Category Archives: Tech Writing

Housekeeping Your 401(k)

I usually rebalance my 401(k) investments once a year. This year, doing research for documentation in the financial industry, I picked up a few things you may want to add to your regular financial housecleaning.

The Department of Labor has enacted new guidelines that may wreak havoc in the investment industry in 2017. As we approach year end, it may be worth having a conversation with your broker or benefits coordinator.

All retirement funds have fees attached to them, and I do mean ALL. Some are more obvious than others.  For instance, the conversation you have with your broker may be a line item charge.  But it will be worth it if you come away understanding the following.

Which of the three types of fees are you paying?

  • Plan Administration Fees – general administration costs, charged off the top [to your employer for a 401(k) and often recouped from you].
  • Investment Management Fees – fees specific to the investments you have chosen; some cost more than others, and a few may be exempt.
  • Individual service fees – like the fee to talk to your broker, take a loan on your investments, etc.

Which of the three common fee calculation methods does your plan use?

  • Per capita – this is a fixed dollar amount charged per participant (sometimes for each asset in your portfolio). Everyone pays the same fee, so you’ll always know what to expect. This is great if you are a high end investor. The small investors are paying an inordinately high percentage of their investment in fees.
  • Pro rata – this fee is based on a percentage of your assets. This is to your advantage if you are a low end investor, but if you have all your retirement in this fund, you may be carrying the load for everyone.
  • Hybrid – a combination of fixed dollar and asset based fees. Some combination of the two other methods is used to level the fees so that no one class of investor is unduly burdened.

The pro rata and hybrid methods calculate fees based on basis points (bps), which are a hundredth of a percentage point of the overall investment, i.e., 0.01%. This translates as 100 bps = 1%. Ask your broker to interpret the fees for you.

  • If you pay much more than 100 bps or 1% of your overall investment per year, look closely at the return you are getting on your investment.
  • If you pay more than 200 bps or 2% of your overall investment, look for other investments.

Ideally, your Plan Sponsor [if you have a 401(k) or other retirement plan] and the recordkeeping company (Fidelity, Merrill Lynch, TIAA, etc.) try to manage fees. The Plan Services Expense is paid out of what they internally call the Plan Revenue.  This has less to do with any profits your investments are recouping and more to do with what they have identified as the price of the plan.  The plan aspires to be in balance or revenue neutral.  The price designated meets but does not greatly exceed the actual cost of administering the plan.  This rarely happens as projections are based on known factors, which do not include other people moving out of the fund or the market soaring or taking a hit. So what you need to ask your broker or benefits coordinator is this:

  • In a Revenue Shortfall, how will the shortfall be covered?  Will I be billed?
  • In a Revenue Excess, will the excess be returned to the participants as a Plan Servicing Credit?

If you are participating in an employer-sponsored retirement plan with employer matching up to a certain percentage of your compensation, you may be leaving money on the table. Ask the following:

  • Am I taking full advantage of matching funds?
  • If not, does my employer do a True Up calculation at the end of the plan year?
  • Is the plan year based on the calendar year?
  • What percentage of my pay would I need to take out for the rest of the year to recoup the matching funds I have missed?

For example, if your employer matches your deduction up to 5% of your annual compensation and you only deduct 3% per pay check, you are cheating yourself. The 2% you have given back to your company on your annual income of $100,000 is $2,000.  If you are ten months into the plan year, you have already missed $1,666.67 of matching funds.

But, if your company does a True Up calculation at the end of the plan year, it looks at the total you put in and the total match. If your employer is not meeting the full 5% match, an additional payment is made into your retirement fund. That means, if you up your participation to 10% for the last two months of the plan year, you can make up half of what you gave away.

It breaks out this way, for the first ten months you contributed roughly $250 per month, which was matched 1 to 1. Your plan saw $500 added each month, so at the end of ten months you added $5,000 total. At year end you can expect a total contribution of $6,000. Whereas, if you had put the full 5% in and it was matched 1 to 1 your total contribution would be $10,000 (5% + 5%) for the year.

Changing your deduction to 10% for the last two months will add $1,666.67, but it will only be matched (initially) up to 5% each month, or $833.33. So you add a total of ~$2,500. However, IF your plan does a True Up, it looks at the total amount you contributed: $4,166.67. Less than the full 5%, it should be matched 1 to 1. The total matching contribution at the end of the year is only $3,333.33.  Therefore, the company will pay an additional $833.33 in True Up matching funds.  Your total contributions to the plan are now $8,333.33.  This is still $1, 666.67 less than you might have had at the end of the year, but you can now go back down to 5% for the coming year and come out ahead.

Better yet, leave it at 10% for the first six months of the new plan year to front load your contribution, then lower it considerably during those months you are more likely to need the cash for vacation, school clothes, and holiday gifts. Again, this only works if your employer does a True Up at the end of the plan year, so ask the questions.