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Fees Make It Hard to Earn Money In Your 401(k)

Most employees don’t understand what they have in a 401(k) retirement plan — that’s because it is so confusing and difficult to keep numbers straight and to understand what effect they will have on the future.  They thus become passive about the money they are dumping into deferred retirement savings plans like 401(k)s and IRAs. In this post, I want to lay out just exactly how bad this situation is so that you may be motivated to do something about it.
First, fund managers (did you even know you had to pay someone to manage the funds in your 401(k)?) feel a need to get paid, whether or not the fund earns money.  Their reasoning is that some years they do well, so they think this is because they made good decisions about what to do with your money.  But what about the years they lose?  Should they give their fees back to you? After all, they made the decisions on the investments.  Of course you will never see this lost money again and it’s silly to think an employee would ever be reimbursed for bad investment results. Knowing that someone else is managing your money and not always doing a good job, for which you must pay them, should affect your decisions about whether to and how much money to pour into 401(k)s and IRAs.
Second, you must pay what are called “soft-dollar” costs to help manage your retirement fund. These shutterstock_248620027costs include such things as the fund manager getting reimbursed for their travel and entertainment costs from the source of where the money was invested.  This kind of money is considered reimbursement of expenses and not  commissions.  But the expenses would have been incurred anyway, so when fund manager gets reimbursed, it is like they are getting paid found money.  Or in other words,  this is saving the fund manager from another expenditure they may have already been paid out of pocket for their own benefit, having nothing to do with your managed funds.
Third, there are trading fees.  These don’t always apply, but any cost of placing a purchase or sale of investment vehicles will be charged to your account.
Fourth, and finally, the hiding of several layers of management fees became such a huge issue of integrity, that in 2013 all fund managers were ordered to disclose all costs to the employer sponsoring the 401(k) or 403(b) or IRA.  However, these disclosures don’t filter down to employees so they aren’t aware that if their retirement account made a 9 percent return for example, but fees took 6 percent, then they are only netting 3 percent.  Statistics show that only 10 percent of all employees ever make any change of allocations and are very passively involved in what happens to their 401(k). This is due to poor assistance from HR and fund managers.
Last week I met with several employees who had a new owner purchase their hospital.  Their 401(k)  plan will now be dispersed and rolled into individual IRA’s.  I asked if any of them had ever met with a fund manger representing the 401(k) investment options.  Only one employee said he had met with a fund manager, and that was only three times in the last ten years. All the others had never had anyone even contact them from the fund management group.  The individual who had met with someone noted that the fund manager had said the  identical words each time they met:  “You need to stay in aggressive stocks to take advantage of long-term growth.”  Not once did he hear anything about the potential problems in advance of the 2008 crash or introduced to any other options of any kind!!  Why pay someone to give you this kind of poor investment advice?  The answer is that unfortunately the investment management system in 401(k) programs is solidly in place, and the individual employee cannot change it.
So if you cannot change the fee structure, if you cannot get good investment advise, if you can never know how best to plan and use your own money, what are you to do?  THE ANSWER:  Look for the earliest opportunity to change employment so you can take charge of the retirement money you do have.
In future blogs I will explain options of where to invest this 401(k) and IRA money and how to get access to these funds to make more money on a private basis.   Hold on for now.

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