Ask The Money Coach

Archive for the ‘Retirement Planning’ Category

A reader of AskTheMoneyCoach.com wanted to know whether or not it’s a smart decision for them to launch a 401(k) or 403(b) investment plan later in life. The person asked me simply:

Q: “Should I start a 401(k) or 403(b) investment plan at 63 years of age?”

A: Yes! Actually, I think it can be a good idea to start a 401(k) plan at any point during your working years. You may know that a 401(k) or 403(b) is an employer sponsored retirement savings plan. But you may not know the full range of benefits associated with these plans.

Continue reading “Should You Start a 401(k) After Age 60?” »

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With many people worried about Social Security, and more employers doing away with traditional pension plans, the 401(k) is taking on a greater significance for those planning for retirement. But how do you know if the 401(k) plan offered by your employers is a good one — or a poorly run one?

Experts say there are definite warning signs you should be aware of. Here are four ways to spot when your 401(k) is being mismanaged:

1. The Plan Charges High Annual Fees

“If a plan has abnormally-high fees, it’s probably a sign that the company is not taking its fiduciary responsibility seriously,” says Mike Alfred, co-founder and CEO of BrightScope, a free service that tracks and compares more than 55,000 401(k) plans.

How high is too high when it comes to fees? Alfred likes to see fees of about 1%. “Certainly, there are not a lot of services offered by 401(k) plans that are worth 2% a year. Nevertheless, such fees get charged all the time,” he notes.

The issue of high fees is most prevalent among smaller business, where some 401(k) plans may impose yearly fees ranging from 3% to 5% of assets.

“But even for small companies, with only a dozen or so employees, there’s really no good excuse to justify those kind of fees.”

2. The Plan Has Major Gaps in Investment Options

The best 401(k) plans offer ample opportunities to invest in every asset class, including stocks, bonds, commodities, real estate, and so on. But some company plans are missing entire asset classes.

“If a 401(k) plan is missing key asset classes, it’s a sign of mismanagement that almost rivals high fees,” says Alfred. The problem with a plan that fails to provide, for example, a real estate fund or an international fund, is that you’re missing out on significant investment opportunities and hurting your chances to diversify your portfolio.

Continue reading Lynnette’s article, Four Ways to Tell If Your 401(K) Plan is Being Mismanaged on WalletPop

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A 401(k) plan has lots of fees, and savvy investors may be aware of various investment-related charges – such as a management fee to a mutual fund manager’s or the sales commission paid when making a transaction.

What most people don’t know, however, is that 401(k) plans also include several other hidden fees that can eat away at their investments.

These include so-called “12b-1 fees” (which are marketing fees passed along to investors) and administrative costs of various types imposed by retirement plan sponsors.

Finding these fees isn’t easy. In fact, you have to pore over a fund’s prospectus and an annual report to ferret out exactly what charges are imposed by a 401(k) retirement plan.

Perhaps this explains why, according to an AARP survey, more than 80% of retirement plan participants have no idea what their 401(k) charges. Even worse, some people mistakenly think that investing in their 401(k) plan on the job is “free” and that no fees are charged.

In reality, in 2009, 401(k) investors in stock funds paid an average expense of .74% of their assets, while the typical bond investor paid an average of .55%, according to a report from the Investment Company Institute.

Think small numbers don’t make a big difference? Think again. A GAO report found that a typical retiree will lose about $100,000 when their 401(k) plan has fees of 1.5%, instead of .5% in fees. That’s just a one percentage-point difference, but it has a huge impact.

Fortunately, there is some good news on this topic and change is soon coming. Under new guidelines issued by the U.S. Labor Department, by January 1, 2012 retirement plans will have to do a better job of clearly disclosing their fees and charges. Right now, disclosure is murky at best.

In the meantime, until disclosure improves, there is an easy way to see what your employer-sponsored retirement plan is costing you. Read the rest of Lynnette’s article, How Your 401(k) Plan Is Costing You Money on WalletPop.

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