I love Smart Money’s series, Ten Things Your [Insert Someone Here] Won’t Tell You, because it really opens your eyes to some of the shady practices of some operations you may otherwise think are being honest and above board. In the latest installment, Smart Money takes a look at 401K’s and the little things that go on that they just won’t tell you about.
1. “We’re making a mint on your 401(k) — even if you’re not.”
I think this is the most egregious of the ten things and it revolves around the fact that the provider is being paid on a percentage of the money its managing and not for their performance. A lot of their fixed costs are instead charged on a percentage basis, such as administrative costs, and while the assets may increase, the administrative (and other fixed costs) aren’t likely to increase on a one to one basis. Luckily these sort of things are coming under the scrutiny of state attorney generals, such as Eliot Spitzer of New York.
2. “You’re buying wholesale, but we’re charging you retail.”
If you buy a fund all by yourself, it’s understandable that you’ll be paying retail because you’re not talking about millions of dollars (or perhaps you are, in which case could you send some my way?). If you buy a fund through your 401k, it’s conceivable, based on how large your company is; that the administrator is moving around millions and you should get some sort of discount on the retail fees – and many times they do. The disconnect is when they pass the charges off to you, they don’t merely divide what they pay and pass it through, they charge retail fees for something they paid wholesale for. That should be illegal.
3. “No one in his right mind would buy these funds — given a choice.”
When you sign up to the 401k, you’ll likely be limited to which funds you’ll be allowed to buy. Unfortunately, sometimes this means that you get to pick from lackluster or under-performing funds because your plan administrator, someone in HR perhaps, doesn’t know what he or she is doing. Also, Smart Money warns that sometimes the funds can’t handle a huge influx of money (the reason why some funds close) because it’s harder to make the same rates when you have so much more to invest.
4. “Our ‘target-date funds’ may miss the target.”
This isn’t a 401k specific issue but one about the target-date funds themselves, some may be incorrectly allocated based on expert opinion, especially if your administrator (and not a large brokerage) sets it up. That’s not to say the big brokerages have perfect target retirement funds, it’s just that they have more minds on the problem which hopefully reduces the problem. There isn’t event agreement on allocation, I did a review of target retirement funds and found the allocations were all over the board.
5. “We offer tons of investment options. Too many, in fact…”
Just as #3 (too few funds) can be brutal, too many options muddy the waters. A survey showed that the average number of funds in a 401k was 19, but that 10-12 was the ideal number, anymore and the investor was “paralyzed.”
Things six through twelve will be forthcoming.
Source: Yahoo Finance