Imagine you're buying a car. You walk into a dealership, and, without showing you any cars, the salesperson explains that every single car on the lot costs between $17,000 and $30,000.
Your first question is probably, “What kind of car can I buy for $17,000? What features do these cars have? Are they used? New? What, exactly, would I be getting for $30,000?”
Sounds ridiculous, right? Well, that's the scenario that may be playing out with your 401(k) plan right now. You're paying fees for your 401(k) – some fees are higher than others – but you may have no idea what you're getting for those fees. Is your 401(k) plan a brand-new, shiny Cadillac with every major upgrade you can think of? Or is it a lemon with 300,000 miles that will break down as soon as you drive it off the lot?
For those who want to know the answer, you're in luck. New Department of Labor-sponsored rules that went into effect in July mandate increased transparency among 401(k) plans. For the first time, the kinds of fees – and amounts – are required to be disclosed to plan participants.
Fee disclosure is a good chance for 401(k) plan participants to take a good, hard look at their plans. Here are some questions to ask of your plan:
1. Do I have an investment fiduciary on my side?
An investment fiduciary is a financial advisor who co-manages your employer's 401(k) plan assets but is held to the highest legal standards in the industry and must act in your best interests. Not sure if you have an investment fiduciary advising your plan? Ask your plan sponsor or HR department.
2. What kinds of fees am I paying?
Take the time to review your quarterly statements to determine who you are paying and what you're paying them. Most plan participants will see the fees show up by the end of the third quarter. All will see them by the beginning of the fourth quarter.
3. What am I getting for those fees?
If your plan fees are on the higher end (a professional can help you determine whether they are), your plan should include sophisticated services in order to compensate for those fees.
For instance, if your plan is paying for an advisor, you should see that person on a regular basis. They should have tools to help you understand planning strategies, market movements and how to put it together.
Remember, if your plan comes with high costs, it should also come with high services.
After asking all these questions, if you're not happy with the answer, you can do something about it. Speak to your human resources department or plan trustees to determine whether you can lower your fees, increase the amount of services your 401(k) plan provides or switch to a plan that is more in line with what you and your fellow employees expect out of a retirement savings plan.