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Is your 401(k) plan wildly expensive, average, or wickedly efficient and inexpensive?

You probably don’t know. Your employer may not, either— particularly if you work for a small company.

Sadly, while the laws have changed to require expense disclosures, the information provided is often foggy. The new disclosures are far less than a “You Are Here” map for expenses.

But costs matter. And a “You Are Here” map exists. It can be found in the 14th annual edition of “The 401(k) Averages Book.” Published by Pension Data Source in Baltimore and available through their website,, the book provides data on how the expenses of smaller 401(k) plans vary with both the size of the plan and across plans of any particular size.

Why the focus on small 401(k) plans?

Simple. Costs are less of an issue with large plans. At the far extreme of low-cost, the governments’ Thrift Savings Plan has annual costs, all in, of 3 basis points. That’s three one-hundredths of one percent. The annual cost for a worker with a $50,000 balance is a mere $15. You can almost hear the pennies rubbing against each other.

Major companies like Exxon Mobil and Texas Instruments are close behind. With these low-cost plans you’re getting virtually all of the return on your retirement savings. The financial services industry is getting very little. The difference at retirement, as I’ve shown in many columns, can be measured inyears of income, not pennies.

But small plans exist in a kind of frontier land. There, the cost can be determined as much by whom the boss plays golf with as by the seeking of the best return on the employee benefit buck. Worse, the boss may fail to realize how expensive his golf games are to everyone, including himself. In a recent telephone interview Joseph Valletta, co-publisher of the book, said “employers usually have the highest balances in the plans, so they have a vested interest in keeping plan costs low.”

Here’s an example of how much plan costs can vary:

Suppose you work for a company whose 401(k) plan has 25 participants and $1,250,000 in assets, or an average of $50,000 a participant. The average plan in that size range has total annual expenses of 1.53 percent a year. Of that amount, 1.38 percent goes to investment expenses (the expenses of the underlying mutual funds), 0.13 percent for recordkeeping administration and 0.02 percent for trustee fees. That brings the total average annual cost per participant to $765.

The most expensive plan of the same size, however, has costs of $1,049 a year per participant. The least expensive plan costs $238 a year. That’s a big range. All of that difference is coming out of the pockets of plan participants.

Viewed another way, the 2.10 percent annual cost of the most expensive plan was more than 4 timesthe 0.48 percent cost of the least expensive plan. It is a whopping 70 times the cost of the Thrift Savings Plan.

The book also found a broad range of expenses for different investment choices in plans of that size. While the average cost for a large U.S. equity fund was 1.43 percent, the lowest cost was 0.24 percent. The highest cost was 2.00 percent. Target date funds averaged 1.38 percent. But the lowest cost was 0.18 percent. The highest cost was 1.92 percent. In general, the most expensive funds cost 8 to 10 times more than the least expensive funds. That’s quite a difference.

Is there any good news here?

Yes. First, a map is available— The 401(k) Averages Book. Second, the problem of high expenses diminishes as plans grow larger. A very small plan with 10 participants and $500,000 in assets has average total expenses of 1.9 percent, but a plan with 2,000 participants and $100 million in assets has average total expenses of 0.90 percent.

Expenses decline as assets increase. The cost of recordkeeping and the plan trustee, for instance, are a significant burden for small plans. But the burden virtually disappears by the time a plan has $50 million. Still, there is a big cost difference between the most and least expensive plans with such assets, with the most expensive plan costing $568 per participant (1.14 percent) while the least expensive plan costing $103 per participant (0.21 percent).

Filed Under: 401(K)

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Q. I am receiving numerous sales calls for reverse mortgages from many sources. Please tell me about the downside to this program, if there is one. —W.W., Austin, TX

A. Historically, reverse mortgages have had two major drawbacks. First, they were relatively expensive in closing costs, insurance cost and interest rate. Second, most of the people who took them out shouldn’t have. Recent reforms have reduced the costs for reverse mortgages. New regulations have limited the amount of the loan value that a borrower could take out in the first year. 

The problems with reverse mortgages came about because they were often given to people who had no other assets, were in debt, and really needed to rethink their shelter needs rather than borrow. The result was that borrowers would take out the maximum amount and then fail to make tax and insurance payments. This put the lenders in a tough place. That’s why the two major lenders, Bank of America and Wells Fargo, withdrew from the market.

But if you are retired, healthy and not dead broke, new research indicates that a reverse mortgage can be what they were hoped to be— another tool for managing retirement income and spending. The change began about two years ago, when Barry and Stephen Sacks published an article in the Journal of Financial Planning showing how a reverse mortgage line of credit could be used to increase the probability of not running out of money in retirement. Indeed, the use of a reverse mortgage line of credit could often increase the net estate of borrowers at death compared to more conventional paths. (See my column about it here.)

Since then, other financial planning researchers have confirmed these positive findings. Reverse mortgage lines of credit are slowly becoming a working tool for financial planning. One thing that contributes to the use of reverse mortgages is that the money borrowed is tax-free, since it is your home equity. Added withdrawals from retirement accounts, on the other hand, can be burdened with high tax rates.

Q. My wife and I (both 37) have saved up close to $100,000 for our emergency fund and other "short term" goals like replacement vehicles (current vehicles are 7 and 12 years old) and home repairs.  While we don't need this money immediately, we are planning to use the car and home money sometime in the next five years.  With that in mind, I know it isn't prudent to invest it in equities, but it pains me to watch it sit in the bank earning next to nothing.  Is there something with reasonable risk like corporate or muni-bonds that I should look into putting the money in until it is needed?  Where do I start looking? —G.P., Frisco, TX

A. To get any yield worth talking about, it is necessary to take some risk. So the real question for you is how much are you willing to risk in order to get some amount of yield today? Here, GNMA funds— the funds that invest in pools of government-guaranteed mortgages— are interesting because their yield has historically been higher than their effective maturity would lead you to expect. This isn’t a free lunch: If interest rates decline, home owners will refinance and you will miss the gains that investors in traditional bonds enjoy when yields decline.

Two well-known low-cost, no-load funds are good examples. The Fidelity GNMA fund (ticker: FGMNX) has a current yield of about 2.5 percent. That’s about the same as a 10-year Treasury, but the effective maturity of the fund is much shorter. You get a nice yield (for the current market), so what’s the risk? Well, in 2013 you lost 2.17 percent. To find another losing year, we have to go back to 1994—20 years ago— when the fund lost 2.00 percent.

Vanguard GNMA Admiral shares (ticker: VFIJX) is another example. This fund also yields about 2.5 percent and has a relatively short effective maturity. Like Fidelity GNMA, it suffered a loss last year, 2.13 percent. And you have to go back 20 years for the next loss, 1.43 percent in 1994.

Morningstar ranks both of these funds five stars and both have consistently ranked in the top 20 percent of GNMA funds or better. The risk here appears to be about a year of interest income.

Filed Under: Home Ownership & Mortgages

 Why might an independent R.I.A. be a good choice for an investor?

  • Independent RIA’s generally have affiliations with a variety of firms that assist with tax planning, estate planning, money management and more. These affiliations allow them to help their clients with complex financial needs.
  • They generally have affiliations that are free from the conflicts of interest you often see at retail brokers, independent broker dealers, or captive insurance agents.
  • The compensation of some independent registered investment advisors is directly related to growing the assets of their clients, which can benefit the advisor and client alike.


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