By conservative estimates, disclosed and hidden plan expenses cost participants an average of 3-5% annually, with as many as 14 different entities profiting from literally dozens of potential charges.
Discussing 401(k) expenses in a PBS interview, John Bogle, founder of Vanguard, said, “The financial system puts up 0% of the capital, takes 0% of the risk and gets almost 80% of the return… That is a financial system that is failing investors…”
And, as the industry increasingly markets fee-stacked Asset Allocation and Target Date offerings, average total expenses could easily soar beyond current estimates to 5, 6 or even 7%.
LIMITED INVESTMENT CHOICES
If your plan is like most, it probably offers fewer than 20-25 investment options. How those particular funds found their way into your plan should concern you.
Conflicts of interest may be influencing fund selection recommendations. In some cases, Providers manage or own the funds they are recommending. In other instances, they are receiving compensation from the recommended funds. Too often, these conflicts result in the inclusion of inferior investment options inside your plan.
Additionally, these limited offerings often provide investors with little opportunity for proper, high-quality allocation among small, mid, large and international sectors.
WASHINGTON MONEY GRAB
Congressional and White House debate concerning a potential government takeover of 401(k) plans has created quite a stir over the last few months. Most of the discussion has surrounded the idea of consolidating 401(k)s into something akin to the Social Security system, a plan that presents many problems.
As proposed, the government would become the beneficiary of your plan at your death – not your family or heirs. Essentially, the government would give you an annuity payment, and eliminate your access to the cash value of your account. And, finally, the government would also select the investments.
Is this possible? The government might attempt to justify the seizure under ERISA, the law that governs employer plans. There are many motivations for such a wealth confiscation. Aside from the obvious, politicians could see this $6-8 Trillion source of wealth as a resource to shore up the struggling Social Security and Pension Benefit Guaranty Corporation programs.
In most cases, rolling over your 401(k) to a personal IRA is the optimal choice. Done properly, you maintain the tax advantages, while opening your account to a universe of investments. Proper allocation, utilizing higher quality investments, becomes more realistic. And, many, if not all, of the hidden expenses associated with 401(k) plans are eliminated, increasing your opportunity for greater returns. A rollover into an IRA will give you and your advisor the tools to manage risks, return and expenses more effectively.