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

[Benton]

Mr. Loeper, thank you for taking the time to answer our queries. I ordered a copy of this book after someone sent me a link to this thread. I look forward to reading it-hopefully fast enough so that I can come back and ask questions here before you're gone.

I recently read this example on DOL's website:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

From $227,000 to $163,000 is a pretty dramatic difference. Is this a worst case scenario kind of example or do you think this happens very frequently?

[David Loeper]

Originally Posted by Benton

Mr. Loeper, thank you for taking the time to answer our queries. I ordered a copy of this book after someone sent me a link to this thread. I look forward to reading it-hopefully fast enough so that I can come back and ask questions here before you're gone.

I recently read this example on DOL's website:

From $227,000 to $163,000 is a pretty dramatic difference. Is this a worst case scenario kind of example or do you think this happens very frequently?

Simple answer, this is by no means the worst case and it happens very frequently.

The DOL used a simplifying assumption that really understates what the impact could be. They way they calculated it, it assumed you would get the exact same return on your 401k every year. Needless to say, there is no chance of that. But it is simpler to understand.

The reality is that if you averaged a 7% return (but included the reality that you do not get the same return every year) you wouldn't end up with $277,000...it could be $600,000 or it could be $100,000. My book has tables in the back that show this effect.

But, in general the DOL example is effectively communicating the conceptual effect of needless fees.

[Julie Rains]

Originally Posted by David Loeper

Like most of my answers, we have to recognize that there are a lot of unique variables that go into this question based on your personal situation. I don't know how old you are, what you have in resources (obviously enough to pay the taxes on the 401k), how far you are from retirement, how much you save each year and into what vehicles, your retirement income goals, tax rates, etc.

However, the future of taxes is very uncertain. I think all of these planners that make projections about a better long term tax strategy are selling snake oil.

Personally, I would think that paying 100% certain taxes now on the 401k to convert that to a Roth in hopes of having tax free withdrawals later, in all liklihood is a bad idea.

This is particularly true if you are planning to start funding a Roth each year (the taxes you would pay would could probably fund a year or two of Roth contributions, so why not take the money you would have paid in taxes and contribute it to a Roth IRA?)

Thank you for saying this...esp. about the paying 100% certain taxes now. There may be some reason to pay now but tax laws change so often, we really don't know what is going to happen taxwise in 20 or 30 or 40 years when retirement rolls around. I have been debating this issue with myself for a couple of months -- am going to stick with the Roth funding idea rather than conversion.

[David Loeper]

Originally Posted by Julie Rains

Thank you for saying this...esp. about the paying 100% certain taxes now. There may be some reason to pay now but tax laws change so often, we really don't know what is going to happen taxwise in 20 or 30 or 40 years when retirement rolls around. I have been debating this issue with myself for a couple of months -- am going to stick with the Roth funding idea rather than conversion.

If you are that far away from retirement, funding the Roth with annual contributions and leaving the 401k in an IRA rollover to avoid immediate taxation will likely be a better course. I'm glad I could help!

[Larrybits]

My friends tell me that a good 401k plan should have at least 10 investment options available. Does that mean if my company have less than 10 options I should complain? What kind of options should I demand for? Most of the options available at my job are active investment plans, which I presume are more expensive in terms of expenses compared to index investments. Is something fishy going on?

Thanks in advance.

[David Loeper]

Originally Posted by Larrybits

My friends tell me that a good 401k plan should have at least 10 investment options available. Does that mean if my company have less than 10 options I should complain? What kind of options should I demand for? Most of the options available at my job are active investment plans, which I presume are more expensive in terms of expenses compared to index investments. Is something fishy going on?

Thanks in advance.

I don't know that there is a magic number, however as a fiduciary, I think that everyone's investment preferences should be accomodated.

Unfortunately, it is not uncommon to have plans that only have active investment options available (usually very expensive), even in plans that have 20 or 30 alternatives.

If you don't have low cost index options available, you have a legitimate gripe because the trustees are forcing you to choose among alternatives that all subject you to the risk of potentially underperforming the markets, a risk you have the choice to avoid with index funds.

Also, the addtional fees charged in active funds for subjecting you to this risk are a 100% certainty, something that you should have the choice to avoid as well.

In my company's plan we have 14 extremely low cost index alternatives available, 6 turn key portfolios assembled from these index funds, and a self direct brokerage account for anyone that wishes to play the active game.

This accomplishes meeting anyone's goals. If someone wants low cost funds where they can design their own allocation, they can do that. If someone wants low cost professionally designed, and rebalanced portfolios, they have that. If someone wants to pick expensive active funds in hopes of out performing, there are 1500 funds (plus all listed ETFs) available in the self directed brokerage account. But, the only people that pay the additional fees in that account are the ones that CHOOSE it. It should be a choice, not forced upon you against your will.

You are in the unfortunate postion of not having the choice to avoid needless investment risk and expense. I don't think it is right that the trustees force everyone to pay for services they are not using or don't want.

[David Loeper]

Originally Posted by davoscat

Being really smart about investments does not make you a geek. It just makes you spiffy.

Spiffy huh? Ok....maybe I'm not a geek.

[beautiful]

Hi,

I'm not sure how much the fees are for the index funds in my 401k plan, but how could I figure out whether it is still worth it to contribute to the 401k after reaching the company match amount?

That is, how I do figure out if the tax savings outweigh the fees in my 401k? I'm looking for a formula in which anyone can plug in their numbers...

Thanks!

[idorunyc357]

I'm a young'un (26 yo) and I have been making contributions to my 401(k) for about 18 months now at 4% of my salary (my company matches 2%)... and I have it all in one of those Freedom Fund things because - well - I'm too nervous to do anything on my own about it. I'm really paranoid when it comes to money, and I'm afriad I'll be second geussing any other choises I'd make on my own. Are they really all that bad?

Also - and this is going to sound bad - where and how can I tell what fees I'm paying? *(if this is already answered, just point me to where it is ) I honestly don't know

[David Loeper]

Originally Posted by beautiful

Hi,

I'm not sure how much the fees are for the index funds in my 401k plan, but how could I figure out whether it is still worth it to contribute to the 401k after reaching the company match amount?

That is, how I do figure out if the tax savings outweigh the fees in my 401k? I'm looking for a formula in which anyone can plug in their numbers...

Thanks!

Tax savings and deferred (or exempt with Roth 401k) compounding will probably make up for the difference in fees in all but the worst plans (those with 2-3% a year in fees.)

There is no easy formula because you would have other options. Could you make the contributions to IRA or Roth IRA? If so, ANY excess fees in your 401k would make it worth while to fund the lower cost alternatives you could have in a self directed IRA, rather than funding your 401k beyond the company match.

However, if you don't qualify for an IRA or Roth, saving the money outside of a tax advantaged vehicle, even at low tax brackets and high 401k fee levels, is unlikely to be advantageous.