Wealth-Killers

While doing research, I came across four stunning new revelations about 401(k)’s and IRA’s. If you have money in one of these plans, I urge you to read this today to find out how to protect yourself from making costly mistakes:

Wealth-Killer #1: The fees you’re paying may be much higher than you think

I’ve written in the past about how Congress passed a law in 2006 protecting employers from liability as long as they automatically put employees’ contributions into certain types of mutual funds, known as “default” investments.

Target-date funds (TDF’s) have emerged as the default investment of choice. Unfortunately, they’ve also proven to be very risky AND they’re among the most costly mutual funds you can buy. (Would it surprise you to learn the mutual-fund industry lobbied Congress to get that law passed and make sure their interests were protected? Didn’t think so.)

So last month, an article in Forbes (“The Trouble With Target Funds”) revealed that, according to the prospectus of one popular target-date fund, your projected fees and expenses for each $10,000 invested is $2,478 over a ten-year period (assuming it grows at 5% a year). That’s 25% of your savings!

So, if you had $300,000 in that fund for ten years, you’d get soaked for – are you sitting down? – $74,340! (And that’s just over a ten-year period!) It also doesn’t take into account all the other fees you’re charged in a 401(k).

The author of this article concluded, “Whoever is buying the funds would not be at the genius level. They have not figured out that they are getting ripped off.”

The bottom line is that compounding is great when it’s working for you. But in traditional retirement plans, the compounding of fees works against you. The more you save and the longer you save it, the more you’ll pay in fees.

Wealth-Killer #2: The fees you pay in an IRA are often even worse than 401(k) fees

While all the attention has been focused on the confiscatory fees you pay in a 401(k) plan, IRA fees have gotten ignored. Many people assume they’re very low. Hold on to your wallet, because a March 2013 Government Accounting Office (GAO) report blew the roof off that myth! (Pages 34-39 of the Report reveal the tawdry details.)

Have you ever left a job and rolled your 401(k) into an IRA? Millions of people do every year. Financial firms often encourage workers who are leaving a job to roll over their 401(k) assets into an IRA also managed by the firm.

Undercover investigators hired by the GAO called thirty of the largest 401(k) providers. Seven of them incorrectly stated there were no fees to open or maintain an IRA. And half of the ten largest firms incorrectly advertised free IRAs on their websites. The fee information was scattered in tiny print in hard-to-find documents on the site.

The study found that at one of the largest IRA providers, the annual advisory fee is 1.5% of assets for accounts with balances up to $500,000. As Representative George Miller noted when he released the report in Congress, “This comes as no surprise since IRAs often come with higher costs when compared to a 401(k).”

So how big of a deal is a 1.5% annual fee? According to the Department of Labor, it’s a very big deal. A fee of only 1% can slash the value of your savings by 28% over the next 35 years.

Wealth-Killer #3: Your plan administrator is a lousy fund picker

A study from the Center for Retirement Research at Boston College in June 2013 found that plan administrators choose mutual funds that lag comparable indexes. Just like the rest of us humans, they routinely chase returns. About the best thing the study could say was that, even though employers choose funds that lag the indexes, at least their choices were better than randomly selected funds. (Translation: Their choices were marginally better than a monkey throwing darts, or a random-name generator.)

Wealth-Killer #4: The new 401(k) fee disclosure rules haven’t helped much at all

In 2012, amidst considerable fanfare, the government announced new rules designed to force 401(k) plans to disclose the fees that we are paying. The new annual disclosure form often runs more than fifteen pages, but it doesn’t provide a simple figure for the annual cost you’re paying.

Even with new laws requiring better fee disclosures, surveys show most participants still have no clue how much they’re actually paying. A 2013 survey from the Employee Benefit Research Institute revealed only half of plan participants even noticed the fee disclosure information, and only 7 percent have made changes to their investments as a result of receiving information about the fees they’re paying.

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