401k Fees

(Source: Bloomberg)

Ron Lieber of the New York Times has an excellent piece on 401k fees and the upcoming requirement that costs be revealed to plan participants. For those who require a bit of titillation on this subject, Mr. Lieber's article has a murder in it. Not exactly a Robert B. Parker novel but still...

He points out an example of the impact of fees on retirement balances (i.e., the "nest egg") put out by the Labor Department.

The Labor Department looks at a person who will retire in 35 years with a balance today of $25,000. Assume a 7% average annualized return and that plan expenses amount to 0.5%/year. At the end of 35 years, the plan participant will have a nest egg of $227,000. If, instead, fees are 1.5%, the nest egg will end up at $163,000--a 28% reduction!

BrightScope has been compiling 401k plan data enabling participants to assess how their plans compare to similar plans. At the BrightScope website, participants can easily get this information at no cost by just typing in their company name.

BrightScope finds that larger plans pay considerably less and that plans with less than $10 million take an average 1.90% out of the bottom line. As an aside - smaller plans, with less than 100 employees, can significantly reduce these fees by offering a SIMPLE IRA to their employees.

In 2012, fund providers will be required to reveal the detail on these fees - a huge step in the right direction.

Google's 401k-the BrightScope rating.

A few days ago, DIY Investor posted the YouTube talk (found at Biz of Life's site) given by the irrepressible Suze Orman to Google employees. DIY Investor found Ms. Orman's talk filled with  essential information, especially for young people in the business world. Now Michael Zhuang at Investment Fiduciary has posted the talk which will get it out to more people. Thanks Michael. Michael has actually worked with Google employees and points out how good the Google 401k plan is, as did Ms. Orman in her talk.

This popped the question into DIY Investor's head as to how good the Google Plan actually is and sent him scampering to the site that rates plans relative to their peers:  BrightScope.

As you can see, BrightScope gives a top peer group rating to the Google Plan:

Source: www.brightscope.com

CLICK TO ENLARGE Suffice it to say that receiving the highest rating in the peer group is not easy.


The component ratings provide greater insight into the Google Plan:
 CLICK TO ENLARGE

Source: www.brightscope.com

The dark green scores are in the best 15% of their peer group. Thus, Google's 401k fees are in the lowest 15% compared to fees, participation rate is in the top 15%, etc. The two components below the absolute top are account balances ( I see Ms. Orman's eyebrows going up) which maybe is not surprising. There is a hint in the talk that Google employees may be a bit challenged in terms of taking on a bit much debt and may not be contributing as much as they should to their retirement. Also, employees may be a bit younger compared to their peer group companies.

The one component that stands out is the "investment menu quality" rating at "below average."  Since Vanguard is their provider, this isn't likely a matter of investment choices--although possibly some fund choices may have underperformed in recent periods. It may reflect the choices made by employees. As of 12/31/2009, the top holding was the Vanguard Wellesley Income fund at 25% of total holdings. With hindsight, we know that wasn't a good choice. Are the employees really that conservative?

In the comment section on the BrightScope page, a commenter recognizes the generosity of Google's 50% match for both the traditional and the Roth plans.

All 401(k)s Aren't Created Equal

The Department of Labor is on a mission to improve retirement opportunities in the U.S.  This is sort of a closing-the-barn-door-after-the-chickens-have-gotten-out initiative; but at least it is useful going forward, at least in my view.

Today we are on the verge of the so-called gray tsunami wave of baby boomer retirements. And. many baby boomers aren't positioned financially to retire. They were given control of their retirement assets as companies moved from defined benefit plans that provided a pension to direct contribution plans like 401(k)s, where workers were responsible for deciding how much to invest and how to invest it.

Workers didn't save and invest nearly enough. This, of course, is the story du jour.

Looking ahead, the Department of Labor has cracked down on defined contribution retirement plan providers by emphasizing the need to offer appropriate investment choices and opt-out provisions that automatically enroll new employees unless they opt out, by increasing participation rates, and by requiring plans to disclose all costs in a manner that participants can actually understand.

It will be interesting to see how the latter requirement is implemented. Disclosing costs in the investment business reminds one of a diner choking on a turkey bone. There may be ample opportunity to practice our Heimlich maneuver.

In previous posts, I have discussed the BrightScope site that rates 401(k) plans relative to their peers. They have recently updated data through the end of 2009 from Form 5500 for many of the plans they follow. If you haven't checked your company plan rating in a while, you may want to bring it up.

Participants can use this data in a couple of ways. If, say, their plan's investment menu is rated "poor" relative to its peers, participants should ask the plan administrator (human resources) why. This goes for the other categories as well. In fact, if the participation rate is low, the head of the company should be asking why before the Department of Labor pops in and pops the question.

Secondly, as I have posted before, a married working couple should compare each other's plans. One may have a superior plan and that should be maxed out, after the match is taken advantage of. In some cases it will make sense to forego the company plan and open a traditional IRA or Roth on the side. From a longer term perspective, putting retirement savings in the right place makes a big difference.

How Does Your 401k Stack Up?

picture by DRW

People don't like to think about retirement. Understandable. It is thinking about getting old. It is thinking about having to save today for the future. It is about having to make decisions about what to invest in and trying to understand the jargon-laden marketing materials handed out by fund sponsors.

All of this bumps up against the awkward fact that most of us will one day wake up to our 65th birthday.

That's when the choices available to us in prior years will loom large in giving us choices in the coming years.

One of the keys is, of course, the 401k you have at work. The better it is in terms of low fees, good investment choices, company match etc., the greater the opportunity for you to achieve a successful retirement.

Until fairly recently, it hasn't been possible for you to assess your 401k. You pretty much had to settle for what was provided. Today assessing a 401k is typically fairly easy by going to www.brightscope.com. There, type in your company's name and see right away if your 401k is rated.

If it is not rated, I recommend talking to your plan administrator about getting it rated. You want to see how your 401k stacks up against similar 401ks. Do you have good investment choices, are fees low etc.?

You can also enter your investment choices via a link on the page and see explicitly the fees you are being charged on the funds you are invested in. This is the type of disclosure data the Department of Labor has been seeking.

The component ratings are shown as follows:

CLICK TO ENLARGE The example shown here is for one of the biggest employers in Howard County, Maryland. With this information in hand, a participant can question a plan administrator about investment choice. Can it be improved? Why is it "average" compared to peer group plans?

With this data in hand, administrators can take steps to improve the company 401k.
I suggest spending some time looking up the 401ks for family members and seeing how they stack up. You'll be glad you made a bit of effort when the 65th birthday rolls around.

Disclosure: I subscribe to the detailed Brightscope data base and talk to 401k administrators about this data

What? I'm Going to Find Out How Much They Are Charging Me?

In 2012, the Department of Labor will take a step towards exiting the cave by requiring 401k fund providers to disclose fees. The yachts on Wall Street continue to shrink.

Participants will see the impact of management fees, sales charges, 12 b(1) fees, trading costs etc. Some of these will disappear in the light of the day. Undoubtedly, fees will drop in the face of increased competition.

If you can't wait, you may want to visit www.Brightscope.com and put in the name of your company.

CLICK TO ENLARGE By scrolling down, you come to the component ratings. The first one is "Total Plan Cost." If it is high, you may want to ask the plan administrator why.

If your plan is not rated, again, it may be worthwhile asking the plan administrator why. It is not difficult for a company to provide data to Brightscope to see how its plan compares to the plans of peers.

How Does Your 401(k) Measure Up?

Analyzing a 401(k)

Readers of this blog know that one of the main messages is that the financial services industry has a strong tendency to grossly overcharge for its services. The industry takes advantage of the gullible public that refuses to educate itself on how much it costs to get professional money management services. The bottom line is that a big part of workers' nest eggs are lining the pockets of fat cat advisors. Nowhere is this more prevalent than in 401(k)s. But how can you assess your 401(k)?

Brightscope

An important resource to check is to go to www.brightscope.com. Put in your company name. If you are fortunate, your company 401(k) is rated. If it isn't, you may want to consider asking your human resources department why it isn't.

CLICK IMAGE TO ENLARGE. As you can see, there are a number of categories rated. Of interest in this plan is the "Investment Menu Quality" rating of "poor."

If you go a step further and complete the free registration, you get even more detailed information. You can actually put in specific information to see the true cost to you, the participant, in the plan.

CLICK TO ENLARGE. If you drill down, you can find costs for the portfolio and the costs of funds in your peer group that have superior investment choices. With the information provided by this service, there are explicit steps that can be taken to improve one of the most important benefits provided to workers. It is an excellent resource to lead to the right questions for employees to ask.

This is also a useful resource if you are wrestling, à la Mickey Rourke, with whether you should roll over your old company 401(k).