Ask an author: David Loeper here to answer your retirement planning questions!

[David Loeper]

Originally Posted by 72Tiger

Thanks for providing this service. My question is, do 401K contributions help when one is approaching the income limits for the alternative minimum tax? In other words, does the AMT kick in based on gross income, or income after 401K contributions are made? Thanks.

I'm not a tax advisor so I would definately check this with your accountant, however, as I understand it, AMT (and the resulting disallowance of deductions) is based on Adjusted Gross Income (AGI) and a non-Roth 401k contribution should therefore help you protect some of your deductions since the 401k contribution reduces your AGI. If your accountant gives you a definitive answer on this, please post it and in the meantime I will check with some of my CPA friends.

[72Tiger]

Originally Posted by David Loeper

I'm not a tax advisor so I would definately check this with your accountant, however, as I understand it, AMT (and the resulting disallowance of deductions) is based on Adjusted Gross Income (AGI) and a non-Roth 401k contribution should therefore help you protect some of your deductions since the 401k contribution reduces your AGI. If your accountant gives you a definitive answer on this, please post it and in the meantime I will check with some of my CPA friends.

Thanks. I don't have an accountant, but I know a few I can check with. I just started thinking about this when I did this year's tax return. Because of the new job I took last year, I will be right at the limit based on my gross income this year. Depending on what I find out, I am even considering taking a day (or so) of leave without pay to make sure I stay under the limit.

[davoscat]

Welcome to the forum David. We are a friendly bunch, I hope you like it here.

Thank you so much for answering our questions! May I ask what inspired you to write this book?

[David Loeper]

Originally Posted by davoscat

Welcome to the forum David. We are a friendly bunch, I hope you like it here.

Thank you so much for answering our questions! May I ask what inspired you to write this book?

Thanks for having me here! It does seem like a friendly bunch!

What inspired me was a sort of a perfect storm of frustrations. In Nov. 2006 my associates and I were doing our annual search for a more cost effective vendor for our own company's 401k plan. We knew there were needless fees but until then the best we could come up with a negotiated fee reduction from our existing vendor. However, we found an independent administrator that was not tied to any investment products and we were able to lower both our company and employee expenses by more than 70% while getting better service and more flexibility.

The same month while this was going on, the Government Accountability Office released a report that showed 80% of participants do not know what they were paying in their 401k. AARP followed on with similar results.

So I put myself in the shoes of a layman and took the steps needed to figure out what I had been personally paying for my 401k balances. Now, with over 20 years of experience and a trustee of the plan, I knew what documents I needed and how to calculate my expenses. It took me a half hour. It showed I was personally paying $1,500 a year in expenses, despite my statement showing $0 in the expense column for the last 20 quarterly statements. But should it really be that complicated? What if I weren't an expert and didn't know what documents to look for or how to calculate it, I thought to myself.

I blew a gasket. This is just unethical in my view. Telling people they aren't paying anything while skimming thousands of dollars from their retirement accounts should be criminal. The DOL and Congress are slow to take action on this because of strong lobbies from the product vendors, so I wrote the book as a "how to manual" to first figure out what you are paying, next, how to proactively and positively get your employer to do something about it and then finally how to make the best choices in your lifestyle resulting from your improved 401k. We donate the net profits from the book to charity. This is just a personal mission.

[soupkitchen96]

What a great service. The fact that you are donating your sales proceeds to charity is doubly awesome. Thank you Dave and Wisebread.

Originally Posted by David Loeper

What if I weren't an expert and didn't know what documents to look for or how to calculate it, I thought to myself.

Do you have a general checklist of things general consumers should look out for?

[Megan]

My question is two part. First, I work for the federal government, so I have a TSP, rather than a 401(k). Does the advice for 401(k)s also apply here? What should I know?

My TSP offers Lifecycle funds. Good idea? Bad idea? Not the worst idea, but I could do better?

Thanks for the advice!

[David Loeper]

Originally Posted by soupkitchen96

What a great service. The fact that you are donating your sales proceeds to charity is doubly awesome. Thank you Dave and Wisebread.



Do you have a general checklist of things general consumers should look out for?

Ferreting out your expenses in your 401k takes a bit of instruction (which is why I wrote the book) and is a bit long for a forum response, but in general these are the categories of fees you should look out for:
1) Expense ratios (these are the easiest to find)
2) M&E (Mortality & Expense Charges) are in addition to expense ratios and they are charged against your plan balances by insurance companies under a contract that is not frequently disclosed to participants. Often can be 0.50% to 1.50% a year in addition to expense ratios.
3) Wrap fees, charged by brokers and advisors often assessed directly against your balances and not shown to you, but your employer gets a contract that discloses them if applicable. Often, these expenses are 1% or more and may be as high as 3%.
4) SAI expenses (Statement of Additional Information)...discloses trading costs within the funds used that are not part of the expense ratio in the prospectus. For index funds this is often less that 0.01% a year but for some active funds this can be 0.50% or more. You have to request this document (so does your employer) because it is not required to be given to anyone.
5) Float - this is the interest earned on your contributions while they drag their feet on investing your contributions. Your deferrals to your 401k should be invested within one or two days, but some vendors to sell your company on "low administration expenses" will earn interest for themselves for as long as 30 days before they invest your money.
6) Administration- Many plans charge for the audit, tax filings and record keeping services directly against your plan assets. This is shown in your plan's Summary Annual Report (which you get) but the report doesn't tell you how much of it you are paying, you have to figure it out yourself because the report shows the total of all participants, not just yours. I was personally paying $500 a year in adminstration costs for my old plan. Now it is $25.
7) "Spread"- this is a "non fee" fee. Stable value and money market account yields on your cash balances can be as much as 1-2% less than the prevailing rate. They get away saying their isn't a fee for stable value and bank money markets, but if for cash balances you are earning 2.5% or 3% and the equivalent safe and liquid alternative is paying 3.5% to 4% you are effectively paying a 0.5% to 1.5% "fee" on your cash balances.
8) Surrender charges and CDSC (Contigent Deferred Sales Charges)- Penalties charged for liquidating investments in roll overs or even rebalancing on occasion.
9) Other fees: there may also be custody, advisory, trustee fees that may apply.

I hope this summary helps. Maybe you will win a copy of my book and you can figure out your specifics!

[David Loeper]

Originally Posted by Megan

My question is two part. First, I work for the federal government, so I have a TSP, rather than a 401(k). Does the advice for 401(k)s also apply here? What should I know?

My TSP offers Lifecycle funds. Good idea? Bad idea? Not the worst idea, but I could do better?

Thanks for the advice!

The TSP can be very good...and can be cost effective. In fact much of what we do for our own company's plan is similar so much of the information here is applicable.

Target Date and Life Cycle funds are "easy" but bad. The problem is they do not consider any of the variables in your personal goals other than a "date" which while being one variable to consider, it is no more or less important than any of the others (savings rate, retirement income goal, estate goal, funded status, etc.) Therefore, invariably for almost any person, a Target Date or Life Cycle fund will have the allocation shifting in exactly the wrong direction from what would make sense when considering all of the other equally important variables. Additionally, many of these funds are making market timing bets which expose you to the risk of underperforming at the wrong time for your goals.

I released a free white paper last week that included information on this topic called "Measuring Temperature with a Ruler- Is Your Wealth Manager Really a Return Manager in Disguise?" Part II and Part V highlight the problem with lifecycle and target date funds. If you want to see the paper (or any of my other white papers) it is available at: http://www.financeware.com/f_frame.asp?load=advisors/whitepapers.asp

[Xin Lu]

Hey David,

Thank you for coming to Wise Bread! My question is, how do you deal with horrible 401k plans? For example, one of my friends had a 401k plan that only had loaded funds. My last 401k plan had investment options that are all packaged up insurance products that levied hidden fees. Should you still put money in these plans even though you know you are being ripped off?

Thanks

Xin

[Night Runner]

Thank you for doing this, David.
Here's my question: I'm an entrepreneur and my main goal in life is to retire early - by the time I'm about 35-40 years old. Is it true that it's impossible to withdraw the money from 401(k) until you hit the retirement age? I know I can "borrow" money from my 401(k), but is there any way to "cash out" whenever I want to?