Part 3: Understanding the Fees You Pay
Fees in the 401(k)
There are various service providers inside the 401(k) for Local 25, because it is a Jointly Trusteed Taft-Hartley Plan. The auditor confirms that all the money that was to be received by the plan (money that came off your check) was received into your account. The actuary checks that the plan passes all the tests required by the government. The investment consultant helps the trustees pick and monitor the funds, and provides education to the participants. The attorney is responsible for keeping the plan in compliance with ERISA and the Department of Labor. Finally, the administrator is responsible for keeping the rules, receiving and investing the funds, sending out statements and processing distributions.
Every dollar charged against the plan comes directly out of the participants’ pockets, so everyone works to keep the costs as low as possible. Last year, the investment costs — which include all mutual funds and the investment consultant — was, on average, under 0.13%, which is very reasonable.
In addition to the standard fees, there is a one-time setup fee of $50 if you choose to receive a monthly distribution after you retire (if you elect to receive a monthly check from the plan). Other administrators often charge fees of up to $100 (or more) for each distribution. Your one-time fee of $50 is substantially below the $120 annual fee you could find yourself paying elsewhere. Couple that with the ability to continue to invest in a retirement plan that has access to several “Institutional Share Class” (lowest fees) funds, and you will likely be ahead of the game!
How People are Paid
Much has been written about “fiduciaries” recently. Rules being pushed by the DOL require those that who offer investment advice to either hold themselves out as a fiduciary, or disclose that they may not have your best interest at heart. Local 25 hired a financial advisor that is a fiduciary to the participants of the plan. They do not receive compensation beyond what the plan pays them, and they do not receive more money if you invest in different funds. Their advice is intentionally designed to be conflict-free.
When dealing with outside financial advisors, there are several ways for them to be compensated. Some advisors will be paid a “flat” fee — either a flat dollar amount per month, quarter or year, or a percentage of assets that is the same regardless of where your money is invested. Other advisors can be compensated based on commissions or “trails.” A commission is something the advisor receives from a client in the form of a “load” or “ticket charge” (often somewhere between 1% and 5% of the purchase), or, in the case of an insurance product such as an annuity, up to 10% of the purchase price. Sometimes these advisors also receive a “trail” — a small fee the fund or insurance product will pay the advisor every year, intended to encourage the advisor to continue offering advice beyond the original investment.
Things to Know
People are often intimidated by people that work in the financial services industry. Whether working for a bank, insurance company or advisory firm, many forget to ask themselves a basic question: Whose best interest does this person have?
If you go to McDonald’s and order a Big Mac, the person taking your order may ask if you’d like fries. Sure, you might say. Would you like to make it a Large? Why not. Next, they’ll ask about a drink. Make it a meal! Did the person at McDonald’s look at you, decide you needed extra food and drink, and then offer the add-ons? Of course not — they are trained to sell more food.
Ask about compensation. Ask about costs. If you were going to have a surgery, you’d ask the surgeon “How much?” Ask your advisor the same question, and remember what potential conflicts of interest might be out there.
Questions for a Potential Advisor
1. How are you paid?
2. What are you paid?
3. Is any of this guaranteed?
(Both “Yes” or “No” may be an acceptable answer)
4. How will this fit with my overall profile?
(As a member of a union with a pension guaranteed by the Pension Benefit Guarantee Corporation, an agency of the U.S. government, a 401(k) may not need to provide as much income to you as someone who does not have a pension fund to depend)
5. How often would we meet?
6. Do you have discretion to make changes without talking with me first?
7. What penalties would there be if I took this money out of your suggestions?
8. What happens to this money if I would die before it is all gone?
9. What conflicts of interest do you have?
10. How do you address these conflicts of interest?
Questions about your current retirement plan, or interested in learning more? Contact Mike Wilcher at 309-794-1170 x242.