Dear Mr. Market:
If you ask any hard working American what their goal is the answer will usually have some something to do with retirement. While this common goal should be attainable through focus and discipline the market has certainly thrown its fair share of setbacks at investors. For most Americans their home is their largest asset and second is their retirement plan (401(k), 403(b), Simple IRA, SEP IRA, etc). You have a limited amount of control on the value of your home but how can you manage and monitor your retirement plan to help make your retirement goals a reality? In this article we will take a step back to the basics and look at factors that will have a profound impact on the performance of your retirement accounts and what you can do to control them.
Last fall legislation was passed requiring 401(k) providers to completely disclose their entire fee structure to participants. Investors will now be able to see what fees are associated with the various funds in the plan and what they are paying to participate in their employers retirement plan. According to CNN Money, a working couple will see nearly a third of their investment reduced by these fees over their careers– that amounts to nearly $155,000!! Schwab reported that nearly 30% of investors had absolutely no idea that they paid any fees for their retirement plan.
With expenses like this it is even more important that the investments within your plan are working for you and performing well. All too often individuals simply pick a couple of mutual funds that they heard about at a “brown bag lunch” presentation on their retirement plan at work and have never looked at them since. Even if employees view them periodically they don’t always know what to do or what to change. How long has it been since you have really looked at the investments in your retirement plan or made any adjustments? Do you know what fees you are paying and how they impact your portfolio?
Here are some ‘eye opening’ statistics that every retirement plan participant needs to be aware of:
- The average mutual fund returned approximately 7% before fees. With fees figured in the return dropped to 4.5%; this means that over 1/3 of the return was taken away by fees!
- Smaller 401k plans (100 employees or less) were charged an average fee of 1.29% while larger plans (100+ employees) were charged 0.43%. A difference like this will have a profound impact on any portfolio.
- Additional fees can be assessed if you leave your company and the funds remain in the retirement plan. Contact your plan provider for more information as each plan is different, consider rolling over old plans to a self directed Rollover IRA.
What can someone do to improve the performance and limit the expenses associated with their retirement plan? Here are a few talking points that everyone should consider when reviewing their plan:
- When looking at investment options don’t simply fall in love with the one or even three year return numbers. Look at how the fund compares to its peers and definitely see how it compares to its benchmark (large cap, mid cap, small cap, international and fixed income).
- Take a moment to look at the fees associated with each investment option and realize that these are charged yearly…even when the fund does not perform well.
- Keep in mind that nearly ¾ of the ‘professional’ mutual fund managers do not beat their benchmark on a yearly basis! Don’t simply ‘pick and forget’ the funds in your plan when putting together your allocation. It is vital that you remember that you are buying that fund with every future contribution to your plan. If the fund can’t beat the market why not just match the market with an index fund?
- Take the time to review your allocation and rebalance your account annually. Portfolio allocation has a major impact on the performance of your portfolio.
- If you have several retirement plans from former employers consider rolling them over to an IRA where you will have more control over investments and you can control fees.
- Know who you are as an investor and what your ideal allocation should be in order to meet your goals. There are numerous questionnaires available online – if you are going to do this we would encourage you to complete at least two or more.
- If this is more than you want to or care to do then find a financial professional that can assist you with your plan! Ask them the same questions that we mentioned in this article. What are their fees and how are they paid? What do they invest in? What are the allocations and strategies they invest in?
Your company’s retirement plan can be a powerful tool to make your retirement dreams a reality. Take the time to ensure that your hard earned contributions are working for you and not sitting in underperforming funds and being eaten away at by excessive fees. Take a moment and think about the impact that an additional $155,000 would have on your retirement goals today!
If you have any questions or comments we would welcome your feedback, please don’t hesitate to contact us at your convenience.
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