Most people will plan their retirement around three sources of income; Social Security, their private savings, and the retirement plan provided by their employer. For many middle-class Americans, their employer retirement plan will provide over 50% of their income during retirement. Unfortunately, most people are unfamiliar with the rules and fees that their plan comes with. These are the things your employer probably isn’t telling you about your retirement plan.
No one with any financial experience has picked the company your retirement plan is through. Years ago, it was common for a company executive to hand selct the investment portfolio for a company’s pension plan. When 401(k) plans first came out, however, they were touted as a way for employees to manage this investment for themselves. In truth, however, employees can choose among a limited number of funds and/or plans provided by a company that was picked by a human resources worker.
The vast majority of HR workers have no experience in the financial industry. What is even more concerning is the way in which the plans are choosen. FInancial services companies market directly to these workers, offering free vacations and sometimes even cash bonuses to HR workers who pick their plans. Odds are, no one has reviewed the plan’s investment options to ensure their good ones for their workers.
Recent cases in which workers have lost significant portions of their 401(k) accounts due to mismanagement have highlighted this problem. Workers who had their savings invested with Bernie Madoff never knew that all of their retirement savings rested with one financial advisor, and a lawsuit the workers filed accused their company of not performing due dilligence when selecting a plan.
The plan’s fees are higher than they should be.
According to a recent survey, over 70% of American workers don’t know what the fees are on their 401(k) plans. In many plans, fees are well over 2% of the total amount in the fund. For workers who are depending on the stock market to gain steadily over time, these fees can be disastrous.
The main reason for the high fees is that the administrators of these plans do not have to compete with other companies to get the money of a company’s employees. Since workers are usually only given one company from which to choose their investment options, there is virtually no incentive for a financial services company to offer plans with low fees.
Ideally, try to find a plan with total fees under 1%. If there are none offered in your 401(k), complain to Human Resources and ask for more options.