Know your 401K plan

Janet Babin Aug 10, 2007

Know your 401K plan

Janet Babin Aug 10, 2007

TESS VIGELAND: With no end in sight to the subprime mortgage crisis, it’s nice to know some of us can count on 401k plans. A new study says our contributions are up over the past few years. But we’re not paying enough attention to the fees and surcharges. Marketplace’s Janet Babin reports from North Carolina Public Radio.

JANET BABIN: Maybe it’s a genetic thing. It just seems like the inclination to stash money, instead of spend it right away, somehow comes from our parents.

Tech guru David Berlind says fear drove him to sock away cash for his nest egg:

DAVID BERLIND: That’s what parents do they scare you into things, like bad things can happen if you don’t do this. And so I listened.

Each year, Berlind fills his 401k to the tax-free max — up to the amount his employer, CNET Networks, will match. He recently switched to a lifestyle fund that automatically correlates his investment strategy to his target retirement date.

But while he’s diligent about his retirement bottom line – he’s less concerned about the fine print, like account fees:

BERLIND: I’m not clear that spending a whole lot of time on these little fees is going to make a really big difference when it comes time for my wife and I to retire.

According to retiree group AARP, more than 80 percent of us don’t know how much we pay in expenses on our 401k’s.

David Certner with the AARP says those fees may seem like a small slice of your savings, but the net effect adds up over your working life:

DAVID CERTNER: If you for example charge fees of less than 1 percent, so .75, over say a 20-year time horizon, you’re going to see your benefits. You’re account balance will be 15 percent less.

Fees can be difficult to avoid. There are commissions and management debits – the cost of account maintenance and investment advice.

Certner says funds that take a lot of time to manage usually come with higher fees, while index funds tend to be cheaper.

You can compare prices on your account’s Summary Description Plan.
If you can’t find it, or can’t understand the legal-speak, you can do what I did, and call them up:

You’re on a recorded line with Mike Druo. OK, Mike, I just want you to know that I’m also recording our conversation. OK

Mike told me my Real Estate fund charged a fee of .79 percent, while the Bond fund charged .45 percent. Then I asked him about fees on what was listed as a group annuity account:

Mike: I don’t think we actually have those available, or have a breakdown of what the expenses are.

This information lapse didn’t surprise Ken Weber with Weber Asset Management. He says many 401K funds come not just with stated fees, but hidden fees.

KEN WEBER: It’s the dirty little secret. Lots and lots of people in my industry are getting fat off the backs of 40 or 50 million Americans who are in 401k plans.

Weber’s advice: avoid group annuities, because their fees aren’t comparable to publicly traded funds. He’s also wary of programs that say. Fees waived, he says that can mean they’re waved right over to the employee’s account. Employers have a legal duty to make sure 401k charges are reasonable.

Some in Congress are now calling for federal legislation that would require investment firms to fully explain 401k fees in plain language.

But then we’d have one less excuse for not checking on those fees.

I’m Janet Babin for Marketplace Money.

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