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7. "If you quit your job, you'll have to pay to keep your 401(k) here."A Hewitt study shows that 32% of people who quit their job wind up leaving their 401(k) with their old company. Maybe that seems easier than hassling HR for the paperwork involved in transferring a 401(k) to an IRA. But chances are, you're paying for it another way. Some employers foot an upfront fee for costs associated with running your plan while you work for them, but an increasing number are pulling the plug once you're off the payroll, says Cook Street Consulting's Sean Waters. This may or may not be clear to employees. "It's not like you get an invoice saying, 'Hey, you owe me $40 a year now,'" Waters says. It makes a case for consolidating your various 401(k)s, because that cost will only increase for those who have multiple plans. "It doesn't make sense to have 401(k)s all over the planet," Waters says.
Often, the simplest solution isto roll them over into your current plan. What if you love your new job, but hate the shoddy funds offered for your 401(k)? Consider an IRA rollover, which means a separate account with an extra set of fees, but also the flexibility to pick the investments you want.
8. "You'd be better off in a Roth 401(k) too bad your plan doesn't offer it."In a traditional 401(k), taxes on your investments are deferred until you begin withdrawing your money in retirement. With the increasingly popular Roth 401(k), however, you pay the taxes up front, then make withdrawals tax-free. Granted, the Roth isn't for everyone (see "Ask SmartMoney"). But if it's the right choice for you, you'll likely be disappointed to discover that your company doesn't offer it only 5% of plans do.
Since Roth 401(k)s first appeared on Jan. 1, 2006, the primary obstacle to their rollout has been the fact that they were supposed to disappear after 2010. Now, thanks to this year's Pension Protection Act, they're permanent but retirement plans have yet to catch up to the legislation. Companies cite other reasons, like administrative complexity, for not offering Roth 401(k)s out of the gate, according to a Hewitt study conducted before the new ruling.
Remember that a 401(k) plan is about having the most money possible in your pocket during retirement. If your plan doesn't include the Roth and you think it's the best option for attaining your goal, ask your benefits department why and what steps employees like you can take to get one. The logistics are their problem.
9. "You want to see some outrageous fees? Try a variable annuity 401(k)."Insurance companies that run 401(k) plans often package them as annuities. It's the common format for small plans and 403(b)s, which are geared to teachers, professors and employees of nonprofit organizations. It's also an expensive one. The insurance company slaps a fee on top of the expense ratio you pay for the mutual funds in the annuity. In return, plan participants can get some type of insurance benefit, like principal protection or the opportunity to annuitize their income stream at retirement, says Michael DeGeorge, the general counsel for the National Association for Variable Annuities.
To be fair, insurance companies have the clout to haggle successfully with asset managers for lower expense ratios on the underlying funds. That said, the combined total of the expense ratio and the insurance fee will still be higher than the cost of other plans. All fees should be explained in the prospectus, but critics of the annuity structure complain they're not often broken out in quarterly statements. Instead, the provider quietly deducts its fee from the total return on your fund. Unless you study the prospectus, you may never notice.
10. "Your nest egg could be a whole lot bigger."In truth, 401(k) plans are getting better. As lawmakers and regulators are scrutinizing fees, some providers are offering participants access to a more attractive suite of investments and refunding money to plans when expenses exceed costs and a set profit. That said, it's still hard for 401(k) investors to grasp how a small difference in expenses can make a big difference for their retirement. Consider this: Brent Glading of the Glading Group, who used to sell 401(k) plans for Merrill Lynch and Dreyfus but now negotiates better plans for company clients, typically can shave 0.20% to 0.40% off a plan's expenses. That doesn't sound like much, but it can translate to $100,000 per employee over 20 to 30 years.
Additional reporting by Janet Paskin
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