If you have a 401(k) plan, you should have received new documentation by today. Though it may seem like more fine type and regulatory jargon, the new documentation is actually expanded information about performance, fees and expenses. Be sure to read it.
The expanded information is mandated by a new Labor Department requirement that plan sponsors provide increased transparency on costs. According to an AARP survey, many employees incorrectly think they aren’t paying any fees. It is likely that many others have no idea what their plans cost. Since every dollar paid in expenses is a dollar you will never see again—or be able to turn into greater wealth—what you pay in fees is no small matter. That’s not to mention that as the value of your retirement savings increases, the total dollar amount of what you pay in fees also increases. (Mutual fund companies and plan advisers take a percentage cut of total assets.)
The new rules require two disclosures. The deadline for getting the first notice to plan participants is today, August 30. This notice details the plan’s costs, performance data on all investment options—including variable and fixed-rate products (if offered)—and the performance of comparative benchmarks (e.g., the S&P 500 for large-cap funds). The second disclosure, a quarterly notice first due out in November, will detail how much you are personally paying in fees, including charges related to any 401(k) loans.
Fund fees are the one expense you can directly manage. Look at the annual expense ratios for the funds you personally own and compare them to other, similar funds offered in your 401(k) plan. Also look for any loads (charges for buying or selling a fund) or other related expenses. Then look at the returns over a period of years. You want to avoid those funds with high expense ratios and comparatively poor performance, and favor those funds with low expense ratios and comparatively high performance. Keep in mind that the expenses of a large-cap, domestic stock fund will be lower than those of an international bond fund, so compare funds only among their category peers.
Your plan may levy additional charges as well. These are costs for managing the 401(k). They vary based on the size of the plan (large companies tend to have lower costs as a percentage of total assets) and the extent to which the employer absorbs the costs charged by the plan sponsors and advisers. There can also be charges for joining the plan, leaving the plan or converting a traditional 401(k) to a Roth 401(k).
If you are unhappy with the costs or the plan options, you can speak to your company’s human resources department. Understand, however, that making changes to a 401(k) plan is not something that can be easily accomplished.
Now is also a good time to review the allocation of your 401(k) holdings, if you haven’t done so this year. Look at how much you have allocated to large-cap stocks, small-cap stocks, international stocks and bonds. Does the allocation make sense given your age, goals and investments you own outside of your 401(k)? (See our Asset Allocation Models for examples of how you may want to allocate your portfolio.) If not, you should change your 401(k) holdings to bring it back in line with your goals.
Finally, look at your regular contributions. Are you saving enough to take full advantage of the company’s 401(k) matching contributions? If not, try increasing your deferral rates. Even a 0.5% increase can have a long-term positive impact on your wealth. If you are only saving enough to maximize your employer’s 401(k) match, consider boosting your deferrals even more. This year, the IRS allows you to contribute up to $17,000. If you are age 50 or older, you can set aside an additional $5,500. Since these contributions are made on a pretax basis, you will give up less than a dollar in take-home pay for each dollar you increase your contribution by.
View original at: AAII Investor Update E-Newsletter
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