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.

Author: Michael J. Marini

Michael J. Marini is President & Financial Adviser at Orlando 401k Specialists.