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VIDEOWhat Your Boss Isn't Telling You About Your 401(k)
Five ways to improve your return, pay lower costs, and save more money.
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Before I tell you how, allow me to come clean about how I feel about these savings vehicles: They were never intended to be mainstream pension plans, are generally overpriced, and often inadequate to meet America's retirement needs.
They fall short because most workers don't know how to use them, underfund them, and don't know how much they really need to save.
Having gotten that off my chest, I'm confident that if you're proactive, you can vastly improve your plan and boost your retirement savings. There's a lot you can do.
Here are five ways that your boss probably won't volunteer:
You Can Cut Costs to Improve Your Net Contribution. Most plans contract with mutual funds or third-party administrators to set up programs. Middlemen fees, which are rarely fully disclosed, eat up your savings because mostly they come out of your pocket.
Unfortunately, it's difficult for most employees to do a reasonable cost comparison. One new tool that offers promise is BrightScope. If your employer is in BrightScope's database of some 30,000 plans, you can see how your 401(k) compares in terms of costs, investment menu, and options.
For example, I ran Bank of America's (BAC) 401(k) through BrightScope. It told me that while the plan was in the top 15% of all programs, it could be better. The plan's shortcomings would result in you working 12 additional years and losing up to $262,100 in additional retirement savings.
Because I don't have access to BrightScope's full database or algorithms, I can't vouch for the accuracy of this number. The point is, you can usually lower costs to boost returns.
If you're paying more than 0.50% annually for expenses in a stock fund and 0.25% annually for a bond fund, you're paying too much. Any large plan should get you rock-bottom institutional pricing. Find out what your plan costs and get them to lower expenses.
Your Plan Can Offer Automatic Rebalancing. This is a great feature that can keep you on track. Let's say you're nervous about market risk -- as you should be -- and want to keep only half your money in stocks. But the recent run-up has changed that allocation to about 60%. An automatic rebalancing tool would get you back to your target.
Slightly more than half of employers offer automatic rebalancing, according to Hewitt Associates (HEW), a benefits consultant. Ask for it. It will help you lower risk and achieve your goals.
Automatic Contribution Increases. This is another autopilot feature that will boost your plan contribution if you get a raise. So you're saving more money without having to make a decision about it. Research has shown that if you don't have to ponder whether to escalate your contribution, you'll save more.
This feature is typically paired with auto-enrollment, which triggers contributions as soon as you join an employer. Nearly 60% of employers surveyed by Hewitt offer this essential option.
Roth 401(k) Option. The biggest downside of a 401(k) is that you'll have to pay taxes on withdrawals when you retire (and before if you have an emergency). The Roth 401(k) doesn't have tax withdrawals. The trade-off is, unlike a conventional 401(k), your contributions will be taxed.
Every employee should start socking money away in a Roth. My prediction is that with Medicare and Social Security in fiscal trouble, taxes will likely rise. That makes the Roth a better deal over time. Yet less than one-third of employers offer a Roth option.
Avoid Company Stock. The list of employees who got burned by holding company stock in their retirement plans is a long one: Enron, Worldcom, Lucent, etc. While you may have supreme faith in your employer, you can never fully know what they're doing in the boardroom or how they do their books. The increasing volatility of the stock market at large is a huge troll that won't go away, either.
This isn't something your boss will like to discuss, but company stock can be toxic. Diversify out of it and put your money in something that's immune from stock market risk.
Keep in mind that your employer has a legal responsibility under a federal law called ERISA to provide the lowest-risk plan at the lowest-possible cost. There are a host of employers who are being sued right now for failing to do that.
How do you get your employer off the dime? Organize an employee group and present some sensible alternatives. The large mutual fund complexes such as the Vanguard Group and Fidelity Investments offer many low-cost 401(k) funds.
You'll be surprised how much you can accomplish and your employer will be compelled to listen. After all, his money's in the plan, too.
Got a personal finance question or subject you'd like me to explore? Let me know by leaving a comment.
John F. Wasik is author of The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.
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