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

[David Loeper]

Originally Posted by 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

Well, even though I don't like paying more in expenses than needed, if there is a match you can get from your employer, it is still worth the contribution, even if the fees are too high. The question is, why not work to get the plan improved? Your employer doesn't want you to be ripped off...their money is in it too! In many of these cases, even the employer doesn't know there are more cost effective options out there...it is a win/win if you handle it correctly. You might be the only one in your company that realizes the fees are excessive.

[David Loeper]

Originally Posted by 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?

It is not impossible to take money out of your 401k at all. Prior to 59 1/2 there is a 10% excise tax for early withdrawals, UNLESS, you take your distributions out over your lifetime, which, is what it sounds like what you are planning. Doing so avoids the 10% excise tax although the distributions are taxable (as they would be at any age.) The other thing to look for is whether or not you have a Roth option to your 401k.

[lazy23]

I think Will is going to have to make a correction. Your book is now #95 on Amazon's bestseller's list. Congratulations.

Which brings me to my question. Why do you think there's such a huge response to your book? I mean usually on any financial topic there's like thirty different authors writing about the same topic again and again. But your books is the first one I know about that specifically tackles this issue. Is there a reason why hidden fees in 401k plans were not covered in other books? Why did it take so long for someone to come out with a book like this?

[David Loeper]

Originally Posted by lazy23

I think Will is going to have to make a correction. Your book is now #95 on Amazon's bestseller's list. Congratulations.

Which brings me to my question. Why do you think there's such a huge response to your book? I mean usually on any financial topic there's like thirty different authors writing about the same topic again and again. But your books is the first one I know about that specifically tackles this issue. Is there a reason why hidden fees in 401k plans were not covered in other books? Why did it take so long for someone to come out with a book like this?

Maybe it is good public relations and marketing??? Some of it has to do with the free gift copies that buyers of the book can use with their associates to send to their employers.

I think the reason no one seriously tackled this issue before is because publishers assume that this is an issue for the employer (a small market of readers relative to participants) because they are the ones that get to choose the offerings in a company's 401k.

They assume that it is out of the control of the employee, there is nothing participants can do about it, so who is going to read a book about something that is out of their control?

But, in reality the employees are the only ones that can get this issue fixed. The employer doesn't have any incentive to shop for a better 401k plan, the participants are paying the price, and if the fees are hidden and the employees are happy, why bother? The employer just wants the 401k plan to be viewed as a positive company benefit.

What makes my book different is how it not only exposes what the fees really are, but gives you a positive, constructive, non complaining approach you and your associates can use to show your employer why it is worth shopping for a better 401k plan.

[davoscat]

Originally Posted by David Loeper

We donate the net profits from the book to charity. This is just a personal mission.

You're my hero David.

You could have easily fixed your own 401(k) and move on with your life. Thanks for passing along the knowledge.

positive, constructive, non complaining approach you and your associates can use to show your employer why it is worth shopping for a better 401k plan.

I imagine employees with better retirement plans are probably happier and more productive. Is that enough incentive to get your employer's attention? What are some examples of these constructive approaches?

[David Loeper]

Originally Posted by davoscat

You're my hero David.

You could have easily fixed your own 401(k) and move on with your life. Thanks for passing along the knowledge.



I imagine employees with better retirement plans are probably happier and more productive. Is that enough incentive to get your employer's attention? What are some examples of these constructive approaches?

They will be happier and more productive, but only if they know their plan is better. Unfortunately, the way fees are hidden, people are naively happy with their 401k, which is why I'm trying to get the word out.

The first issue is really a mindset issue. You need to put yourself in your HR Dept, Controller's, etc. shoes. Understand when approaching your employer that:

1) They probably weren't aware of all of these fees within the plan either

2) They probably have some "pride of authorship" in selecting the plan

3) You are probably the going to be the first person that even mentions it, so their assumption is you probably calculated something wrong since no one else has mentioned it (that's why you need to get some associates to help.)

4) Their own 401k money is being skimmed by these excess fees too, so they do have an incentive to learn about this and get the problem fixed.

5) The first person your plan authority will contact is likely going to be the sales person for the plan who is skilled at protecting his or her fees.

Understanding these things helps. I use an example memo in the book that is a thank you note for you to send to your plan authority for helping you assemble the documents you needed to do your retirement planning (and calculate your fees.) Sending a thank you note for their help and the gift of the book is pretty hard to perceive as confrontational...don't you think?

[Gaylesblog]

Hello. Brand new member here. I was just browsing Amazon for a good 401k book and came across David's book. I thought I would google him a bit before purchasing the book and found this thread. I've never heard of writers answering questions in a forum before. What a neat idea. After seeing how helpful David is here I'm definitely going back and making the purchase. Since I'm here I do have a question: Aside from hidden fees, what are some of the common mistakes people make when picking and managing their 401ks?

[David Loeper]

Originally Posted by Gaylesblog

Hello. Brand new member here. I was just browsing Amazon for a good 401k book and came across David's book. I thought I would google him a bit before purchasing the book and found this thread. I've never heard of writers answering questions in a forum before. What a neat idea. After seeing how helpful David is here I'm definitely going back and making the purchase. Since I'm here I do have a question: Aside from hidden fees, what are some of the common mistakes people make when picking and managing their 401ks?

Thanks! Welcome to the forum and I hope you enjoy my book, and most importantly, get your 401k fixed so you and your associates can make the most of your lives.

I'm going to give you some common mistakes that are ignored by conventional wisdom instead of the normal industry mantra.

1) Saving too much money- Yup...that's right...there are a lot of people that have been guilted/coerced into saving too much money. If it is possible to save too little (a common theme with the product vendors that get fees on your assets) it is also possible to save too much. You need to know the right amount for your personal goals and situation.

2) Focusing on past performance. Doing so is only useful if you have a time machine and can go back in time to get that track record that the product vendors shamelessly sell you on. Uncertainty of the future is certain.

3) Taking needless investment risk. The product vendors often have "useful tools" to identify how much investment risk you can "tolerate." They proceed to position you in a portfolio that will ultimately subject you to that maximum tolerable pain, regardless of whether or not it makes sense for your goals, merely because you can tolerate it. I can tolerate a bad sun burn or getting a tooth fillied without novacaine...that doesn't mean I would intentionally subject myself to it if it wasn't needed.

4) Buying (and paying for) hope...hoping to out perform markets while ignoring the certainty of excess costs associated with doing so and evading the reality of the risk of underperforming markets which you have the choice to avoid. (see my free mutual fund and ETF grading website: www.fundgrades.com)

5) Using target date or lifecycle funds...these are sold by the product vendors as the "easy" way to get the "right" allocation, but since they are all based only on a calendar (with maybe a risky market timing kicker that could end up kicking you in the...ummm...well you know) and ignore all of the other equally important considerations (savings rate, funded status, retirement income goal, other resources, estate goals, etc.) they invariably will be moving your allocation in exactly the wrong direction from what would otherwise make sense when considering these other variables beyond the calendar.

[Julie Rains]

Hi David,
I am a blogger here and I wanted to say thanks for your visit and the book. I am self-employed now and have a SEP-IRA (it's just me) but have had 401(k)s with previous employers. I have since rolled over my 401(k)s and so I can manage my accounts rather than have to pick from pre-selected ones.

I'm glad you are writing about how to advocate for yourself -- I don't know if people (including me) realize that you should, though I happen to have read that Jeff Opdyke (the PF guy with Wall Street Journal) was trying to get his wife to talk to her employer about the company plan. My last employer was acquired and before the acquisition, my account did great; afterward, my growth ended and just stagnated. It took me a while to figure out that the problem wasn't with me but rather with the plans being offered!

A topic that might be of interest are the plan rules governing rollovers -- that is when you leave a company, what things should you be aware of in moving the funds (selling them, transferring them, etc.) to another account.

Again, thanks for visiting and offering your expertise

Julie

[David Loeper]

Originally Posted by Julie Rains

Hi David,
I am a blogger here and I wanted to say thanks for your visit and the book. I am self-employed now and have a SEP-IRA (it's just me) but have had 401(k)s with previous employers. I have since rolled over my 401(k)s and so I can manage my accounts rather than have to pick from pre-selected ones.

I'm glad you are writing about how to advocate for yourself -- I don't know if people (including me) realize that you should, though I happen to have read that Jeff Opdyke (the PF guy with Wall Street Journal) was trying to get his wife to talk to her employer about the company plan. My last employer was acquired and before the acquisition, my account did great; afterward, my growth ended and just stagnated. It took me a while to figure out that the problem wasn't with me but rather with the plans being offered!

A topic that might be of interest are the plan rules governing rollovers -- that is when you leave a company, what things should you be aware of in moving the funds (selling them, transferring them, etc.) to another account.

Again, thanks for visiting and offering your expertise

Julie

Julie...thanks for participating in this forum.

Rollovers into IRAs are a good issue to discuss especially since so many of the "no load" and "no transaction fee" discount brokers fund programs get fees from within their "no fee" funds that are higher than some of the worst 401k plans out there.

For example, if your employer has a plan like our company where you can get a globally diversified portfolio for between 0.09% and 0.18% in total annual expenses, you would be nuts to transfer it into a discount brokerage account.

Schwab as an example, in their One Source program, has the cheapest S&P500 index fund at 0.19% a year (two and a half times the cost of our 401k's fund for the same thing) unless you have at least $75,000 to invest in the fund, then you get it at 0.10% (only about 50% higher cost). Of course, these are Schwab's own funds.

In the small cap category, the lowest cost fund on One Source is 0.42%...or almost FIVE TIMES as much as our company's plan. Be careful of these "no load, no transaction fee funds" from the discount brokers that constantly skim your account for up to 0.30% to .40% a year.

In terms of executing a rollover, if your company's 401k is not cost effective, the best way to handle this to avoid potential tax problems is to execute what is known as a "direct trustee to trustee transfer." While you can document getting the check from your balances and placing it in an IRA rollover, it is safest to avoid handling the money if you want to avoid potential tax problems.

Also, if your IRA's fund program has excessive fees (like most of the no load programs at any of the discount brokerages) and you have sufficient assets to justify it ($25,000 or more) you might want to consider using ETFs and paying the $9.95 or so transaction fee instead of using excessively expensive funds.