Many people fail to grasp their 401K plan charges them. For years these costs were never disclosed at all and now some plans donít fully inform participants where their money goes. If you take someoneís money and donít tell them you did it, some people call that theft. Bowing to congressional pressure, primarily from Representative George Miller (D-CA), consumers can see their 401K costs. For those of you who still donít get the message, open Microsoft Word and type 100 times ďMy 401K plan charges me.
During the Great Recession, many companies dropped or reduced matching contributions to 401K plans. A random guy flagged me down in Seaside and asked should he stop his 401K plan elective deferral since his employer dropped the match. I told him that only made sense if he fully funded a Roth IRA. Hopefully he stuck with his 401K or added a Roth; patient investors rode the market for a 120 percent gain. Fees can erode growth and can be just as deleterious as no employer match.
Ian Ayers, Yale Law School, and Quinn Curtis, University of Virginia School of Law, released a paper titled ďThe Pervasive Problem of Excessive Fees.Ē Ayers and Quinn examined more than 3,000 401K plans with total assets topping $120 billion. Their study found 1 in 7 401K plans were so laden with fees a participant lost all tax advantages. This is not a rallying cry to drop 401K participation but investing after tax, under some circumstances, beats high cost plans. While the veil has been lifted, there remains foot-dragging by some plan sponsors and employers. Without good data, participants continue in the dark.
With Wall Street salivating, standard libertarian doctrine replaces pensions and Social Security with defined contribution plans. Ignored and unsaid is defined contribution plans are expensive vehicles to maintain. Some employers, like Rosemary Beach, use low-cost leader Sharebuilder. Fees are legitimate and often necessary but the lack of disclosure is inexcusable. As fiduciaries employers should advocate for their employees.
Another troubling development over the last 10 years is investment advisers layering their standard management fee on top of 401K plans. Often these fees are more than the fee the plan investment advisor charges. If you give advice on how to invest the 401K assets by all means you should be paid. But the investment advisor canít make trades on 401K assets nor can the investment advisor choose specific investment options. An entire industry has popped up called billing for held-away assets. Google it if you like. Letís do the math. Iíve seen defined contribution plans charge from slightly over 1 percent to more than 2 percent. If we split the difference at 1.5 percent and assume 7 percent growth, a 1 percent additional AUM fee cuts your return by one-third. It helps someoneís retirement, maybe not yours.
TRICARE Pharmacy Update
To minimize co-payments TRICARE beneficiaries can opt for prescription drug home delivery potentially saving hundreds of dollars annually. TRICARE website (Tricare.mil/pharmacy) recently added a new tool to evaluate potential savings. Simply enter the brand-name and generic medications currently filled at a retail pharmacy and compare with home delivery costs. A 90 day supply via home delivery costs $13 versus a $17 copayment for a 30 day supply by a retail pharmacy.
Buz Livingston, CFP has a Blue Mountain Beach based fee-only, hourly financial planning and investment management firm. For more information, visit www.livingstonfinancial.net or come by our office at 2050 Scenic 30A, M1-Unit 230, Redfish Village.