Evaluating Your 401(k) Plan

Most people don’t know a lot about their 401(k) plans, which is odd, because that is the main retirement savings vehicle for most Americans. SmartMoney lists the key factors you need to review when evaluating your 401(k) plan. I don’t usually like SmartMoney’s “10 Things…” series, but this one makes a few good points among the usual filler and obvious points. The best points are those on fees and investment options.

One point I’ve made over the years is that when there is a bad 401(k) plan, employees are better off foregoing the tax benefits of the plan and saving their after-tax income through a low-cost mutual fund or brokerage account. Don’t neglect to save simply because the plan is bad. Make things better by saving through a better vehicle.

Take for example a portfolio that says its fee is 1%, a number that wouldn’t be uncommon. That may not sound like a whole lot. But when it’s chipped annually from your retirement nest egg, the cumulative effect can be significant. A worker who makes $75,000 per year and saves 8% of that annually in a 401(k)would lose 2.8 years’ worth of savings in a target-date fund with a 0.2% fee and 11.6 years in one with a 1% fee, over the course of a career, according to an analysis by Towers Watson. The new DOL fee disclosures were designed to open individual participants’ eyes to this kind of impact, but for now, they’re mainly raising eyebrows mainly among savvy employers, Topley says.