Controlling Your 401(k) Amid Fees
NEW YORK ( MainStreet) Of all the pieces in your financial life as an employee, it's your 401(k) that may be hardest to control or understand.
That's because plans are sponsored by employers, who decide who administers your plan and what investments you'll have access to.
The basic deal is that the employer matches your own contribution, up to a level it chooses, and you're permitted to put in more money, up to $17,500 per year, even more if you're 50 or over.
That money is then invested through an administrator chosen by the employer, and you hopefully collect the money at retirement. You may get a chance, once a year, to direct money into a menu of mutual funds. You may even be able to borrow against your balance.
Brightscope offers analysis and ratings of some large corporate plans, and the results can be eye-opening. A good plan can be costing hundreds of thousands of dollars more than a mediocre one, given the administration fees of the plan manager and the fees charged by the mutual funds it invests in.
As the light has shone on 401(k) plans, administration fees have gone down. A few years ago they averaged over 2%, off the top, every year. They're now averaging closer to 1%. Brightscope's research indicates that, in general, the smaller the group you're in, the higher the fees you're charged.
The main chance you have to control a 401(k) is when you change jobs. In theory you can keep the money where it is, roll it over into a new employer's plan, move that money into an Individual Retirement Account (IRA) or just cash out and pay taxes on the balance.
That's the theory. But some plans discourage former employees from staying on, while others have long delays in accepting "rollovers" from other plans.
The IRA choice is aggressively marketed by 401(k) administrators, because it keeps their own fees rolling in, and most consumers don't yet pay attention to the fees.
Ian Ayres, a Yale law professor, recently co-wrote a paper on high 401(k) fees with Quinn Curtis of the University of Virginia, then sent letters to 6,000 plan sponsors his research indicated were paying above-average fees.
The head of the plan administrators' trade group, Brian Graff, fired back with a blog post calling the letters "shocking" and "threatening." Brightscope, the source of much of Ayre's data, objected to use of its name, and the letters stopped.
Ayres himself is something of a gadfly. Since sending the letter he has gone on to suggest how to use an endowment to save journalism and questioned Microsoft's claims for its Bing search engine. His challenge to the industry looks to be a one-off.