We saw the PBS special, and we believe it is part fact and part misguided. Participants might pay more fees in their 401(k) plan than they would in a self-directed IRA or brokerage; however, 401(k) plans are more complex than self-directed IRAs or brokerage accounts because of the vast IRS and DOL rules that govern them and the added benefits they offer workers and companies.
401(k) plans allow the employer to match contributions. This is generally up to a plan-specified percentage of compensation. Participants can also borrow funds from 401(k) plans, while it is a prohibited transaction to pledge your IRA as collateral for a loan. There are no Roth income limits to 401(k) plans with a Roth deferral option, while Roth IRAs have income restrictions. Participants can defer $17,500 plus another $5,500 catch-up contribution (for those 50 or older) to a 401(k) plan, while you are limited to $5,500 plus an extra $1,000 catch-up contribution (for those 50 or older) to an IRA. The IRS also limits the deductibility of your IRA contributions if you or your spouse have access to a 401(k) plan (i.e., limits apply even when you or your spouse are not participating in a company retirement plan).
We feel PBS does not do a good job of explaining the whole story. We believe it is misleading to focus on the fees in a 401(k) plan when investors would be paying some of the same fees through an alternative savings strategy. When you compare the benefits vs. the cost, 401(k) plans are still the best savings option for most workers. If participants want to lower their expense ratios, then it is more of a question about active management vs. index funds—not 401(k) fees vs. IRA/brokerage fees. It is an apples and oranges comparison.
If participants are concerned about the fees they pay, they can generally lower their cost by investing in the index options, but they will give up the ability to outperform the index benchmarks. Also note that in most 401(k) documentation, all mutual fund returns are presented net of fund fees. The PBS special used a gross return and then subtracts the expense ratio. Most often, this has already been done for you in the performance numbers listed on the investment comparative chart provided by your plan’s administrator.
When you earn $1 in income, you have to make a personal decision to spend or save part of it. If you decided to save it, you have three choices: You can save it to a taxable account (e.g. checking/savings account, CD, or brokerage account), which means you do not get a tax deduction or tax deferral on your earnings; you can save it to an IRA, or you can save it to your company’s 401(k) plan. If you save to an IRA, you do not get a company match, plus you have some of the other restrictions mentioned above. Each choice has costs (fees, missed company match, taxes, etc.) and benefits (loans, tax deferral, cap gains rates, etc.). If your goal is to accumulate retirement savings, we recommend focusing on your savings rate first, performance second and fees third. Fees are an important aspect of a 401(k) plan. We think PBS and Frontline are helping shed some light on a topic that has been ignored by many companies and workers; however, higher fees alone will not keep you from a successful retirement but lack of savings and poor performance will.
At Henssler Financial we believe you should Live Ready, which includes understanding which retirement accounts will allow you to save the most for your future. If you have questions regarding your 401(k), the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
