Thursday, May 21, 2009

Retirement Planning: Do You See What I See (in your 401K)?

Last year, Rep. George Miller, a California Democrat and chairman of the House Education and Labor Committee was not sure that folks understood how much their 401K plans were costing them over the lifetime of investing. He introduced a bill to the committee, interviewed mutual fund heavyweights like John Bogle of Vanguard Group, and eventually tried to get the legislation through Congress. He failed.

Now he is taking the same bill and trying again. Rep. Miller believes that it is what you don't know about that retirement account that could harm you more than the possibility of a market downturn. He acknowledges that the downturn stripped a great deal of wealth from many retirement portfolios. But he feels as though the hidden costs in these plans took them down further than they needed to go and, even as they fell, these fees continued to cost the investor.

Your 401K may be paying fees not only for the administration of the plan but also for the funds in the plan. This can often be hidden from investors when the markets are doing well. The problem for employers is much the same for the individual investor: although much of the language has become easier to read, it still has a long way to go to achieve full transparency.

Over a 20-30 year working career, these costs can deeply impact a retirement plan. Trading fees, investment fees, advisory fees or stewardship fees according to John Bogle's testimony last year can strip up to 75% of the plan's balance if unchecked.

Fixing this problem is not as easy at it sounds. Mutual funds continue to be less than forthright when discussing fees, shifting them to administer plans while declaring that their overall expenses are lower. Turnover rates within the fund, the presence of other funds with in the fund (often the case with life style or target-dated funds) hide other fees within fees, and the fact that what is often considered value funds may in fact be something much more risky all give the investor a veil of cost-effectiveness that might not be there.

Mr. Miller is shooting for disclosure first but openly shows his disgust for what is happening to these accounts, good markets or bad. In his opinion, and this blogs as well, the fees come after the average investor dutifully invests their money.

Some of the options on the table include the index fund and its availability in the average 401K plan. But as we have found out, this is not always as clear an option fee-wise as some would believe. And with SEC investigating the target dated funds, the offering that has caught fire recently as investors sought to protect their money by moving into a fund that promises to adjsut risk over time, shooting for disclosure is the right first step.

In the meantime, here's what you can do. Stick to only a handful of funds, spreading your investment among three to four sectors such as large-cap, mid-cap and small-cap funds with a fixed income (preferably something encompassing as much of the bond market as possible. Keep your index fund investment on the outside of your 401K plan - better to pay those taxes now rather than later. And until target-dated funds fess up and disclose what they really are, stay away from them. A little time and diligence can provide you with the same type of investment at a far lower cost.

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