Photo: Daniel Goodman / Business Insider
From the looks of this 2011 AARP study, it’s no wonder millions of workers are getting ripped off by their retirement plans.A staggering 71 per cent of workers surveyed said they believed they weren’t paying any fees at all for their 401(k) plans.
Here’s a wake up call for you:
No retirement plan is free.
There are a number of annual fees tacked onto employer-provided retirement plans, but providers have been able to sneak in hidden charges for years without much pushback.
Under current law, the onus is on your employer to make sure you’re not paying out the whazoo for your plan, but that doesn’t necessarily mean they’re going to put in the effort. And if you haven’t reviewed your plan statement recently, you might have forgotten how utterly unreadable the things are.
All that will change in a few months when the new Fee Disclosure Act goes into place and plan providers will have to make their fees more transparent to consumers. But for now, it’s up to you to figure it out.
I recently spoke with David Loeper, CEO of Financeware Inc., whose book, Stop The Retirement Rip-Off, lays out exactly how to tell you’ve been screwed by your retirement plan and – this is the tricky part – how to convince your boss to negotiate a better plan.
“The industry has been creatively hiding these fees for so long that the majority of the public isn’t aware of them,” Loeper says. “There’s a lot of misinformation in financial services in general which is rightfully why the public is upset with Wall Street. They feel like they can’t trust them and a lot of times they can’t.”
Now’s the time to start reviewing your retirement plan. Here’s how:
Get out your magnifying glass. You’ve got to suck it up and dig up your retirement plan paperwork if you want to really find out how much you’re paying. Pull out your account statements and look at the summary of your plan on your annual report.
Fees typically fall into three categories: plan administration fees, investment fees, and individual service fees. But plan providers like sneak in extras like representative fees, administrative fees, distribution fees and expense ratios, Loeper says. When the new Fee Disclosure Act takes effect, there’s going to be a some major “retirement plan sticker shock” going on, he predicts.
Gauge whether the fees are reasonable. If you’ve done the maths and come up with a plan that’s charging between 0.25 per cent and 0.75 per cent annually, you’re probably in good shape. Anything more than that and you had better be getting a lot of personalised financial service from the provider, Loeper says. That should put you in the 0.75 to 1 per cent range. Some plans charge fees topping 4 per cent, he says, which are “outrageous and not even necessary.”
Look for a brokerage window. If you’re paying too much in fees, see if there’s a brokerage window available for your plan. That would allow you to open a personalised brokerage account for an annual fee (usually about $100) instead of using default investment options. Other names for brokerage window: self-directed account (SDA) or self-directed brokerage account (SDBA).
No brokerage window? Time to speak up. Most plans are managed by human resource departments, but if you’re working for a small business, it’s probably just your boss. Approach them casually, tell them what you’ve found and ask them if they’ll look into negotiating a better plan. If you’re unsure, check your disclosure statement, which lists a plan administrator to contact, Loeper says.
There’s power in numbers. It certainly won’t hurt your case if you discuss your findings with coworkers and get them on your side. Your boss will get the ball rolling a lot faster if he/she is worried about a full-fledged mutiny.
Don’t give up. It’s not fun to analyse financial data but this is your retirement we’re talking about. Think of it this way: If you’re 55 years old and are shooting to have $150,000 accumulated by retirement, an extra 1% access fee could delay your retirement by three years, Loeper says. “A lot of people want the easy answer on this plan, but is it really worth working three entire years for a needless fee? You’d have to save an extra $4,500 per year to retire on time.” (See 5 money habits that’ll wreck your retirement.)
Use your last resort. If you’ve exhausted all your options and your employer is unwilling to budge, it’s time to take your complaint to the Department of labour. Call them at 1-866-4US-ADOL to file a claim. You’ll be covered by whistleblower protection law, which keeps companies from firing tattletales and protects your identity.
In 2005, the agency only logged 10 complaints, but just wait until the new fee disclosure act is in place and people start to see exactly how much they’ve been paying in fees.
“These (new) expense statements coming out will be very clear,” Loeper says. “There will be people who didn’t think they were paying that much but are paying thousands. It’s definitely an envelope you’re going to want to open.”
Don’t stop at your retirement plan. See why it’s so important to make a will >