Buy Low Sell High
Worcester, MA
Female, 49
I converted an existing 401k for a small tech company about a year ago. I moved us from an insurance company to a brokerage platform. We are saving a ton on fees.
I have also a background in financial planning, so I know how the 401k can fit into your daily budget. The biggest problem I see is that people do not know how to take advantage of this awesome tax gift from Uncle Sam. I think the reason if that most people do not know how to approach their HR department and ask questions.
Hi Telly,
That's a great question. I bet most people don't realize that their employer is incentivized to partner with a particular provider. I happen to administer the 401k for the employer (or the "plan sponsor" as they are called) and have been offered these incentives.
The problem with these incentives is that they may influence the plan sponsor to pick a plan with the best incentive instead of a plan that is best for the participants.
The incentives I have seen involve having the fees paid by the participants "swept" over to the third-party administrator. This directly reduces the cost of the plan for the employer as they would normally have to pay for this service. One could argue, at a high level, this is a wash for participants because it makes it more likely that employers will offer a 401k, but it can also create a problem if there are better plans that do not offer an incentive.
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Wow, another good question. And I thought people were going to ask me if they should buy gold and put it in the ground.
First, a 401k plan is nothing more than an IRS designation for a pool of funds. Think of it as a magic bubble that gets special tax treatment. A 401k is not insured because it can be empty.
If your plan administrator goes out of business, that will have no effect on your assets - the plan would just be transfered to a new administrator. Of course, if a plan administrator does a sloppy job then they may cause you to violate the IRS guidelines and you would forfeit your special tax treatment. That would be a major disappointment to the participants who were counting on the plan. I would be interested in hearing from others if they know of any plans that have recovered from this.
Assets held in a 401k are generally held in a SIPC insured brokerage account. Every 401k that I know of is either individual stock, ETF's or mutual funds. I do not know if an investor can invest in rare objects and real estate in a 401k (as they can for a routine IRA) since most 401k also have a company match and regular contributions making it a better fit for bonds and equities.
SIPC will cover up to $500,000 in securities and $250,000 in cash in the event that a brokerage firm becomes insolvent. In addition, most larger and well-known firms have a collaborative insurance plan to increase those levels to a much higher level. YOu should check with your institution if you have a large balance. Also, make sure you get an annual statement in paper form. If you ever have to collect from SIPC you will be very, very glad to have that.
Most people should worry more about getting as much money in there each year and not worry too much about it being insured. Each year, a wonderful "window of opportunity" passes if you are not making a contribution.
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Remember hanging out with your friends and negotiating a baseball card swap? You'd analyze the merits of Jeter vs. Sosa vs. Griffey Jr. and slog it out until everyone was satisfued that a fair exchange had taken place?
Well, it's not like that.
When an employer switches plans, it is usually because they are reducing costs (either overhead or real fees). Plans are sold on the basis of costs and ease of transition from the old funds to the new funds. Great liberties are taken to squeeze size 10 feet into a pair of size 8 shoes.
Once the swap is made you cannot go back to the old mutual funds. But, happily, you are always free to complain to the HR person. Look over the expense ratios of all the funds and then invest in the lowest cost funds of the strategy that you want.
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I keep a pretty close eye on industry changes, and that is not one that I have heard. At the moment, the IRS allows you to take pre-tax money and save it until you turn 70.5 at which point you must begin taking the money out (taxed).
The only changes I read about are pushed by progressive-minded strategist who would like to see the whole system dismantled (arguing that only the rich can afford to save this way) and replaced with a mandatory withholding from wages that would be invested with a guaranteed 3% return. So far this idea has not gotten traction, but if young people don't start using the 401k system (voluntarily) then it may eventually get replaced.
The one change that I have seen, as a result of people living longer, is the trend to keep money in the stock market after retirement so purchasing power is maintained.
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The biggest improvement has already happened! In August 2012, every 401k plan was required to start publishing the annual expenses (cost) to the employee. There isn't much more you can do besides show people what it costs and let human behavior do it's thing. How many people got the notice and did not read it? That's what needs to change.
After giving it more thought, I want to add a more concrete change: I think every 401k plan should be required to have at least one FDIC insured cash option and an index fund in each investment category (for example, MSCI index, S&P500 index, bond index and FTSE index).
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I have seen those statistics, and these is a lot of truth to the idea, but let me note that it is not a complete apples to apples comparison.
First, I want to admit that I had to research the term "MER". Apparently this is a Canadian term for what Americans would call the "expense ratio". Expense ratios are what every investor should know before they commit one penny to any publicly traded investment (mutual funds, ETF, ETN, MLP - they all have them). They are listed online, and in the prospectus, but you may have to hunt a bit. There are plenty of online resources: Google finance, Yahoo finance, AOL finance, etc.
There is nothing I love more than an index fund and I recommend it at cocktail parties when people try to pry investment ideas from me (I am FUN at parties, really!). I like them because they are very low cost ways to get market exposure. But, even the investable index underperforms "the index" because the mythical index that we use as a benchmark has no costs associated with it. Over time this is a fantastic benefit and makes it hard to outperform. And please note! Index funds have lower costs than active funds and so over the long run you can see the same advantage.
Your main point is excellent and I do not want to skip that: are active funds the biggest swindle of the modern age (Modern Portfolio Theory is less than 100 years old)? Well, I can tell you it’s a swindle I would like to see less of, but there have been some fabulous swindles and I don’t’ think expense ratios will make the short list.
I don’t know what context your 3% MER is charged, but I will assume you are referring to some kind of pension scheme. In the States, the typical 401k participant is paying 2.5% - this is way, way more expensive than investing through other methods. The price takes advantage of the fact that people have no choice over the plan, that most people are highly motivated to participate and that the employer’s match will drown out the high fees.
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LOL, that's a good question! Since we use a brokerage platform, and therefore they can buy anything they want from cash to gold, it would be hard for them not to take personal responsibilty for their choices. Most of them are just happy when the balance goes up.
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