The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 2

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 2


401(k) plan fees generally fall into three categories:

(1) Plan administration fees


(2) Individual service fees


(3) Investment fees

Plan administration fees are charged for things like toll-free numbers, online account access, seminars, and the customer service representatives you speak to when you call the company. You didn’t think these offerings were free, did you? The cautious good news here is that some employers may cover these plan administration fees. The bad news is that those employers are quite few and far between – if I were to bet my house on it, I’d say you are covering your own plan administration fees.

Individual service fees are assessed to you only if you use specific optional services, like taking out a loan from your 401(k). And to be very clear here, this is a separate charge from the interest you will pay on the loan. The best way to describe an individual service fees is as a processing fee of some sort.

This post focuses on the investment fees, because they are by far the largest and most lethal of the three. And the manner in which these fees are treated is quite disturbing – let’s see what you think after you’ve read the post.

Generally speaking, you might see the plan administration and individual services fees – which tend to run just a few bucks – on your 401(k) statement. BUT for some bizarre reason, the investment fees – which are by far the largest (and we’re talking an-arm-and-a-leg large here) – NEVER show on any of your statements. Really? Yes, really! It’s strange, and rather unfortunate, but information about your investment fees does NOT show anywhere on the statements you’ve been receiving. Is it just me, or do you also find that rather interestingly odd?

So How Are These Investment Fees Charged?

Your 401(k) investment fees are charged against your investment returns. So let’s say your 401(k) statement shows a positive 8 percent return (which is good, because you made money) – your fees have already been deducted. So if the fee were 2.5 percent, your investments would actually have gained 10.5 percent (the 10.5 percent total, minus 2.5 percent in fees, equals your 8 percent return).

In the 401(k) world, this nocturnal approach is called INDIRECTLY deducting the fees from your returns. You’ may be thinking, “Since my returns are down because my investments lost money, there won’t be a charge.” That would be nice, but sorry!

Here’s how that side of the equation works. Say your statement shows negative 7 percent (I know you don’t like losing money, but bear with me for just a moment). You haven’t avoided the 2.5 percent fee we are assuming for this example. It was still deducted, thereby making your loss much deeper than it would have been otherwise. In effect, your investment actually lost only 4.5 percent, but the 2.5 percent fee brought your total loss to that negative 7 percent. Again, this is done INDIRECTLY. You see, when you lose money, your fees are deducted from what you’ve already saved. Yes! That’s how it works.

How Can You Figure Out Your 401(k)’s Investment Fees?

Perhaps you are very concerned (or even pissed-off) right about now, and are trying to determine how much your 401(k) fees are costing you right now. The problem is that 401(k)s are not one of those investments where you can just ask and someone will give you the dollar amount or percentage of your investment fees. Here’s how that process (yes, process!) goes:

First, you’ll need to contact your plan’s administrator (who is usually someone outside your HR office). So you will likely end up calling an external vendor or even having to make that request in writing. Once you do that, you’ll receive a thick document containing, among other things, a bunch of numbers. This may take 7 to 10 business days to arrive. Then you’ll have to sort through that document for the fees (called expense ratios) for the SPECIFIC funds your money is invested in (because that book usually contains fees for all the funds that your administrator handles). Next, you’ll have to grab your 401(k) statement and multiply the expense ratio for each of your funds by your ending balances to determine their costs. (If your money is invested in, say, 13 different funds, you’ll need to do this for each of them). Then you’ll need to add them up! How easy and fun do you think this expedition will be for you? If it sounds like a full day’s job, that’s almost exactly how it will seem.

What do you think about all this revelation and the word TRANSPARENCY? You know, I often hear buzz about credit card fees being crazy and outrageous! And I’m not saying that they aren’t. But at least those credit card companies have the guts to show borrowers exactly how much they are being charged. That’s fair! Compare that with your 401(k) or other employer-sponsored retirement plan for which you have absolutely no idea how much you are actually paying. When it comes to any other investment program, aren’t the fees among the first things you’d inquire about?

Another interesting thing is that under the Employee Retirement Income Security Act (ERISA), employers are required to ensure that 401(k) fees are reasonable in the light of the level and quality of services provided. I trust that you know well what that key word “reasonable” means. No fear if you don’t, because even more bizarrely, your employer probably doesn’t know either! Ask about it at work, and you’ll be directed to – guess who? – the plan administrator. Yes, the same one.

Talk about a classic case of out of sight out of mind. One thing I’ve always wondered is what would happen if everyone actually saw their fees in plain sight – just like they do for credit cards and other forms of investments?

One last question: Has this ever come up in your discussions with your financial advisor? Or does he or she believe that those fees don’t matter much? For all you know, you may be working hard to line someone else’s pocket, being completely ripped-off in the process. Who in their right mind wants to do that? Or are millions already doing that?
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Call us at 301.949.4449 or visit us on the Web to schedule your complimentary consultation to determine how effective - or ineffective - your employer-sponsored plan is for your retirement-planning needs.

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 1

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 1


Indulge me for a moment by imagining that I am your financial advisor and I am recommending that you invest your retirement nest egg in a financial product where you would not know exactly how much you’d be paying in fees. Just to be clear, it’s not that there are no fees associated with this investment (there are, and you’ll be paying them) – they just wouldn’t be in plain sight as would normally be the case for similar investment options. Would you follow my recommendation? Of course not! Who would, right? You’d probably tell me I am out of my mind – or at least think it – and then get up and leave.

In that same spirit, let me direct this question to those who own 401(k) plans or other forms of employer-sponsored retirement plans: Do you know how much you are paying in fees for your plan? I mean, do you have even the vaguest idea, you know, in a general sense? I wouldn’t blame you if you don’t have a clue, because roughly 99.99 percent of folks believe they don’t pay any fees, or that there may be fees but their employers cover them. In fact, why don’t you ask around your office or among your friends, family, acquaintances, or even total strangers and find out their thoughts on this subject?

As a financial professional specializing in retirement-income planning, I can emphatically tell you that employer-sponsored retirement plans – 401(k)s, 403(b)s, and the like – are the least transparent when it comes to fees. That statement may give rise to some discomfort because, by default, so many Americans believe (or behave as if they believe) that since these plans are sponsored by their employers, they are all transparent. If you think about it, folks tend to automatically jump on the 401(k) bandwagon, period! It’s offered, so they do it – almost without thinking. Yet how is that any different from the scenario I described earlier?

This absolute lack of transparency should be very frustrating to those who own these kinds of plans. But how can you be outraged if you are not even aware of how much you are being charged to begin with? And yet it happens all the time, because 401(k) statements don’t mention anything about their hidden fees! It’s true! There is absolutely no such information on any 401(k) statement! Go examine yours now to confirm my point.

Is It Even That Big a Deal?

I’ll let you decide that for yourself after considering this simple example.

Let’s say that Jimmy, age 35, just left his previous job for a new one and has $100,000 in his old 401(k). For simplicity’s sake, let’s also assume that he no longer contributes anything to this old account and he earns 7 percent annually. If Jimmy’s 401(k) charges only 0.5 percent in fees annually, his $100,000 will grow to $227,000 at age 70. On the other hand, if the fees were 1.5 percent, Jimmy’s account – the exact same $100,000 – will reach only $163,000 by the time he turns 70. Just that 1 percent difference in fees will shrink his retirement nest egg (and livelihood) by a whopping 28 percent! But I believe the much bigger issue for Jimmy – and 99.99 percent of folks with 401(k)s – is that they don’t have the slightest idea how much their fees are! So how can they knowledgeably assess whether the plan is worth it or is a total rip-off?

Don’t you find it completely preposterous that the very fees (and most of these plans do cost an arm and a leg) that could prevent you from enjoying a financially comfortable retirement, cause you to have to work much longer, or even cause you to run out of money, are not transparent to you?

I believe this is enough revelation for today. In next Monday’s post, I’ll discuss what it will take for you to figure out how much your 401(k) or other employer-sponsored retirement plan is actually costing you. Stay tuned, because you won’t want to miss that!
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In the meantime, call us at 301.949.4449 or visit us on the Web to schedule your complimentary consultation to determine how effective - or ineffective - your employer-sponsored plan is for your retirement-planning needs.

If the Affluent Are Delaying Retirement, What Can the Rest of Us Expect?

If the Affluent Are Delaying Retirement, What Can the Rest of Us Expect?

HAPPY 2011! I wish you a prosperous and fruitful year ahead. Today I’d like to discuss a troubling finding from the “Merrill Lynch Affluent Insights Quarterly,” which was released in October:

61 percent of the affluent Americans surveyed expect to retire later than they had originally planned, up from 29 percent in January 2010. In terms of investing, the survey also found that a large number continue to take a more conservative approach to managing their investments.

May I suggest you reread that finding again, this time paying close attention to what is happening here? This is both sad and scary! You see, this particular study seeks to measure the financial priorities and concerns of affluent Americans – although I doubt you’ll think this situation is limited to this group of Americans. Now, let me explain why I believe this is both sad and scary.

I’m thinking the only logical explanation as to why such a predicament would befall so many hard-working Americans is because they have been receiving and following the completely wrong financial roadmaps for all these years! As I have been saying all along – and pointed out in this article I recently wrote for the Maryland Women’s Journal – there is a right approach and a wrong approach to retirement finances. The sad thing, though, is that the vast majority of Americans spend a lifetime working hard and saving money, but pursuing the wrong, unrealistic financial strategies … only to realize it when it is usually far too late. How unhappy would you be if this were you?

What makes this finding scary is that most people follow some form of financial guidance either directly, by hiring a financial planner, or indirectly, by following advice from books, magazines, talk shows, blogs, newspapers, and other sources. Given that this particular study focuses on the affluent, it is not outrageous to assume that they have access to so-called top-notch, expert financial advisors. So how good can the strategies/advice be that they have been receiving all these years? Wouldn’t you agree that’s pretty scary?

How would you feel to realize that you can’t retire when you intended to because your nest egg was just crushed by something you should have been prepared for all along? The fact of the matter is that every investor needs to understand that investing is real and not theoretical, as it seems some advisors would have them believe. And in reality, approaching the investment of your life’s savings with a strategy hinging on the probability that you might get lucky has never been and will never be a viable plan. But that’s exactly how most Americans invest their hard-earned dollars. So should it be a surprise that their retirements face eminent danger?

I am especially proud about the fact that not a single one of our clients will have to delay their retirement by even a couple of hours due to the fact that the stock market tanked. I know for a fact that only a few smart investors are working with practical advisors who pursue stable, realistic strategies like the ones we employ here at Laser FG. This is one area where it is actually a good thing to be in the minority!
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Please join me for a special workshop to explore practical concepts you can implement right away to eliminate most of the guesswork and count on a comfortable retirement. The date is Saturday, January 15, 2011. Call 301.949.4449 or follow this link today for more information and to reserve your seats.

2011 Best Picks … if You Intend to Keep Your Roller-Coaster Investing Dilemma Intact

2011 Best Picks … if You Intend to Keep Your Roller-Coaster Investing Dilemma Intact

I am fully aware of the sarcastic nature of the headline, but in this instance, that seems the best way to get my message across. I’ll wait to see what you think after reading.

Right about now, almost every financial show, magazine, guru, blog, and what-have-you is offering investors advice about the products and places in which they should put their money so that they can become rich in 2011! I’m sure you've seen references to those hand-picked funds where all you have to do is purchase – and then start planning how you’ll live wealthily ever after, haven't you?

Depending on how you define smart, I may not be the smartest cookie around - but I have a ton of common sense. So perhaps I’m missing something in this regard, but here are two simple reasons I believe any serious person should not waste their valuable time, effort, or money on these so-called best picks.

Reason #1: There’s only one predictable thing about the stock market, and YOU already know what it is: the stock market will continue to fluctuate up and down. No one can predict exactly where it is headed next. I mean, if you seriously think about it, where have these prediction gods been these past couple years while folks were taking a spanking with their portfolios?

My guess is that they have always been around, introducing unsuspecting, naïve investors to “smoking hot picks” that turned out not to be so hot after all. Before you fall for any of these (in my opinion) silly moves, do yourself a big favor and look at how your favorite expert's most recent "best picks" are doing today, just for track-record purposes to see how smart their advice really was. What kinds of testimonials do you have from folks who are actually getting anywhere financially by following these “smoking hot” leads?

Reason #2: All of these experts would rather be retired, enjoying their ultra-wealthy status, than marketing to YOU. Something also tells me that if these prediction experts really knew what the heck it was that would make you a gazillion bucks tomorrow, they’d have used those abilities to make fortunes for themselves, too. In which case, they’d be so super rich that they’d probably be retired to their own private islands, cruising the open waters, and drinking an endless supply of piña coladas. They're not doing that, though, are they? No - they are working for their paychecks by showing you the “best picks,” which change from year to year.

I could be absolutely wrong, but common sense, the facts on the ground, and reality tell me otherwise. I won't deny that it's possible to become rich overnight, but from what I have seen, most folks only build true, lasting wealth over time, with a real plan and the assistance of a professional with a proven track record.

If you'll be in the D.C. area on Saturday, January 15, 2011, please join me for a special financial workshop. You can visit our Web site or call or call 301.949.4449 to reserve your seat now. Feel free to invite anyone you know who might be interested. Sorry, I can’t promise you any hot picks, but you will walk away with proven, legally sound, practical steps you can begin using immediately to help regain control over your retirement.

Wishing you a safe, happy, and prosperous New Year!

Ho! Ho! Ho! Three Cheers of Gratitude!

Ho! Ho! Ho! Three Cheers of Gratitude!

Wow I cannot believe how quickly Christmas rolled around this year. It sure seems to me like last Christmas was just yesterday, although my daughter thinks the complete opposite - and I’m guessing that’s probably true for your kids, too. Anyhow, as we take some time to look back over this past year and glance ahead to the coming year, I’d like to ask you to take a few minutes to ponder the one word I believe sometimes gets lost as we slog through our busy lives.

That word is GRATITUDE.

Without a doubt, 2010 has been an especially challenging year for many in this country. Far more than usual number of people are without employment, as the economy tiptoes out of the recent recession. And lots of folks with jobs are under pressure to stretch their paychecks far enough. Many have been forced to forego the pleasures they have come to enjoy. In such an environment, it is very easy to lose sight of the fact that there is always someone else (many people, for that matter) who would consider it heaven just to have somewhere warm to sleep at night, breathe fresh air on their own, wake up pain-free in the morning, take a warm shower, put clean clothes on their back, have breakfast, and most importantly, have the health and strength to do all of these things.

If you have the luxury of reading these words, you almost certain realize that you are enormously blessed, do you? In that case, I just successfully made my point regarding gratitude. As we go through this holiday season, please take some time to carefully consider the gifts with which you have been blessed, rather than focusing your energies on what you do not have.

From all of us here at Laser Financial Group, have yourself a wonderful Christmas and a safe holiday season!

Changes In The Financial Laws - What Do They Mean for You?

Changes in the financial laws - what do they mean for you?

It’s an unsurprising statement of fact to say that the world of personal finance revolves around laws. As a natural consequence, therefore, the passage of new laws – or significant changes to existing rules – means that the complexion of your retirement strategy and products may also be required to change. Or so you would think. Here are some real-life cases in point:

• Before the passage of the Revenue Act of 1978, 401(k)-type plans did not exist in America.
• The Tax Reform Act of 1986 made primary/secondary residence mortgage interest (within limits set out under Section 163 of the tax code) just about the only tax-deductible interest for individuals, after 1991. Before that time, even credit card interest was tax deductible. In response to this change in the law, homeowners have resorted to using cash-out refinances to convert their otherwise nondeductible consumer interest payments into deductible mortgage interest. Doesn’t that make perfect sense? And it’s legal!
• Also, since the Taxpayer Relief Act instituted Roth IRAs in 1997, investors who thought it wise to leverage the benefits from them had to make some changes.

I could go on and on, but here’s the point I am trying to make: I’m only an observer of Congress, but I’m fairly certain this trend toward new laws and changes will not be ending anytime soon. That means that as an investor, you may need to revisit your strategy/product choices and, more importantly, make some changes to ensure that you are taking full financial advantage within the scope of those new laws.

So far everything sounds pretty normal, but the reality is that only a cutting-edge financial counselor will be savvy enough to suggest you examine your plans/products and make such changes. And from what I am witnessing, the rather unfortunate truth is that some financial professionals have no more idea about what’s cutting edge than I do about performing open-heart surgery.

I’ll be the first to admit that none of the highly trained professionals here at Laser Financial Group (including myself) could ever claim to know everything – because we don’t. But what we are sure of is that we are constantly keeping up with developments in our industry. And whenever we are asked a question, we give honest and correct answers, which occasionally include the admission that we will have to do further research to find the complete answer and get back to the client a little later.

However, some in this industry will go as far as dishonesty just to save face or prevent losing a potential client. Think about this. You’ve learned something new and exciting that you believe could be a plus to your retirement strategy, and you seek verification or a second opinion from a financial professional. After all, you expect YOUR advisor to be honest, don’t you? However, this guy or gal has only the vaguest idea – or is completely unfamiliar – with your inquiry, but happens to be one of those types who wants to be perceived as a know-it-all.

What kind of response are you likely to get? I’m thinking the possibilities range anywhere from, “That’s illegal, because I’ve never heard of it,” to “Since the law surrounding this is fairly new, it’s probably a good idea to stick to the old system and wait to see how this new strategy works out.” If not literally, the answers would probably be close to this.

Don’t get me wrong. I am a huge proponent of proper due diligence, especially when it comes to retirement. But don’t we all need to be reminded that laws change and we may have to change our course accordingly, if we want the best results? This statement by Benjamin Franklin pretty much sums it up in my opinion, “When you’re finished changing, you’re finished.”

To that end I also recommend that you heed this advice by the late President Reagan: “Trust, but verify.” I would, however, add my own very important caveat that your verification source must be knowledgeable and 100 percent honest.
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To schedule your appointment with a knowledgeable and honest financial advisor who will help you sort through any changes in the law that may affect your retirement planning, please visit our Web site or call us directly at 301.949.4449.

Pay Now or Pay Later?

Pay Now or Pay Later?

[Jackie (not her real name) made this request via the “Ask the Advisor” tool on our website. I obtained her permission to share it on this blog because it has such an interesting educational twist to it.]

Hi Samuel,

I inherited about $55,000 of my father’s IRA and was intending to pay all the taxes this year and be done with it. But my father’s financial advisor and another advisor at my bank think I will pay too much in taxes by doing that. Instead, they suggest that I do a stretch IRA. I am 49 years old, a single mom with two teenagers, and I earn about $68,000 a year. Would you give me your thoughts on this? 

Thank you.

Those who read my columns regularly are quite likely to know my initial response: Let’s gather the facts, and then you can make your own decision. The main issue here is that this lady (or probably anyone, for that matter) does not want to pay “too much in taxes.” Let’s clarify the point by agreeing that not only does she not want to pay “too much” today, but in the future as well. Now that we’ve established that, let’s drill down to the two alternatives, shall we?

The “Pay Now” Alternative

As a head of household earning $68,000 a year, Jackie will have a standard deduction of $8,400 and $10,950 of personal exemptions (for herself and the two teenagers at $3,650 each). This will result in a taxable income of approximately $48,650 ($68,000, less $8,400, less $10,950). Notice that this is the lowest number. However, should she itemize on her Schedule A because she has more deductions to claim, like mortgage interest, charitable donations, property taxes, and the like, that $48,650 taxable income will be even less still.

Here’s a key statement: According to published IRS tables for 2010, a head of household with taxable income between $45,550 and $117,650 will be taxed at a 25 percent marginal rate.

So as it stands now, Jackie’s marginal rate is 25 percent. If she recognizes all of the $55,000 inheritance as income in 2010, her taxable income moves up to $103,650 ($48,650 plus $55,000). Now, the real revelation: What bracket does the new taxable income of $103,650 put her in? You are smart, so you can see that it is the exact same bracket of 25 percent. Incredible, isn’t it? But I told you it has an interesting twist…

Given this scenario, she would pay 25 percent tax ($13,750) today and could save the remaining $41,250 in a completely income-tax free account going forward, and know for certain that she is done and does not have to worry one bit about future tax rates. Not to mention that – under current law – if she happens one day to pass this money on to her children, they’ll owe no income tax whatsoever.

What About the Advisors’ “Stretch” Alternative?

According to the IRS’s Single Life Expectancy Table for Inherited IRAs, this 49-year-old woman will be permitted in 2010 to withdraw $1,567, as opposed to the entire $55,000. The question – and this is a really good one – is: At what tax rate will this little tiny, itty-bitty amount be taxed? The shocking but 100 percent correct answer is – are you ready for this? – 25 percent (or $392). Yes – the same 25 percent! Pretty interesting, isn’t it?

That therefore leaves the rest of the money still untaxed, and therefore yet-to-be-taxed at future (and unknown) tax rates. Again, you are smart, so you realize that by doing this, Jackie would be making a very unwise gamble that her tax rate will remain that low (or somehow even lower), because otherwise she would have made a very bad move. Remember she is claiming two teenagers today who, in a few years, will no longer serve as a tax break for her. But guessing by what these two advisors are proposing, they seem pretty sure that today’s incredibly low rates will stay that way for a very long time – or even better, they expect tax rates to be lowered in the near future. All I can do is to wish them good luck on that frankly naive gamble.

My bottom line in situations like these is that you decide for yourself. But make sure you talk with professionals who have a real track record of knowing how things really work, because a large number of advisors apparently live on another planet.

Visit our Web site to ask YOUR question or call us today at 301.949.4449 to schedule a complimentary session with one of our knowledgeable advisors to discern the best move for your inheritance or other retirement income planning needs.