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

[amyschiff]

Hi David,

Thanks for all the awesome info on this thread! My question is: what is a good way to start planning for retirement for people new to the workforce?

I just got my first full-time job recently, and being a small (but growing quickly) company there is no retirement plan as part of my benefits. I would like to get something started within the next year. I am 25 years old, so only about 45 years until retirement! =P

[David Loeper]

Originally Posted by just_kelly

What would be the best thing to do: Pay of student loan debt and become completely debt free or build up a emergeny fund? Thanks!

I'm assuming the financing costs on your student loans are favorable and are in good standing. If that is the case, before I'd make accelerated payments on favorable financing, I would accumulate some money in an emergency fund.

The reason is life if full of little (sometimes not so little) surprises and in the absence of liquid cash to pay for such events you would be forced to finance them, probably under much less favorable terms.

If your job is secure, once you accumulate 2-3 months of take home pay in an emergency fund, you can start to split your savings between pre-paying the student loan and adding to additional emergency fund savings.

Once the emergy fund grows to 4-5 month's income, you could direct your savings toward pre-payment of student loans.

However, if you have a reasonable match from your employer on a 401k, you should capitalize on maximizing the match for contributions to a retirement plan when you have an adequate emergency fund.

Also, it is important that you prioritize replenishing your emergency fund when you need to draw on it for life's little surprises.

[David Loeper]

Originally Posted by amyschiff

Hi David,

Thanks for all the awesome info on this thread! My question is: what is a good way to start planning for retirement for people new to the workforce?

I just got my first full-time job recently, and being a small (but growing quickly) company there is no retirement plan as part of my benefits. I would like to get something started within the next year. I am 25 years old, so only about 45 years until retirement! =P

Assuming you have some cash set aside in a liquid and safe emergency fund, it is easy to open up a IRA (if you are in a low tax bracket you probably would want to do a Roth IRA).

Even small companies can afford to offer a 401k plan though, you should talk you your employer about it. It shouldn't cost the company any more than $1,500 a year to offer a top notch 401k plan, and it will help them attract talent to their growing company.

[amyschiff]

Thanks for the info! I had been reading about IRA's but wasn't sure if they were a good idea, so now I will start to take a closer look.

[David Loeper]

Originally Posted by amyschiff

Thanks for the info! I had been reading about IRA's but wasn't sure if they were a good idea, so now I will start to take a closer look.

Let me know if you have any further questions. There are a lot of choices out there but it is good that you are interested in starting to save for retirement now at a young age. This will enable you to have a lot of choices including retiring a lot sooner than 45 years from now!

[Will]

Hi guys!

This week, the lucky winners of David's book are jusrme and troyte.

We're giving away two copies of the book per week so there are plenty of chances to win.

[jusrme]

Originally Posted by David Loeper

Based on this, I'd say that it is likely that the declining share balance is the daily accrual of a per participant administrative fee (if this represents the majority of your balance) OR a 7-15 basis point advisory fee from Diversified Investment Advisors that is not offset by the revenue sharing from their fund selection.

While not as expensive as some of the biggest offenders out there, the funds they list on their website, net of the revenue sharing kickback they apparently pass through to the plan/participants (or use to offset their advisory fee), generally have expenses more than 0.75%...a tiny bit high. The money market fund is about double what is available and the large cap index fund costs about four times what is available in the market.

Are you sure the symbol was RAEGX? In our www.fundgrades.com site we have 14 different share classes for American Funds Growth Fund of America, but no symbol that matches RAEGX.

The closest match we have is RGAEX. Our report card for that fund is available here:
http://www.fundgrades.com/securityreport.aspx?id=92680

I'd write a memo to the administrator simply asking why you have declining share balances each day and if it is to cover various plan expenses/services, request a copy of the contract that these expenses apply.

I apologize. I transposed two letters and the fund symbol mentioned above is RGAEX.
The 401(k) through Diversified has 15 funds but only two of them are actual funds from Diversified (Total Return Bond and Mid-Cap Value). All the funds in the 401(k) continue to decrease shares daily even on days when the market is closed. A Plan Service Fee is charged for each fund on the last day of the month.
I am told that: "An annual plan service fee will be deducted from your account based on your account balance in the investment options. Deductions will be made on a quarterly basis." Each fund has a plan service fee of 0.110%. This fee is in addition to the fund expense ratio.
There has never been a quarterly deduction that has been visible. There are daily decreasing shares and then the last day of each month there is a plan service fee that comes off of each fund...and the money is taken that day from the balance...monthly.

[David Loeper]

Originally Posted by jusrme

I apologize. I transposed two letters and the fund symbol mentioned above is RGAEX.
The 401(k) through Diversified has 15 funds but only two of them are actual funds from Diversified (Total Return Bond and Mid-Cap Value). All the funds in the 401(k) continue to decrease shares daily even on days when the market is closed. A Plan Service Fee is charged for each fund on the last day of the month.
I am told that: "An annual plan service fee will be deducted from your account based on your account balance in the investment options. Deductions will be made on a quarterly basis." Each fund has a plan service fee of 0.110%. This fee is in addition to the fund expense ratio.
There has never been a quarterly deduction that has been visible. There are daily decreasing shares and then the last day of each month there is a plan service fee that comes off of each fund...and the money is taken that day from the balance...monthly.

Let me make sure I am perfectly clear about this. When the plan service fee that comes off of each fund comes out at the end of each month, are there additional decreases in your share balance beyond the daily declines you have been noticing?

[jusrme]

Originally Posted by David Loeper

Let me make sure I am perfectly clear about this. When the plan service fee that comes off of each fund comes out at the end of each month, are there additional decreases in your share balance beyond the daily declines you have been noticing?

Yes. Here is an example of one fund -
July 01, 2007 units/shares - 676.639546
then units/shares decrease teeny bit by teeny bit each day to
July 30, 2007 units/shares - 676.576699
July 31, 2007 units/shares - 676.574810
On July 31, 2007 there is a Plan Service Fee taken out of that fund of $1.04.
August, 01, 2007 units/shares - 676.572831

There is never a day that the units/shares do not decrease - even on days the market is closed.
The higher the funds close at on the last day of the month the higher the Plan Service Fee is. (It appears that they may be subtracting the number of shares on July 31 from the number of shares on July 1 and then multiplying that amount by the closing price on the last day of the month). If the last day of the month is a great day in the market the Plan Service Fee is higher of course.

The particular fund mentioned above -
The market closed on Friday, March 07, 2008 with a share price of $12.35 and this fund was worth $8938.23.
Saturday, March 08, 2008 it was worth $8938.20.
Sunday, March 09, 2009 it was worth $8938.18.
So between the time the market closed on Friday and the time it opened Monday morning it lost $.05.
It sounds like a small amount but take that times each fund and times 365 days a year and times many years and it really adds up.

My question came up because I have never witnessed this in any other 401(k) that we have had in our family and also because when I called Customer Service at the 401(k) company they had no idea what was going on with the continuous decreasing of shares/units.

[David Loeper]

Originally Posted by jusrme

Yes. Here is an example of one fund -
July 01, 2007 units/shares - 676.639546
then units/shares decrease teeny bit by teeny bit each day to
July 30, 2007 units/shares - 676.576699
July 31, 2007 units/shares - 676.574810
On July 31, 2007 there is a Plan Service Fee taken out of that fund of $1.04.
August, 01, 2007 units/shares - 676.572831

There is never a day that the units/shares do not decrease - even on days the market is closed.
The higher the funds close at on the last day of the month the higher the Plan Service Fee is. (It appears that they may be subtracting the number of shares on July 31 from the number of shares on July 1 and then multiplying that amount by the closing price on the last day of the month). If the last day of the month is a great day in the market the Plan Service Fee is higher of course.

The particular fund mentioned above -
The market closed on Friday, March 07, 2008 with a share price of $12.35 and this fund was worth $8938.23.
Saturday, March 08, 2008 it was worth $8938.20.
Sunday, March 09, 2009 it was worth $8938.18.
So between the time the market closed on Friday and the time it opened Monday morning it lost $.05.
It sounds like a small amount but take that times each fund and times 365 days a year and times many years and it really adds up.

My question came up because I have never witnessed this in any other 401(k) that we have had in our family and also because when I called Customer Service at the 401(k) company they had no idea what was going on with the continuous decreasing of shares/units.

The daily declines are the daily accrual of the plan service fee that are reported to you monthly.

You notice that when the fee comes out at the end of the month, there is not an offset of a corresponding amount of decline in shares (because they have been accrued each day of the month.) That $1.04 fee would be about 0.08 shares, but the decline between days is only around 0.002.

You are correct the fees add up and effect the quality of your life. At least your statements show these expenses. Many plans hide a number of the fees from participant statements.