Don’t Let Surprises Derail Retirement Savings
Surprises. They come in all shapes, sizes, and types. In 1994, my parents bought me a new car three months after I signed an athletic scholarship to play football for the University of Tennessee. A few years later, Coach Fulmer called me into his office for a meeting that I thought related to a speeding ticket (somehow college football coaches know everything about their players). Instead, he sat me down and informed me that my grandfather had passed away. Good surprises, bad surprises, we all have them throughout life.
What kind of surprise will it be this summer when you receive a statement showing all of the expenses associated with your company’s retirement plan? At best, you knew they were there because they’ve been disclosed on your statement all along. At worst, it’s a frustration that this is the first you are hearing about these fees. Unfortunately, most companies have never disclosed their fees to participants in the past simply because retirement plan vendors had no legal obligation to do so. No longer is that the case.
By August 30th, 2012 your employer will disclose to all eligible participants in your company’s defined contribution plan (i.e., 401(k), 403(b)) how much it costs to invest in the plan. Expenses for investment management, financial advisory fees, record keeping and plan administration will now be broken out line by line instead of bundled inside of the investment options within your plan. Thankfully, folks in the financial services industry can no longer be disingenuous saying “administration and record keeping is free.”
Don’t be alarmed if you didn’t know these fees existed. A survey published February 2012 by AARP found that 71 percent of those polled believed that they did not pay fees on their 401(k)’s. Six percent said they did not know whether fees were levied.
What should you do with this information?
Keep Investing: It’s easy to get frustrated with fees you don’t know about and just decide to stop investing. However, it’s not all about fees. It’s also about saving enough. Don’t let these new disclosures slow down your retirement savings.
Diversify: The key to smart investing is having the right mix of stocks, bonds, and cash. Have a discussion with your personal financial advisor or the advisor to the plan, if offered.
Stay Informed: Your company doesn’t have to offer the cheapest retirement plan but the expenses paid for the services provided have to be reasonable in comparison to other retirement plans similar to your company’s. As a result of the disclosures mentioned above, plan sponsors now have tools and resources available to benchmark their retirement plan costs.
Life is full of surprises. Don’t let this new transparency regarding retirement plan fees knock you off the path to a successful retirement.