direct plans to save on costs, but because the owner or executives are too cheap or stupid, they don’t realize that they are personally responsible for the plan. This harps back to the beginning of this article when I said “afterthought”. Large companies with direct plans are prime targets for law firms looking for class action suits.

1-800 operators for direct plans are a complete waste of time. They are not licensed to give advice, but are robots reading scripts and guiding you through a worthless process. And  guess who is selecting the investments? It is either the human resource or owner selecting the assets and they have no clue. You essentially have the blind leading the blind. Only when another market crash occurs will they wake up.

Fee Disclosure

The third warning sign is the lack of fee disclosure. Ask your human resource person when was the last time the plan was changed. Or better yet, when the fees were reviewed and adjusted to competitive rates in the marketplace. More than likely nothing has been done, since the executives are suffering from a lack of humility and geniuses in their own mind. High fees will be eating at your retirement funds like termites on virgin wood. More than likely, your investments will suffer from these events and fail to compound.

There are a number of companies that have their plans with advisers who are insiders. Usually the executives are friends with the adviser’s relatives or some other nonsense. In these cases, and there are many, look at the size of the plan and see what the advisers are charging. There are plans that have hundreds of millions of dollars and are being charged 25 basis points by the adviser. So the adviser is getting paid $250,000 for a 100 million dollar plan. What adviser is worth $250,000 for a plan is beyond me – sounds like the one million dollar toilet seat ordered by the Air Force.

If you find that your plan is this large and has these types of fees, I would Google several legal firms that specialize in class action lawsuits, and ask them for their opinion. Class action lawsuits serves a great purpose, and it is to keep the industry in check.

The Most Dangerous Sign

The last sign is the payoff. Usually you get a crooked adviser who kickback fees to the plan administrator (usually the CFO). If your plan has  changed every 2 to 3 years, this is a sign that the plan administrator of your company is probably on the take. Most plans should stay in place for years, unless there is an industry shift in pricing or assets. Contact the Department of Labor, and inform them of the suspicious activity, and explain what you suspect. I have seen a plan that was changed 4 times in 5 years. It was fairly evident that the plan administrator when they told me not to contact them again. Gee, I guess I will have to call the Department of Labor.

It is your right, as an employee, to question your plan since it is the only thing you have that can take care of your future. Don’t let the executive or adviser clown ruin your financial future. Take action.

We are asking the following question.  What does that statement above really mean to the average person and how will it impact them and their 401k or their retirement for that matter?

Perhaps we are cynical, but the quick answer is not much change for the average person.

So what if these companies who are making millions off of you and I disclose what they are really charging. Do you think that the government has enough power to really make a change happen with all of the lobby groups working hard to avoid any change at all.  At the very least, if they are successful, it will take several years before our government can enact any laws or force these companies to lower their fees. The best thing coming out of all of this discussion is that investors will have a much better understanding of the fees and can make better a selection of the funds that they invest in.

The politicians will make a big deal about disclosure and how they have helped the common person, however the real change will be either insignificant or not noticed at all by the average person. So what should you and I do regarding these fees? One of our posts outlined all of the fees that an administrator of a 401k fund, administrators of mutual funds and your investment adviser charges. We suggest that you read this post about fees to get a better understanding of the real costs of investing within your 401k through your company or otherwise.

Focus on Investing Wisely and Think Before You Leap

Let’s face it everyone wants to use your money and pay as little as possible to you or make as much as possible using your money. When you invest your money in stocks, bonds or mutual funds, we are basically loaning the funds to a company to use in the generation of revenues for their business. The mutual fund companies and brokerage companies are essentially charging fees to make these transactions and manage the investments the funds make when you invest in a mutual fund. Your adviser is receiving a commission for helping you make these investments. Everyone seems to have their hand out to take a little bit here and there. All of these transaction fees add up to millions of dollars for these management companies.

You must look after your own investments to the point that you have an excellent idea of what you will make with each individual investment and how much you are going to pay in fees, regardless of you participate in a 401k or an IRA. Once you know this information you can make informed decisions regarding your personal investments. If you are in a 401k managed by an administrator, you need to understand the fees that they are charging and make a decision regarding how you want your money invested. Should you leave it were it is or move the funds to an IRA assuming that your employer will allow this?

Buying Company Stock Within Your 401k

For many people this may be an attractive option. Often they are offered incentives such as stock options, dividend reinvestment plans and low administrative or brokerage fees to participate in these plans.  Some employees can make quite a bit of money with these types of plans as well and will often place these funds inside their 401k as a means of tax reduction.

There is a danger when you invest in your companies stock as there is in any company or mutual fund when you overload your portfolio with one investment. The deal sounds so good, that you would be crazy to not take advantage of these opportunities. The stock is increasing, you may also be collecting dividends and your portfolio is climbing like a rocket.

But what occurs when the economy goes into a tail spin or even a depression. What will happen to the value of your investments then? They go down just like everyone’s! Your administrator will continue to get paid their fee in any case for managing your 401k.

Most financial advisers will recommend that you do not place more than 10% of your investments in one stock, bond or mutual fund. The reason for this is diversification and protection from too much exposure to any one investment. This can be a very tough decision to make. Should you continue taking advantage of the many savings in fees that you get, along with the options etc , knowing that you are risking a large part of your portfolio?

Or should you request your 401k administrator to balance your plan assuming that you have this option in your 401k, which of course will incur fees for transactions that take place. The answer depends on a lot of things. Here are some of the issues that you may want to consider:

• Health of your company
• Stock option requirements
• Dividend re-investment plans
• Fees associated with the plan as is
• Fees with the plan if you make changes and re-balance
• Your age
• Number of years to retirement
• Risk assessment and your ability to deal with risk
• What is the worst that could happen
• Can you handle the worst case

These are a few of the issues that all investors should take into account if you are being encouraged to invest your stock options or stock into your 401k that is managed by the company you work for.

Your comments are welcome on this post as usual. Our readers will value any constructive comments that you may provide.

Using Financial Calculators

There are a number of calculators that are available on various web sites that can also help do these calculations without having to rely on your adviser. Once you have a plan in place you can then sit down with him or her to discuss the pros and cons and then make any final adjustments that are needed.

We found one calculator and made a few calculations with various assumptions to illustrate for our readers what they should consider and expect from the results.

Retire at 55 , Freedom 55

We have not heard that term for a few years now due to the recession and many people losing a lot of money out of their 401k plans. For this example, we will assume the person is 55 and will live until the age of 80. We will assume that they receive a company pension when they retire of $3,000 a month and have saved $100,000 in their 401k. Assuming a return of 5% and that the full $100,000 is used by the time they pass away, the pension and savings will generate $3,544 / month or $43,000 / year.

Retire at 60

If this same person decided to work until they were 60, their company pension would increase some amount, let’s assume to $4000 a month and we will assume they can save another $100,000 so they will have $200,000 in their savings plan. As a result they now will $5,300 / month or $63,800 / year to live on. This is a substantial change for only having to work another 5 years.

How Much Money Do You Need to Save To Provide Same Income – No Pension

This is a critical question for many people who have worked all of their lives for a company and do not have a pension plan or found that their companies go bankrupt with no pension provided for them.

At age 55, if you decide to retire without a pension, you will need to have at least $620,000 saved in your 401k to generate $43,000 / year.

At age 60, you will need to have at least $800,000 in your 401k to generate the same level of income as the previous scenario with a pension of $4,000 per month or $63,000 / year.

In both cases this is a substantial amount of money to save and emphasizes the need to begin early to ensure that you are able to live in the manner that your prefer.

Impact of Social Security

If you’re eligible for Social Security, you should also take into account the amount of monthly income you’ll receive from Social Security each month. Someone earning $40,000 per year in 2005 and retiring in 2006 at age 62 would have been eligible for nearly $825 in monthly benefits from Social Security. Someone earning $100,000 in 2005 and retiring in 2006 would have received nearly $1,425 in monthly benefits. These amounts are adjusted every year and obviously depend on the age you retire and the amount you made while working.

Add these amounts as well to your income estimates to assess what you may have to live on.

Return On Your Investments

The amount of money you make on your investments within your 401k is critical to whether you achieve your your goals or not.  A change of 1% can make a difference of $5,000 a year for someone who is retiring at age 60 with no pension and savings of $800,000. This is significant, especially when you consider that the mutual fund companies are taking their fees off the top and doling out what is left to you the investor.

I don’t know about you, but I am going to pay attention to how my money is invested and what the return rate is on my investments in order to maximize my income. Someone who is well diversified, across blue chip stocks and bonds is in a pretty good position, while others who take more risk may make a bundle or lose a substantial portion of their investment.

Each individual investor must take stock of how much risk they can take on and more importantly what the recovery will be if they lose a substantial chunk of their investment. If you cannot handle the risk and cannot handle the loss, then invest wisely and safely. Your returns may be lower, but you will still have your investments in your 401k when it is time to retire.

Can You Save $800,000 in Your 401k?

The answer is yes assuming that you work an average of 35 years at a salary that averages $60,000 per year and you set aside 15% of your income every year in a combination of 401k and savings plans with an average return rate of 5%. Sounds like a tall order but not impossible for a couple working and saving together over their married life and careers.

This is why we have emphasized throughout most of the posts on this blog the importance of starting your savings in your 401k or IRA early, not touching it until it is time to retire and managing your money to maximize the return rate on your investments. Sure you can expect to receive something from social security, but even that is suspect over a 30 year planning horizon. Who knows what will happen over that time frame to the US debt and budgets.

Throughout this blog we have emphasized that you need to take control of your investments and your retirement planning and not leave it to someone else. If you do and are successful, things like company pensions and social security will be icing on the cake and allow you to live in style during your retirement years!

The following is a short list of some of the reasons you might want to consider with drawing money from your 401k:

• Retirement
• 401k rollover  to an Individual Retirement Account (IRA)
• Cash out Your 401k, Pay Your Taxes and the 10% penalty fee
• 401k Loans
• 401k Hardship Withdrawal
• Non 401k Hardship Withdrawal

Retirement

The primary reason to with draw from your 401k is at retirement time. There are a variety of methods to withdraw money, however we will not be discussing these methods in this post. Instead we will focus on some of the other reasons that you might want to with draw money from your 401k. Obviously the longer you can delay taking money out of your 401k, the better off you will be and the larger your savings will be for your retirement.

401k rollover  to an Individual Retirement Account (IRA)

We have focused on 401k’s in this blog, however once you leave a company you may want to roll your 401k over into an IRA.  For many people it is a good choice since it provides control to the investor over the asset allocation and individual assets instead of the 401k provider. You can continue to provide for a comfortable retirement because it allows the investor’s capital to continue compounding tax-deferred while providing maximum control over asset allocation.

Transferring to an IRA is relatively easy. Order a distribution of the current 401k plan assets on IRS Form 1099-R. Once you receive the assets , they must be contributed into a  new retirement plan within sixty days and reported on IRS Form 5498. You can rollover a  401k once every twelve months.

Cash out Your 401k, Pay Your Taxes and the 10% penalty fee

This is one of the worst things you can do.  If you cash out, you will lose out on the decades of tax deferred compounded interest and dividends that this money would have earned. From an investment and retirement perspective this is the worst decision that you can make. Many younger people cash their 401k’s when they change companies and lose out on all of this future income. There is also the tax loss as well, however this is really minor when compared to the long term income loss.

For the record when you cash your 401k, you may end up paying a penalty in the range of 10% and of course you will recapture this income and pay tax on this income. You could even find yourself in a higher tax bracket as well, and pay even more tax.

401k Loans

The government also allows 401k owners to borrow from their 401k savings under special circumstances. There is no tax and no penalty when you borrow from your 401k. While the government places no restrictions on what you use the money for, some employers will place some restrictions on the funds and if you are married may also require that you get the signature of your spouse as well. Check with your plan administrator to determine what restrictions there are.

There are limits to 401k loans. Usually an employee can borrow up to 50% of the vested account balance to a $50,000 maximum as long as you do not have other loans and you are not in arrears. You must repay this loan over the next five years. Again check with your administrator for specific details.

Note that this may also be a bad decision in terms of retirement savings. While you are still paying interest on the loan, you are essentially paying it to yourself and the interest income is tax deferred. You are still losing the compounded interest on the money borrowed, so we suggest that you weigh your decision carefully before borrowing from a 401k savings plan.

There is another serious drawback to 401k loan. If you quit or are terminated, the loan becomes due and must be repaid within 60 days. If you cannot repay the loan, the loan is considered as a cash with drawl and taxed along with penalty fees. It may be tough to meet this sudden repayment requirement if you are having difficulty finding a job.

401k Hardship Withdrawal

At some point you may find yourself with no options left but to withdraw money from your plan. Not all administrators will allow loans, however they are obligated to allow hardship with drawls if you meet the following conditions.

• You have an immediate and severe financial need
• You can’t get the money elsewhere to satisfy that need
• The  loan amount  does not exceed the amount of the need
• You have already taken advantage of all possible distributable or non-taxable loans that are available under your 401k plan

Once you meet these conditions,  the funds can be withdrawn as long as they are used for one of the five purposes outlined below:

• Purchase of a primary home
• Education and associated fees for you, your family or other dependents for the next 12 months.
• To stop eviction or foreclosure of primary home
• Demonstrated severe financial hardship
• Medical expenses that are tax deductible which will not be reimbursed for you, your spouse or your dependents

There are a number of disadvantages to 401k hardship with drawls and this decision should be considered very carefully.

• Withdrawals are subject to taxes and the ten-percent penalty
• Forgo forever the tax-deferred compounded growth
• 401k hardship withdrawal is permanent and cannot be returned to the account after  the disbursement has been made.

Non-Financial Hardship 401k Withdrawal

In this situation the 10% penalty is waived, however you also must demonstrate that you indeed have a hardship that qualifies under one of the five ways listed below:

• Total and permanent disability
• Medical debts exceed 7.5 percent of your adjusted gross income
• A court decision orders you to give the funds to your divorced spouse, a child, or a dependent
• A permanent lay off, termination, quit, or retirement  in the same year you turn 55 or later
• You are permanently laid off, terminated, quit, or retired and have established a payment schedule of regular withdrawals in equal amounts for the rest of your expected natural life. The investor must continue taking the payments for five years or until he/she reaches the age of 59 1/2, whichever is longer.

Any with drawl from your 401k plan should be considered as a solution of last resort, including hardship with drawls. Always check with your plan administrator for details.

There is another reason to keep working as well and that is to stay sharp and to keep active mentally at something that we enjoy. We will explore both of these seemingly ridiculous views in this post. We would really like your comments on this post since for many people it will hit very close to home while others will think that working past 70 is just plain crazy!

Pensions, 401k’s Not Measuring Up

The 2008/9 economic downturn really took a toll on many people and their financial health. They lost jobs, they lost homes, they had to borrow from their 401k’s and their savings and many lost a lot of money as stocks and mutual funds nosedived. Some had all or at least a major portion of their savings locked away in company stock only to see the company they worked for all of their lives go bankrupt. They lost their life savings!

If you are in your 40′s or younger, yes it is a tough time, but you have time to recover before you retire. Folks who are in their 50′s and 60′s will have a much more difficult time since their prime earning years are shorter and there is less time for their 401k’s to recover from the losses they experienced before they need to begin drawing on their savings during retirement. Add to this problem the fact that many senior workers find it difficult to get good paying jobs that will give them the opportunity to recover from their losses.

We  have written in earlier posts in this blog, that you need to assess your plan and your potential income from your 401k and decide if you need to keep working longer than you planned. For this group of consumers who have lost a major portion of their savings, they have no choice but to continue working. You see them in the service industry working at department stores and other major chains on the cash register, greeters and many other jobs in the service industry.  They do not make a lot of money at these jobs however they do make enough to subsidize their income from other sources to allow them to live a more comfortable lifestyle, pay the bills and enjoy their life.

We know of one individual who works at a donut shop through the summer and fall so that he can head south for the winter. Turns out he cannot afford to go on a vacation unless he works and he hates the cold winters. So he works to pay for his vacation. He is in his late 70′s! Many others are not as fortunate, they need to work to pay for the basic necessities.

There is an upside to this story that many people might not imagine, which leads us to the second part of this post.

Working to Stay Involved and Stay Sharp

The upside to continuing to work is that many people find it interesting, challenging and enjoy meeting people every day. Sure there are always difficulties about any job. There is not a job in the world were there is something that is not great about it. However most people would say that most jobs have something positive about them and that is one of the reasons why people work.

Leaving work to retire means that you also give up the social aspect of work. The people you associated with at work, met for lunch, had coffee with or even the odd drink after work. Sure you get together once and a while with your co-workers for lunch or drinks after you retire, but as time goes on, this becomes less and less due to other interests and time conflicts. Some people will turn to hobbies and sports such as golf and curling, to replace the social part of the job that they miss. They enjoy the interaction with people who they can have a good time with and just talk about world affairs or the latest gossip.

Many seniors are now finding that going back to work in the service industry provides them with an excellent outlet to regain some of this social interaction that they lost when they retired. The jobs are not usually full time which means they also have time to do some of the things they always wanted to do and never had time.

Employers appreciate having these seniors on the job. They show up on time every day, they work when they are supposed to work and they don’t fool around on the job the way some of the younger teens do on their first job. In other words they are dependable!

This situation is a win win for everyone and the benefits to the person, the employer and even the community are significant. As a senior you are making a contribution to the community which would not otherwise be provided.

Comments are welcome. Our readers will appreciate any suggestions and ideas you have regarding working past 70!

Working Past 70, You Cannot be Serious

These are two excellent reasons to continue to wok past 65 into your 70′s. Of course working while you are supposed to be retired is not for everyone. Some cannot work due to health reasons, while others do not have the desire to work. However if you need the money because you did not save enough in your 401k or you lost a great deal during the recession, this can be a solution with additional benefits that you may not realize were there.

Let’s assume that you are doing all of the right things that a good investment plan calls for. You are well diversified across excellent quality stocks, bonds and mutual funds with the right mix of income and growth or higher risk investments. That’s a mouthful, I know, and it is really the subject of another post which you may want to read at another time. We will assume you have done all these things and now you want to know a couple of things.

• What changes in your 401k should you consider to prepare for retirement?
• Will you have sufficient savings in your 401k?
• Do you need to increase your savings rate in your 401k or in a regular savings plan?
• Should you consider stress testing your financial retirement plan?

These questions are really aimed at making sure that when it does come time for you to retire and begin drawing on your savings, you will have sufficient funds to ensure that your retirement is what you expected it to be. We will deal with each one separately. Note that as you approach your retirement, it is a good idea to recheck all of your assumptions to ensure that you are continuing to meet your objectives.

What changes in your 401k should you consider to prepare for retirement?

According to the theory, as people get closer to retirement they should be gradually shifting their investments  from growth or higher risk investments towards more income related investments. This income will be what they rely on during retirement. They also want to protect their savings since it is tough to make up for a loss when you only have a few years left to work. As part of your assessment it is a good idea to prepare a migration plan over time from  growth investments to lower risk and income oriented investments. A gradual migration vs. a quick move will allow you to take advantage of investments that have matured or reached their peak. Programming these changes over time will also minimize and spread out the costs as well of trades over several years.
Will you have sufficient savings in your 401k?

Part of your assessment and this is were you should work with your adviser, is to test your income expectation vs. the income that your 401k will generate. Don’t forget to include other pensions that you may be eligible for as well.  Once you know what the estimate of your total income will be during retirement, you can consider making  adjustments to when you might retire. For example if you need to work a couple more years to increase the savings you need, now is the time to realize this and make arrangements.

Do you need to increase your savings rate in your 401k or in a regular savings plan?

Deciding to work longer to ensure you have a more comfortable retirement may be unsettling at first, however the reality is that it is better to work longer  vs living in a style that you and your spouse would not be comfortable with. By completing the assessment mentioned in the previous paragraph provides you with the knowledge you need to make the right decisions to meet your goals. Some people will work longer at their current job, while others will retire anyway and accept their situation. There are more and more people who want both and are choosing to continue working on a part time basis, which provides them with the money they need, gives the challenge they still want and also allows them to take time off to do some of the things they always dreamed off during retirement.

Work with your adviser or do it yourself, but take the time to calculate your cash flow after retirement and determine how much savings you will need to generate the income you need to allow you to live the way you wish during your retirement years.

Should you consider stress testing your financial retirement plan?

This is something most people do not even consider until it is far to late. As we have seen over the past two years, the economy can play havoc with the stock market and many retirement plans. Anyone retiring in 2008 or 2009, would have seen their 401k decrease significantly as a result and their income levels also drop. If you could wait until 2011 or 2012, many 401k investments recovered significantly.

For someone retiring sometime in the next 5 to 10 years, performing a stress test on your investments will shed some light on what the impact would be on your plan and how much income it might generate. For example, bond income and blue chip dividend stocks for the most part kept right on paying during 2008 and 2009, however many mutual funds stopped or decreased their payments significantly due to the fees that were paid to the fund managers. If you sold at that time, your 401k suffered a permanent loss, while holding on meant that many recovered.  This is only one scenario to consider and a stress test of your investments and retirement plan should be tailored to your situation as well as your beliefs about what can happen in the markets, your health situation, family support requirements, inflation etc.

Once you have the results of your stress test, you can decide what if any action you want to take regarding your 401k. Rebalance your investments, sell some, position for income, save more, delay your retirement, or do nothing, etc.

Hopefully this post has given readers some ideas about what to do in terms of getting ready for retirement when you are 5 to 10 years away from that magic date. Readers are also encouraged to leave their comments and suggestions as well.

What 401k Fees are There?

We are going to list some of the fees that we are aware of and trust me they are probably not all of them.

Plan Administration Fees -These fees pay for the operational fess of keeping the 401k fund running. They can include all of the following fees – plan record keeping, accounting, legal and trustee services. There may be other services as well that they advertise as part of their package of services to you, however guess who pays for them – you. They include some of the following – telephone voice response systems, access to a customer service representatives, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation and online transactions. While these are all excellent benefits, ask yourself if you will use them and will you get your money’s worth. Plan administration fees can be paid either by your company or by the fund itself, however everyone should realize that regardless of who actually pays the fees, they are coming out of the potential profit of the fund and mean you get less income paid into your account. If you ask for more services you are also going to have to pay for them.

Investment Fees -This one is hidden in many cases. A lot of people focus on what they actually see as payments in their funds in their accounts. The amount your receive from the mutual fund is what is left after the investment fees have been applied. Many funds did not pay anything out to their customers during the economic down turn in 2008 and 2009. While you did not receive any payments rest assured that the investment fees still were paid causing your mutual fund values to decline even further.  When was the last time you got paid for losing the customers money? While these fees are hidden, they can be the largest amount of the overall fee structure.

Individual Service Fees - These fees cover a wide spectrum of fees that may be associated with your  401(k) plan. Individual service fees are charged based on the type of account you have, the features that you may subscribe to, for taking out loans against your plan should you need to borrow from it.  There are also annual fees for the plan that the administrator of the plan may also charge. These are not to be confused with the administrative fees that are charged by the mutual fund administrators  of funds that you may invest in. Investors will also pay broker fees for any stock trades that they may execute from within their plans.

Trading Fees - Within a mutual fund, they regularly make a number of trades to take new positions in companies or to re-balance the mutual fund portfolio. We are not certain, but we suspect that most funds pay a brokerage fee for these trades which of course is charged back to the fund it self and therefore affects your eventual earnings from within the fund. We suspect as well that the fees paid are not commercial fees, but charged at the retail level which means you pay even more than you probably should.

What Can Be Done About These Fee’s

At your and my level not a lot. Congress is looking at this issue to asses what can be accomplished, however with the huge lobbie groups that are working to maintain the status quo it is unlikely that anything will be accomplished soon. The mutual fund industry does not want to change anything that would decrease the huge profits they make for the companies that manage them.

Investing in corporate stocks and bonds are one way of minimizing some of the fees, however you will still get charged the trading fees and the 401k annual admin fees. Prior to investing in a mutual fund, investigate their admin fee levels, ask your financial adviser how much money he or she gets as a kick back for getting you in to the fund in the first place. Take a look at the services that you are paying for and determine if any of these services can be reduced.

Sounds like hard work, digging into all of these issues and it is for many people who just want to save their money and make a reasonable profit. Most Americans do not have the time nor the inclination to spend any of their time on this sort o investment management and planning. There is no other alternative that we know of other than to sit back and pay or get involved and examine every expense that is associated with your expenses.

Investment Advisers

Investment advisers are not supposed to play favorites and have the best interests of the investor in mind. Most do, however we have all heard the huge stories about advisers who have taken their clients for millions and either squandered it or lost it or both. Obviously you want to do your homework and avoid these fraud artists.

There is something far sinister that many investors must watch out for. Every time you invest in a mutual fund, your adviser receives a kick back or commission for the investment that you made. How many times has your adviser come to you with a hot new mutual fund he is recommending? Test your adviser by asking how much money he stands to make off this fund? Ask other advisers from other firms to see what they think of the fund, look at the fees associated with the fund etc.  Remember he gets paid regardless of how your fund performs!

Comments on this post are very welcome. Your stories about fees charged to your 401k plan will help our readers avoid similar issues that you may have had.