Tuesday, May 25, 2010

A Word About 401(k) Fees

But first, a short announcement:

TAG 401(K) Meetings

Wednesday, May 26: Nickelodeon -- 1 p.m. -- Main Conf. Room

Thursday, May 27: Fox Animation -- 2 p.m. -- Main Conf. Rm

Now, back to the issue up in the title.

Questions about 401(k) plan costs are among the top three inquiries I get. TAG's investment fees, which range from .19% to 1.45%, are listed in the lower left-hand corner of the Morningstar ratings sheets in the Animation Guild 401(k) Plan's Enrollment Book.

The lowest cost funds in the TAG Plan are 1) Vanguard Target Funds (19%), Northern Trust Select Indexed Equity Fund (22%), 3) State Street Global Advisors Mid Cap Equity Index (.62%), and State Street Global Advisors International Equity Index Fund (.69%).

Unsurprisingly, all of these offerings are index funds, the lower cost siblings of actively managed funds ...

The not-so-secret secret of every 401(k) plan is that each one costs participants money. The Plan Administrator takes a cut; the Plan attorney(s) are paid for legal work; the mutual fund offerings have costs. So all in all, whenever you participate in one of these retirement plans, every deducted investment dollar pays some of the freight that plan carries.

Happily, the bigger the asset base of a 401(k) plan, the smaller the fees for participants, and our plan is now up over a hundred million dollars, so costs are (relatively) small.

Even so, money that 401(k) plans pay out for administration has been an ongoing issue with congress:

A 401(k) fee disclosure provision has been added to the new stimulus bill, the $190 billion American Jobs and Closing Tax Loopholes Act that the House is supposed to vote on this week.

Among other things, the new jobs bill extends unemployment insurance to nearly two years and relaxes pension funding rules. The latter provision prevents companies that still offer old-fashioned pension plans from having "to choose between making forced cash contributions, freezing plans or cutting jobs," according to Rep. George Miller, D-Calif., chairman of the Committee on Education and Labor ...

If this jobs bill does pass and if the 401(k) fee provision remains intact, "A worker's quarterly statement would be required to list total contributions, earnings, closing account balance, net return and all fees subtracted from the account," according to Miller's website ...

The point I make in 401(k) enrollment meetings: You should definitely use 401(k) Plans to shelter income, but you should roll money from older plans in which you have investments into an IRA Roller Account at a low-cost fund family like Vanguard or Fidelity.

With the right fund selection, your investment costs will be lower than a 401(k) Plan, so ... my advice is never roll money into a 401(k), but only out. You'll end up richer.


Anonymous said...

Thank you for posting this information, Steve.

I'm reading John C. Bogle's Common Sense on Mutual Funds right now. He makes a good case for avoiding high costs, and it's making me gunshy of any mutual fund with a greater than 0.50% expense ratio.

I'm glad that animators have access to the inexpensive Vanguard and Northern Trust funds in their 401(k) plan.

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