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Increasing 401k Fee Transparency

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I recently read an article on the internet about how a federal watch dog is lobbying for Mutual funds and the companies that manage them to be more transparent about the fees they charge. In addition the firms who manage 401k’s for many people in America are also being encouraged to become more transparent regarding the fees they charge. My immediate reaction was, big deal, it is not going to impact my 401k at all in the near term.

We are asking the following question.  What does that statement above really mean to the average person and how will it impact them and their 401k or their retirement for that matter?

Perhaps we are cynical, but the quick answer is not much change for the average person.

So what if these companies who are making millions off of you and I disclose what they are really charging. Do you think that the government has enough power to really make a change happen with all of the lobby groups working hard to avoid any change at all.  At the very least, if they are successful, it will take several years before our government can enact any laws or force these companies to lower their fees. The best thing coming out of all of this discussion is that investors will have a much better understanding of the fees and can make better a selection of the funds that they invest in.

The politicians will make a big deal about disclosure and how they have helped the common person, however the real change will be either insignificant or not noticed at all by the average person. So what should you and I do regarding these fees? One of our posts outlined all of the fees that an administrator of a 401k fund, administrators of mutual funds and your investment adviser charges. We suggest that you read this post about fees to get a better understanding of the real costs of investing within your 401k through your company or otherwise.

Focus on Investing Wisely and Think Before You Leap

Let’s face it everyone wants to use your money and pay as little as possible to you or make as much as possible using your money. When you invest your money in stocks, bonds or mutual funds, we are basically loaning the funds to a company to use in the generation of revenues for their business. The mutual fund companies and brokerage companies are essentially charging fees to make these transactions and manage the investments the funds make when you invest in a mutual fund. Your adviser is receiving a commission for helping you make these investments. Everyone seems to have their hand out to take a little bit here and there. All of these transaction fees add up to millions of dollars for these management companies.

You must look after your own investments to the point that you have an excellent idea of what you will make with each individual investment and how much you are going to pay in fees, regardless of you participate in a 401k or an IRA. Once you know this information you can make informed decisions regarding your personal investments. If you are in a 401k managed by an administrator, you need to understand the fees that they are charging and make a decision regarding how you want your money invested. Should you leave it were it is or move the funds to an IRA assuming that your employer will allow this?

Buying Company Stock Within Your 401k

For many people this may be an attractive option. Often they are offered incentives such as stock options, dividend reinvestment plans and low administrative or brokerage fees to participate in these plans.  Some employees can make quite a bit of money with these types of plans as well and will often place these funds inside their 401k as a means of tax reduction.

There is a danger when you invest in your companies stock as there is in any company or mutual fund when you overload your portfolio with one investment. The deal sounds so good, that you would be crazy to not take advantage of these opportunities. The stock is increasing, you may also be collecting dividends and your portfolio is climbing like a rocket.

But what occurs when the economy goes into a tail spin or even a depression. What will happen to the value of your investments then? They go down just like everyone’s! Your administrator will continue to get paid their fee in any case for managing your 401k.

Most financial advisers will recommend that you do not place more than 10% of your investments in one stock, bond or mutual fund. The reason for this is diversification and protection from too much exposure to any one investment. This can be a very tough decision to make. Should you continue taking advantage of the many savings in fees that you get, along with the options etc , knowing that you are risking a large part of your portfolio?

Or should you request your 401k administrator to balance your plan assuming that you have this option in your 401k, which of course will incur fees for transactions that take place. The answer depends on a lot of things. Here are some of the issues that you may want to consider:

  • Health of your company
  • Stock option requirements
  • Dividend re-investment plans
  • Fees associated with the plan as is
  • Fees with the plan if you make changes and re-balance
  • Your age
  • Number of years to retirement
  • Risk assessment and your ability to deal with risk
  • What is the worst that could happen
  • Can you handle the worst case

These are a few of the issues that all investors should take into account if you are being encouraged to invest your stock options or stock into your 401k that is managed by the company you work for.

Your comments are welcome on this post as usual. Our readers will value any constructive comments that you may provide.

 

 


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