There's a Surprise in Your Next 401(k) Statement
Now more than ever, the onus is on you to save for retirement. With most companies having done away with traditional pension plans, 401(k)s and other contribution-based retirement plans have become the norm. And with their growing popularity comes growing scrutiny, with 401(k)s getting a lot of criticism over the years for having high fees that are hard even to discover.
That's about to change with your next 401(k) statement.
Now new rules require plans to give you a lot more information, including badly needed disclosures about how much you're really paying to sock away money for retirement.
A Revealing Look at Your Old Plan
When you get your next 401(k) statement at the end of September, here's a list of things to watch for, and some guidelines to help you judge your employer's retirement plan and make the best choices for your future:
1. How much you pay to invest.
Until now, you've often had to dig deep in order to find any information about the investment options you have within your 401(k). But the new rules make it much easier, requiring disclosure of total annual operating expenses, both in percentage terms and in raw dollars and cents for every $1,000 you have invested in your account.
What you'll likely find is that fees are much higher than you'd expect. With many actively managed mutual funds (popular investment options in 401(k) plans) charging 1% or more in annual expenses, an account with $50,000 in retirement savings could be costing you well over $500 in lost returns each and every year. But paying less than 0.5% or $5 per $1,000 invested is a good sign.
2. How your investments are doing.
The flip side of how much an investment costs is whether it's getting the job done for you. New rules require funds to provide return information for a variety of timeframes, including one, five, and 10 years. More importantly, those returns also have to be put in the context of an appropriate market benchmark.
As a result, you'll be able to see not just how well you're doing but also how your investments have stood up to the competition. That way, even if the market has a good year, you'll know if a fund you've chosen doesn't match up -- and be able to consider better alternatives.
3. What you pay for other plan expenses.
Too many investors have made the mistake of thinking that the fees they pay for mutual funds and other investment options represent the total cost of their retirement account. But a variety of other administrative fees and transaction costs can be an even bigger drag on the growth of your savings.
The new rules require your employer to tell you if it passes on any general plan administrative expenses as charges to your account. In addition, if you pay any special expenses for things like taking out a 401(k) loan or splitting up your account in connection with a divorce, then your employer must disclose them as well. Such charges must appear at least quarterly and will most likely end up incorporated in your regular quarterly statement.
Ideally, you won't find any expenses here, as your employer should cover all expenses. If not, though, you'll have a better sense of how much of the bill you're shouldering.
4. How to get things done with your plan.
Finally, the new 401(k) disclosure must give you information about the way the plan is structured and what you need to do to take advantage of it. For instance, your employer needs to let you know how to make decisions about choosing investments and a list of current investment options, as well as any other arrangements that may let you go "off the menu" to choose other investments through special directed brokerage accounts.
Don't miss out!
After the market meltdown in 2008, many workers got too scared to look at their 401(k) statements, choosing instead to set them aside or just pitch them. But all the new information that your employer is required to provide won't do you any good if you never see it. So even if it's been a while, bite the bullet this time around and open your brokerage statement. You may learn a lot from what you see.