401(k) - The Danger of Hidden Fees

"There are a lot of reasons that 401(k)s are coming up short, like the stock market's steep decline from its all time high in October 2007. A less obvious reason, in fact a hidden reason, are all of the fees that can take a big chunk out of your investment returns." - Mike Schnieder, Bloomberg News

Most employees choose to invest into their company's 401(k) plan without ever questioning the cost associated with their investment. For those employees lucky enough to have an employer match their contribution, they are one step ahead of the rest of us. Unfortunately, most people have no idea how much they are paying in fees according to Bloomberg News,

"What they don't know can hurt them!"

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A survey done by AARP in 2007 (click here to download the study) showed that eight out of ten respondents with 401(k)s didn't know the cost of their plans. That's because many of the fees (all of which are legal) are either buried in the fine print of obscure documents or are so confusing they might as well be written in a foreign language.

"It's a complicated puzzle. By the US Department of Labor's Count there or at least 17 different fees that can be charged to your plan. Right now you'd be lucky to find even one of them listed by name on your account statement. What you don't know can hurt you. If you're paying for the same amount of your 401(k) as some of the people in this program after 40 years of investing, you can say goodbye to over half of your potential nest egg." - Mike Schnieder, Bloomber News

How can you protect yourself against hidden fees?

A new law went into affect three years ago allowing you to now get a 35-50 page disclosure document. The law requires that the 401(k) plan's administrator provide plan, investment, and fee information to all employees. As a result of these new rules, a person can determine the reasonableness of the costs they are being charged to save for retirement and compare the costs associated with different investments. Although this is a step in the right direction, most administrators don't understand the disclosure document let alone help their employees make sense of it.

Now that the first generation who invested in 401(k) plans are entering into retirement, we are beginning to see the disadvantages. After the stock market crash of 2008 and the exposure of unregulated fees, many Americans are looking into alternative investments to balance out their portfolio. If you are going to balance your portfolio, make sure you enlist the resources of an adviser you trust who can help you determine the investment strategies that work best for you.

To learn more about the options available to you, click below for a free consultation:

Is Your 401k Overexposed to Stocks?

Originally published by Mark P. Cussen, CFP®, CMFC, AFC | October 19, 2015

The vast majority of financial planners will tell their clients that they need to have some exposure to stocks in their 401(k) plans even if they are very conservative investors. But many 401(k) holders have ridden the recent bull market over its crest, and are now rediscovering that stocks can move in two directions. This pullback effectively serves to illustrate the impact that a domestic bear market can have on the retirement plans of older workers – and what you can do to ensure that you do not get caught unprepared.

Asset Allocation

Although many financial planners recommended the 60/40 mix of stocks and bonds through the nineties while the markets were reaching new highs, the subprime mortgage meltdown of 2008 burst that bubble for a large percentage of retirement savers. That crash and the more recent pullback in stocks have clearly illustrated the need for investors to be aware of their drawdown risk, which measures the amount of time that it will take to make up for a loss. The Dow Jones and S&P 500 Indices took about six years to regain the losses that they posted in 2008. On a practical level, this means that workers who are within five years of retirement (or at least plan on taking distributions from their retirement accounts within five years) should think twice about having their retirement plans heavily invested in stocks.

One of the disadvantages of having stock in any type of tax-deferred account is that you are not allowed to harvest tax losses as you can in taxable retail accounts. And those who purchase shares of their employer’s stock in their 401(k) plans need to be doubly careful because that portion of their plan is subject to more than general market risk. For example, what would happen if an enormous problem or flaw were found in your employer’s main product? Would you be able to absorb a 50% loss in a tenth of your holdings? If the problem is not resolved quickly, it could take years for the company to recover. (See also How Near-Retirees Can Ride Out Market Volatility.)

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