Take The 401k Challenge

The 401k total participant fee should be the most crucial point of consideration for employers and employees in evaluating their 401k plan and deciding to keep it or switch retirement plan providers.  Actually, can we take a moment to press pause?  Would it be ok if I went back and started over?  I apologize for the goof up in my opening statement.  Thank you for bearing with me.  This is what I should have stated.  The 401k total participant fee is the ONLY point of consideration for employers and employees in evaluating their 401k plan and deciding to keep it or switch retirement plan providers.  And here is a quick question to help you decide if you agree with me.  When you log in to your 401k plan to check your balance, what is the first thing you look at?  Oh, I’m sorry.  I didn’t mean to give the answer away in the question.  It is your balance.  What is the second thing you look at when you log in to your 401k account to check your balance?  Who cares?  It might be your 401k loan balance if you have one.  It might be the quarterly returns for the mutual funds.  It might be the Morningstar ratings for the mutual funds.  It might be to check how much you are deferring from each paycheck.  Those are all important reasons for you logging in, but the thing you really care about is your balance and the thing that impacts your balance the most is your fees. Why?  The fees are debited directly from your account balance while you sleep.  The higher the fees, the lower your balance when you login.  The lower your fees, the higher your balance when you login.  Sure, returns matter.  But you’ll find out how much more fees matter than returns when you complete the challenge.  You can get the same mutual funds inside any 401k plan.  The thing you cannot get is the same fees.  Fees are where the road forks.  You have to get engaged and get ruthless on fees if you care about your retirement.  I believe you do care and I believe you will get engaged after you take the challenge.

The amount of money being debited from participant accounts for fund expenses and administrative fees in 401(k), 403(b) and 457(b) plans is of far graver concern than anything else a participant or employer might think is important.  Let us examine a few of these things.  For starters, low 401k participant fees are more important than the stylishness of the retirement plan company’s website.  How do I know this?  I started investing in my first 401k plan before there was such a thing as an internet or smartphones.  We relied on an 800 number and paper quarterly statements via snail mail for our information.  Low 401k participant fees are also more important than the glossy brochures and enrollment kits from the retirement plan company.  How do I know this?  In my first 401k plan they shoved some prospectuses in front of us and a payroll deferral form. We barely knew what 401k and prospectus meant and knew absolutely nothing about investing in stocks and bonds, but myself and my co-workers figured it out.  Oh, and when it came to a company match, we neither had one or had even heard of such a thing.  You might even say we were too dumb to care.  But we figured it out.  We joined the plan and we were better for it.

Low 401k participant fees are also more important than financial wellness programs offered by 401k advisors and representatives.  Why?  If the point of financial wellness is to help employees be penny wise, shouldn’t we start by getting rid of pound foolishness?  Shouldn’t we start with the obvious? Shouldn’t we start with the elephant in the room?  Shouldn’t we start by cutting 401k fees?  I’ve always felt slightly weird about the concept of a 401k provider offering financial wellness programs to their client for their employees in the workplace.  Perhaps it is because personal finance is my business and it all just comes easy to me.  Or perhaps I’m just a little jaded.  I don’t know.  I really can’t put my finger on it.  Perhaps it is because it is 2018 and we can Google any financial question at any time and have an answer in 0.3 seconds. Financial wellness programs are really just about encouraging employees to save more for their retirement.  I feel any employer can do one better by getting the lowest possible fees for their employees and letting them know how much that truly helps them.

Low participant fees are even more important than the “warm and fuzzies” of the relationship between the employer and the financial representative to the plan, and even the name-brand of the plan.  How do I know this?  I know this because it is 2018 and thankfully we do have an internet and we do have smartphones.  Would it surprise you to know that you can get all the things that you might think are important, like a stylish website, glossy enrollment kits, a warm and fuzzy relationship with a financial advisor AND you can get ultra-low participant fees too?  Imagine that.  The warm and fuzzy relationship between an employer and the financial representative of the 401k plan is the number one killer of retirements, because it is the number one thing that causes employers to stay with a high-cost plan. Employers and employees need to be ruthless when it comes to selecting their workplace retirement plan.  Great service, a stylish website and even warm and fuzzy relationships are important, but make sure those are numbers 2 thru 4 on your list of priorities.  Low participant fees are #1.

Here is my 401k Challenge.  These are 21 questions designed to help you assess if you are knowledgeable and ruthless about your retirement, or if you are operating under an incorrect set of assumptions that could ultimately cost you a lot of money by the time you turn 59 ½.

Q: Do you know the total participant fee your 401k company is deducting from your 401k account while you sleep?

Q: Do you believe your employer knows the total participant fee your 401k company is deducting from your account while you sleep?

Q: Do you believe your employer is knowledgeable about 401k fees and able to assess the difference between ultra-low fees and ultra-high fees.

Q: Has your employer ever discussed the total participant fee with you?

Q: Have you ever posed the fee question to your employer?

Q: Are the fees taken from your account while you sleep visible or invisible?

Q: If you have $100,000 in your 401k account and your total participant fee is 3%, how much is your 401k plan deducting from your account each year while you sleep?

Q: If your best friend has $100,000 in their 401k account and their total participant fee is 1%, how much is their 401k plan deducting from their account while they sleep?

Q: Would you rather have your 401k plan, or would you rather have your best friend’s 401k plan?

Q: Is your best friend any more deserving of paying low fees than you are?

Q: If you are striving to earn an 8% return in your 401k plan and your plan is charging 3% in fees, you get to keep just 5%.  Do you think that is fair? Reasonable?  Excessive?

Q: Did you know that a 2% reduction in fees could net you an additional $1 million or more in your retirement account over 40 working years? (depending on the amount of your contributions)

Q: Are the returns you can earn in your 401k account finite or infinite?

Q: Is the amount of money you are personally able to set aside for retirement finite or infinite?

Q: Are the number of years you have to save for your retirement finite or infinite?

Q: If you can’t save any more money than you are saving, and there is a ceiling on how much you can earn, and the number of years you have to save is limited – what can you do to increase the amount of money you’ll have at retirement?

Q: Are the fees you pay to your 401k plan decided by you or by your employer?

Q: If the high-fee 401k vendor has a warm and fuzzy relationship with your employer, what are the chances your employer is even considering that something could be off with the relationship?

Q: Do you think your employer might just need a little help?

Q: Do you think if employees were empowered to help their employers in this regard, for the good of everyone in the organization, that would be a good thing?

Q: Do you know what the benchmark is for an ultra-low total participant fee in a 401(k) plan?

So…Are you ruthless?  Is your employer ruthless?  Or…Is this a well-timed wake-up call.  The benchmark for an ultra-low total participant fee in 401k plans is 0.65%.  If you have $100,000 in your 401k account, you should be keeping 99.35% of your money at year’s end.  The 401k company should not be taking even 1%. The total of your fees should not exceed $650 for each $100,000 in savings.

401(k) plans, 403(b) plans and 457(b) plans are nothing but a menu of stocks and bonds you shop from each payday. Your objective should be to pay as little as possible for the shopping experience.  Less money for them equals more money for you.

I hereby dub you “fee detective” to your 401k plan.  In my new book 401 CONFIDENTIAL I empower employees to take the lead and drive change within companies by working with management to assess and then secure lower retirement plan fees for everyone in the organization.  The good that you do will be good that helps every single person in your workplace for the rest of their lives.

Where do you go from here?  I recommend receiving my #1 Dirty Little Secret for how 401(k) companies get FAT on your money.  Just enter your email and I’ll send it to you for FREE, even without buying the book.  This dirty little secret negatively impacts approximately one out every two participants in 401(k), 403(b) and 457(b) plans across the U.S., costing people over a billion dollars every year in unnecessary fees.  That’s right.  I said unnecessary.  I didn’t even say excessive.  There are two kinds of bad fees.  There are the too-high kind, and there are the unnecessary kind.  When you have the unnecessary kind, the only way to ditch the fee is to ditch the retirement plan company and find a new provider.

401k Rollover To An IRA

One of our 401(k) participants recently asked me if I would roll her 401(k) account into an IRA for her.  She said she was leaving the employer and wanted to know what her options were.  After some thought I realized this question comes up probably a thousand times or more each day as people prepare to leave one job for another.

An Individual Retirement Account is something every retirement saver will ultimately possess.  It is just a matter of when you get yours.  In my opinion, the sooner you open an IRA the better.  In the case of my client she came to a fork in the road and found herself in need.  We opened the IRA because she needed it, and she also decided to roll her 401(k) into it.

Why did she need the IRA, and why did it make sense to roll her 401(k) into the IRA vs. transferring it to her next employer’s 401(k)?  There are two reasons.  The first reason for needing the IRA is continuity.  In 401 CONFIDENTIAL I explain the importance of what I call the “ABC’s”.  Always Be Contributing to a 401(k), Individual Retirement Account, or both.  While she is in her one-year waiting period to join her new 401(k) plan (assuming the employer even offers a plan), she needs to continue to save money for retirement.  If she’s waiting to become eligible to join her new employer’s 401(k) she has no place to resume investing.   Thus she needed to open the IRA, regardless of whether she chose to roll her previous 401(k) into it.

The second reason she needed the IRA is she needed the freedom to choose where to invest her life savings.  When you open an IRA there is a limit on how much you can contribute, but not on the amount you can transfer in from your last employer’s 401(k) plan.  Sometimes we tend to elevate 401(k)s above IRAs in our minds because they have higher contribution limits.  Do not think of 401(k)s and IRAs as being on different planes.  Think of them as being on the same plane, and decide which plane is more appealing.  Do you want one choice of where you can invest your life savings, or do you want unlimited freedom to choose your destiny?

If you go with one choice, you are saying you trust that your next employer’s 401(k) plan has only excellent investment choices and only low fees.  If that were a guarantee then I wouldn’t have written 401 CONFIDENTIAL.  If you go with an IRA, you are going with unlimited freedom to choose your investments and your fees.  I highly recommend everyone follow the ABC’s.  And when you come to that fork in the road and need to decide where to put your life savings from your previous employer’s 401(k) plan, I hope you’ll choose freedom.

Foreword – 401 CONFIDENTIAL

It happens right under your nose.  The Department of Labor requires them to disclose to employer and employee how much they take out of your retirement account and what it pays for.  But it doesn’t matter.  You trust them.  Your employer trusts them.  You heard the fees are good.  And truthfully, you wouldn’t know if the fees are good or not.  It’s not what you do.  They do what they do.  You do what you do.  That’s what they count on.

But here’s the thing.  You don’t see it.  According to 401ksource.com, you could be losing 4% or more of your retirement dollars to fees and you and your employer be completely unaware.  Your money is long gone by the time you pull out your smartphone to check your balance, and they don’t even leave you a note.  And do not think for one second that you are immune because you work for a large employer or because your plan is stocked with low-cost mutual funds.  Low-cost mutual funds are not the culprit.  They are the diversion.  These retirement plan companies are smarter than you. They are smarter than your employer.  And they are counting on you keeping it that way.

Why did I write this book?  To be your man on the inside.  Have you heard the expression “you don’t know what you don’t know?”  By showing you what you don’t know, perhaps I’ll have the good fortune of meeting you and we’ll end up working together.  I serve individual investors, small businesses, large corporations and local and state governments with retirement plans, investments, life insurance, disability insurance and ACA & ERISA compliance services.

I also thought it would be cool to save people a billion dollars a year in retirement plan fees.  This book can do way more that, but I should probably keep my expectations realistic.

Each chapter of this book is written to build your knowledge from the ground up.  I take complicated topics and speak about them in ways that third-graders can master by recess.  The simplicity is what makes it powerful for you.  If you are an employer frustrated with your retirement plan, you’ve come to the right place.  If you are an extremely plugged-in 401(k) participant concerned about fees, you’ve come to the right place.  If you think 401(kay) is pronounced 401(kuh), you’ve come to the right place. This book will enrich you and make your life better.  Each chapter will teach you something new and your future will be brighter for it.

Whether you are the 401(k) decision-maker at your company, plan participant, wondering if you should join your plan, or even if your company doesn’t have a retirement plan, this is the book for you.  You might just be the one to share this book with your company and get a retirement plan started.  Or you might just be the hero who shows your organization how to save everyone hundreds of thousands of dollars by switching to a lower-cost plan.

Ask any employer or employee who has been through the retirement plan wars and they will tell you.  The best 401(k), 403(b) and 457(b) plans come about when employees speak their concerns, and everyone pulls together to make your organization’s retirement plan the best it can be.

Employers Are Not 401k Fee Experts

Employers are not 401(k) fee experts and we need to stop expecting them to be.  The average participant in a small employer 401k plan is paying 4% of their account to fees each year.  403(b) and 457(b) participants are faring no better.  What employer would agree to such high fees if they had even the slightest understanding of what they were signing themselves and their employees up for?  I submit that most employers know very little about 401k plans and sit on the same side of the table as you.

The internet has thousands of articles giving advice on how to play overlord to the fees in your workplace retirement plan.  We’ve got articles like “15 Big 401k Questions To Ask Your Employer,” “3 Questions To Ask About 401k Fees,” “The 21 Questions You’re Going To Need To Ask About Investment Fees.”  You can learn how to find fees.  You can learn what the fees mean.  You can learn how to selectively sidestep the highest-cost funds in your plan.  I’m not saying the articles are not good and the advice not sound.  But all the advice ends the same way.  This is your plan.  Your employer chose it.  If it’s a bad plan, suffer through it or simply choose not to participate.  After all, that is the system.  In most workplaces one person decides for the entire organization where everyone gets to save their retirement dollars.

The time has come to move beyond that thinking and empower employees to work with employers to get a bad retirement plan thrown out the window and replaced with an entirely new plan.  Now there’s a bright idea!  Employers are people too.  They are as much in the dark as your are about retirement plan fees and what to do about them.  If they made a bad vendor choice the first time, how likely are they to want to go through that process a second time?  They would rather put their head under the pillow and pretend that nothing is wrong.  In my new book 401 CONFIDENTIAL I empower any employee at any workplace to assess the fees in their retirement plan and determine if they are reasonably low or flat out too-high.  I then teach them how to work with management to secure lower retirement plan fees for everyone in the organization.  Play the hero.  Read 401 CONFIDENTIAL and then show your employer how to save money by switching everyone in the organization to a retirement plan with ultra-low fees.

Who’s Watching Your 401k Fees?

The most unsettling issue I encounter with 401(k), 403(b) & 457(b) participants is a misplaced belief that your employer is watching the fees.  Based on my experience, 99 out of 100 employers have zero understanding of the fees in the very plan they signed you up for.   They did sign you up, right?  It’s not as if they gave you a list of retirement plans and let you choose.  It was more like “here’s our plan, take it.”  That’s how the system works.  One person essentially decides for everyone at your job where you get to save your retirement dollars.

Employer are responsible for ensuring you pay only reasonable fees, but how do they take responsibility and solve a problem you can’t even see?  After all, the fees are invisible.  Your money is gone long before you pull out your smartphone to check your balance, and they don’t even leave you a note.  Is it any wonder that a large swath of people in workplace retirement plans do not even know that they pay fees?   The  average participant fee in small business 401k plans across the United States is a whopping 4%.  What employer would agree to 4% if they had any idea what they were signing themselves up for?   This begs the question.  If your employer doesn’t know what the fees are and nobody is even questioning the fees, then who’s watching out for you?

Another challenge facing employers and employees is an underestimation of how negatively you are impacted by high fees.  Every dollar you overpay in fees is a dollar that haunts you forever.  That’s because you not only lose the dollar.  You also lose the future compounding interest on that dollar for the rest of your life.  Imagine the ripple that a pebble makes when you toss it into a lake.  Now image a ripple that doesn’t stop after a second or two.  Imagine a ripple that goes on forever.  That is compounding interest.  That is why fees matter.

Employers simply cannot be expected to solve this problem on their own.  They need help and it needs to come from their employees.  In my new book 401 CONFIDENTIAL I teach employees how to take the lead at their workplace in assessing their retirement plan fees and determining if they are ultra low, reasonably low, or “it’s time to move our plan to another company.”  I then teach them how to work with management to secure lower  401(k), 403(b) or 457(b) fees for everyone  in the organization.