The Hidden Fees In My Employer Sponsored Retirement Plan

Do you know what fees you are being charged in your retirement plan? Read below as I examine my plan!

Now that you have a small insight as to how the mutual fund industry works, I wanted to walk you through my current employer sponsored retirement plan.

If you missed my earlier article on the Mutual Fund Industry, you can read about it here: Exposing The Mutual Fund Industry.  Since I will be exposing some of the hidden truths within this powerful industry, I am not going to disclose my employer or the retirement company that is sponsored because I really don’t want to get sued.

With that being said, my employer sponsored plan is actually quite good compared to others offered out there.  While there are hidden fees in my plan, the fees are reasonable if you know what funds to choose.

While I was doing research for this article, I could not remember the annual fee my retirement provider charged me to administer the plan.  This is the administrative fee charged on top of the fees added on the individual funds themselves.  I signed on to my online portal but could not find the fee disclosure anywhere.

Calling My Plan For More Information

I decided to call the 1-800 number on the top of the website.  I initially spoke with a nice lady and asked her about the annual fee.  I told her all I needed to know was how much the annual fee was that they charged me for administering my plan.  She didn’t even attempt to answer and told me she would need to transfer me.

I sat on hold for five minutes until someone picked up.  The first lady answered and introduced me to a man who she said could answer my questions about fees.  I relayed my initial question and told him I just needed to know the annual fee I was charged.  He told me he didn’t think there was an annual fee on my plan to which I quickly informed him that I was positive there was an annual fee.  I sat on the phone with him and he continued to look on his computer and finally found that my plan charges and annual fee of .12%.  This fee is charged on top of the fees charged by the individual funds.

For reference, he told me that the annual fee information was on page 6 of my disclosure forms.  I looked through my paper copies and found the language (in small print) on page 6.  Here is the fee disclosure:

fee

Does that make sense to you?   There is a reason they don’t just write: This plan charges a .12% annual fee for maintaining the plan.  What is T1 and T2?  Without getting into the weeds, the T1 and T2 denote differences between funds as to the time the actual transaction of the funds take place.  In other words, T1 funds charge a .12% fee and T2’s don’t.  All of the funds in my plan are T1 funds – except one which is a stable income low return fund – that you shouldn’t be invested in.

After recording that .12% fee, I looked further into my plan.  Below is a front page view and explanation of my statement:

1

The very first line is the annual fee that was taken out of my account and charged by my plan – the fee that the representative didn’t think I was charged.

The second line is a recent purchase of I made that came directly out of my check pre-tax.

The third line of “Reinvested Dividend Adjustment” shows the amount of money I received from owning specific stocks within my funds.  Refer to my article Stock Market Basics for information on dividends.

The activity report should be self explanatory and the reason the dividends is $0.00 in this section is due to the short time frame that is recorded (10/1 – 10/10)

Investment Options

Next, I took a look at the options I have to invest in based on my plan.  Below is a screen shot of the options available to me.

targetdate

invest

The first picture are target date funds.  I will go deeper into target date funds in the future, but in essence, they change what you are invested in based on your anticipated retirement date.  They become more conservative the closer you get to retirement.  In theory they are a great option, and for my plan they charge very small fees compared to other plan target date funds.  However, based on my investment strategy, target date funds are not for me.

The second page involves the more traditional fund options.  Below is a diagram of the page with explanations.

diagram

Explaining The Fees

Now before you go investing your money you need to pay attention to track records and expense ratios.  When I look at a fund, I don’t usually don’t give much credit to the Year To Date percentage.  Those can fluctuate significantly depending on where we are in the year and just because a fund manager is doing great this year doesn’t mean they performed all that great in prior years.  It also doesn’t mean they aren’t going to fall on their face next year either.  Also, you can see that in the large cap funds there are two funds .  One appears to be performing better than the other wouldn’t you agree?  Then why am I invested in the fund that isn’t performing as well? (Denoted by the check mark)  There are several reasons I’m invested in the second fund.

  1. The top fund has performed better every year right?  Well look at the inception dates.  The top fund was created in December of 2016.  We have been in a historic bull market since the recession and pretty much everything has been going up.  The inception date of the second fund goes all the back to 1990 – yet still has averaged a 10.05% return each year.  That is stellar compared to most actively managed funds.
  2. I look at expense ratios.  The top fund charges .64% annually while the second fund charges .04%.  While this may not seem like much, the more than .5 percent is significant over time when you factor in compound interest!

The Games They Play

If you look at the funds in my plan, there is one new one that is out performing the older more established fund in a few of the categories.  Coincidence?  I think not… the older funds are index funds and the newer funds are actively manged funds.  Mutual fund companies pay extra money to retirement plans so you can bet that part of that expense ratio is going to my plan sponsor.  Mutual fund companies bid with retirement plans and make deals to get their funds in the plan.  Win win for everyone! Except the investor….

Why Are The Newer Funds Outperforming The Older Ones?

Mutual fund companies frequently create new funds.  For instance, they may create 5 funds, and if one does well, they scrap all the others and promote the best fund.  Throw enough at the wall and hope something sticks.. makes sense right?  Take into account the newer funds in this plan.  What do you think they will do if one of these funds starts tanking bad and can’t keep up with the index?  They will replace it with a fund that is performing better at that moment and ride it as long as they can until it tanks as well.  It’s a game my friends, a came the 17 trillion dollar industry hopes you don’t figure out.

How To Invest

Before you start investing, start thinking about what you need the money for.  For me, I don’t need to touch my account for another 20+ years so I have plenty of time.  I invest in different indexes.  If the market tanks for the next 3 years, it doesn’t affect me because I’m in it for the long haul.  I will leave my money in there and buy as much as I can while the market is down.  Never, ever, pull your money out when the market is down (if you’re invested in a mutual fund).  The market has always recovered – just be patient and wait it out.  If you try to time the market, you will pull your money out and put it back in at the wrong time and miss out on all the opportunities – including dividends.  Slow and steady wins the race.  The object is to do the best job you can with the information you have.  Pay attention to those fees, inception dates, and past performance.

While past performance is not an indicator of future performance, it can give you some insight as to how the market performs over time.

If you have a much shorter time until retirement, I would seek the advice of a Registered Investment Adviser (Fiduciary) and ask questions about fees.  I will have a future article about the different types of advisers and what questions to ask as you prepare for retirement.


Until then, thank you so much for reading and please comment below if there are any questions you have that I forgot to address!! I would love to hear from you and please subscribe to my blog by entering your email below.  If you found this beneficial please share it across social media to help promote my blog and help as many people as we can!  Keep at it – you work too hard to be this broke!

-Ryan

 

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Author: Ryan

Hi!  My name is Ryan and I have a passion for personal finance and education.  I am married and have three children, a girl and two boys all under the age of ten.  My wife stays home with the kids so it can be challenging to live off one income.  Much of what I write is based off my personal experiences and what I have learned in the course of my life. My financial journey began when my wife and I saved up a sum of money and I didn't know who I could trust to invest it.  After several interviews with financial advisers, I still didn't feel like I could trust anyone.  That began my journey to educate myself by reading every finance book I could get my hand on and by attending financial seminars.  After getting a good handle on debt, finance, and investments, I decided to start this blog as a resource for others who find it difficult to trust people with their money. I recently started writing this blog about how to get out of debt and start investing to create the future you deserve. I have been in law enforcement for 14 years and I have seen the devastation left behind by people who mismanage their finances.  I started this blog because I want to help as many people I can by educating them on common sense money management. As far as my formal education, I obtained a Bachelor of Science in Education and a Master of Administration Degree from Northern Arizona University.  I am an adjunct professor at a local community college and I have been a student of finance for many years. This blog is dedicated to those looking to eliminate their debt and to mold a new way of thinking, living, and spending. Education, focused on financial stability and wealth, is the main purpose of this blog. This website is a new journey for me and I know there are areas that I could improve.  Please feel free to reach out to me with any critiques - I would love the feedback so I can be as effective as I possibly can and provide the most relevant information.  I look forward to writing for you and learning with you! If you have any questions or comments, I would love to hear from you! -Ryan

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