Important Tips for Managing 401k Fees

If you are contributing to a 401k or you are eligible to receive employer contributions to a 401k account, it’s important to educate yourself on the types of fees involved. Many 401k plans are subject to several types of fees, including investment management fees, trust custody fees and administrative fees. You can’t avoid paying these because they are taken right out of your account, but you can find ways to offset some of the fees and costs.

If you are participating in an employer-paid 401k plan, your employer will usually absorb the cost of administrative fees because these fees are imposed to manage and maintain your account. Here are some important tips for managing your 401k fees:

1. Monitor fees when you leave your job. If you do end up leaving your company that made contributions to your 401k plan, make sure you know who is responsible for paying the administrative fees going forward. Most companies will not pay for administrative fees when the employee leaves their job, so you will end up paying a little extra in order to maintain your account.

2. Take a close look at investment fees. Investment fees are the biggest component of most 401k plans and are deducted from your investment returns. Your account may be subject to sales charges or sales “loads” and commissions that are paid out based on the number of shares bought and sold on the account. Other investment fees include front-end load and back-end load fees, Rule 12b-1 fees (usually imposed on mutual funds), target date retirement fund fees, collective investment fund fees and charges on variable annuities. Make sure you have a good understanding of what these fees are and consider shopping around for lower rates to get the most return on your investment.

3. Review your account statements thoroughly. All of the fees and a breakdown of all fees on each account will be posted on your account statement. Take a close look at the paperwork you receive in the mail or online so that you are aware of the total fees you are paying each month and year. Remember that there are a number of different factors that can impact fees and expenses of your 401k plan. You could be eligible to receive lower fees if you have more assets. Costs can be subsidized if your 401k plan and other services are offered through a bundled program.

Taking some time to learn about 401k fees can help you make some wise investment decisions. Use these tips to manage your 401k plans better and ensure you are getting the highest possible return from your investments.

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5 Steps to a Healthy 401(k) Plan

401(k) plans offer a number of benefits and can help you build up that all-important savings cushion you need for retirement. If your employer is contributing to your 401(k) and you are being consistent with your own contributions, you can build up a healthy savings account and look forward to a comfortable, stress-free retirement.

However, there are several things you need to do to make sure your 401(k) account stays healthy. Here are just five steps to a healthy 401(k) plan:

1. Be aware of your rights. You can start contributing to your 401(k) plan after one year of being with your employer. Take some time to learn about your rights as an employee and the benefits you are eligible to receive after one year of employment.

2. Automate your 401(k). Set up an automatic transfer of your contribution after each paycheck so that you don’t have to take the extra steps to make an actual deposit into the account. Automating your contributions can make it much easier to just “set it and forget it”. You’ll be able to build up that 401(k) account without having to think about it each time you receive your paycheck.

3. Take advantage of employer-matching. Check with your employer’s HR department to learn about your benefits and find out if you are eligible to receive an employer match for all contributions. Many corporations and some small business owners do match employee contributions, and this can be a great benefit for you in the long-run. Remember that these contributions are completely tax free, so you are essentially getting a “tax free raise”.

4. Don’t borrow from your 401(k) when you’re strapped for cash. If you’re running low on funds and need cash fast, don’t borrow from your 401(k) account. You will be paying a price for taking out this loan and will have to pay a penalty for withdrawing from the account. If you do end up leaving your job that is paying for some of your 401(k), you will have to pay the penalty and taxes on the withdrawal, unless you repay the entire amount in full.

5. Contribute up to the maximum amount whenever possible. You are permitted to contribute a certain amount each year and the IRS adjusts this limit on a regular basis. Make sure you know what this amount is so that you are contributing up to this amount year after year. Remember that none of those dollars will be taxed, so it is in your best interest to contribute as much as possible up to the contribution limit.

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Tips for Dealing with a Bad 401(k)

Most employers offer a 401(k) plan to employees as part of their benefits package, but what happens when you find out that your 401(k) really isn’t that good? A good 401(k) plan includes a variety of investments and doesn’t impose extensive fees for maintaining it. A bad 401(k) may only include a couple of weak investments and you may be responsible for paying hefty fees just to keep it. If you find that your 401(k) isn’t as good as you though it would be, and you think you might be better off getting your own account, here’s what you need to do:

1. Assess your current investments’ performance. A good 401(k) plan doesn’t include a lot of your company’s own stock. If yours does, it may be time to find out how well your other investments are performing. Find out how other funds are doing on the stock market by looking for the funds’ ticker symbols online, or in the newspaper.

2. Decide if the employer contribution is enough. A good employer 401(k) account matches about 50 cents for every dollar an employee contributes. If your employer is contributing much less than that, consider other investment options. In the long-run, the employer’s contribution may not be worth it and you could be better off with your own account or different type of investment account.

3. Take a close look at fees. Mutual fund fees should be minimal, but some types of accounts require you to pay very high fees to keep the account active. Many accounts also impose administrative fees. If your employer has set up an account that has very high fees, it may be time to make some changes.

4. Start contributing less to your employer-matched fund. If you do decide that your employer’s 401(k) is costing you more than investing in a regular account, it’s time to reallocate your investment dollars. Talk to a financial advisor about setting up an independent account but continue to contribute to your 401(k) – only much less than you have.

5. Remember you can roll your 401(k) into an IRA. When you leave your company, you do have the right to roll your 401(k) into an IRA, and this could open up even more investment options for you. Keep this in mind as you begin making your financial and investment decisions, and work with a financial advisor for tips and suggestions. Your financial advisor can guide you through the rollover process and ensure that you are making the most of your investment dollars.

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What You Should Know About 401(k) Fees

Whether you’re contributing to a company 401(k) or have set up a plan independently, you need to be aware of the fees that get posted to your account each month and year. Many companies that offer 401(k) plans work with investment companies that charge very high service fees – often much higher than the average. Calculating what these fees, surcharges and administrative costs are can be challenging, but once you’ve identified them, you can take steps to modify your contribution amount or set up a new account with lower fees.

Some of the most common fees associated with today’s most popular 401(k) accounts include:

Trustee fees – these are paid out to an individual who is in charge of handling the contributions. Some employers hire a trustee internally, while others work with a third-party to oversee the account. Whatever the case may be in your situation, trustee fees could be putting a dent in your 401(k) account.

Investment advisory fees – these are a set of ongoing charges and fees imposed to your 401(k) just to manage your assets. These are usually calculated as a percentage of the value of your 401(k), so they do change over time.

Administration fees – these are among the trickiest fees to catch and are often imposed on 401(k) accounts to cover the cost of legal services, customer service and accounting services. Administration fees vary significantly by plan and employer, so take some time to learn what these fees may be.

Recordkeeping fees – some companies impose these types of fees to make sure all transactions are accounted for and documented correctly. Your employer may be paying someone to do this in-house, or they may work with a recordkeeping company or accounting firm. In either case, you may be seeing some extra fees on your account to cover the cost of this extra service.

Sub-transfer agent fees – if you are working with a brokerage firm, the company may subcontract some of the recordkeeping activities and other services to a third party. If they do, you will be footing the bill for the services in the form of fees. These fees will vary by brokerage and may not always be easy to catch. They’re also a type of indirect fee on investment accounts.

Distribution fees – also known as 12b-1 fees, these include commissions to brokers, marketing expenses, and advertising expenses. They usually don’t exceed 1 percent of your 401(k)’s value per year, and are considered to be one of the indirect fees.

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401k Mistakes to Avoid in 2011

If you’re determined to improve your financial situation in 2011 and protect your 401k, you’ll need to make sure you’re not making some costly mistakes this year. Even though the economy has slowed and we are still in the midst of a recession, it’s important to continue contributing to your 401k, up to your contribution limit whenever possible. Many people make the mistake of not contributing when the market is down so that they can save money .However, this can be a risky move and reduce your tax benefits in the long run.

Here are some 401k mistakes to avoid in 2011:

1. Borrowing against your 401k. If you’re strapped for cash and turn to your 401k for help, you could be losing a lot of money in the long-run. Tap into an emergency fund or look for other resources if you need to cover some costs. Borrowing against your 401k in 2011 is not a good idea and you could end up lose lots of tax benefits and money.

2. Putting your 401k funds into a money market account. Even though money market accounts may seem less risky than a 401k and offer a high return on  your investment, they don’t have the same tax advantages and benefits as a 401k account. Avoid transferring your 401k funds into a money market account and focus on building up your 401k instead. Use other savings and funds to put towards a money market, if you feel that you have found a good interest rate.

3. Suspending 401k contributions. As stated earlier, many people make the mistake of stopping making contributions to their 401, account because they want to save money, or feel that the market is fluctuating too much and having a 401k is a risky venture. Suspending your 401k contributions can be a risky move itself and will limit the amount you will be able to save over the course of the year. Remember that you can continue contributing to your 401k up to the contribution limit, so be consistent about it and make a commitment to stick with it. Your 401k retirement account will always be a work in progress and something that you will need to keep building, regardless of the state of the economy.

Protecting your 401k account in 2011 and making some wise financial decisions will help to improve your financial position. Keep these 401k mistakes in mind when you are reviewing your 2011 financials, and look forward to a solid retirement plan in the near future.

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Roth 401k Versus Traditional 401k Plans

The Roth 401k became available to employees interested in a retirement plan in January 2006. Since then, thousands of employers have added the Roth 401k to their list of employee benefits, and many employees are enjoying the value of tax-free withdrawals and the flexibility of this type retirement account.

The Roth 401k plan has many similarities to a traditional 401k, and can help you to increase your savings potential as you work towards retirement. Here’s a close look at the Roth 401k and its similarities and differences to traditional 401k plans:

How Roth 401k Plans Work

As long as you follow IRS rules, having a Roth 401k account allows you to enjoy tax-free income upon retirement. Roth 401k plans are investment accounts and is now offered as a benefit by many employers. The plan allows account holders to defer a certain amount of their after-tax income to build up a solid savings account for retirement. The contribution limits for Roth 401k are the same as those for traditional 401k plans, and this limit changes from year to year.

The Roth 401k is only available for employee deferrals, which means that any employer contributions, such as profit sharing, employer matching are not included.

Anyone who chooses to participate in an employer’s 401k or 403b plan is eligible for a Roth IRA account, and you will not lose eligibility if your income increases to a certain level. Employers simply provide a form where you can designate whether all or some of your contributions should go to a Roth 401k account.

Roth 401k Plans vs. Traditional 401k Plans

The simplest reason to choose a Roth 401k plan is that you will be able to maximize your tax-free income received after retirement. Roth accounts are typically more valuable because distributions from these types of accounts are not taxable. Building up savings in a Roth account can make you much wealthier than traditional savings accounts during retirement.  Many financial experts emphasize that the Roth 401k plan will make you wealthier in the long run.

Some of the similarities between the Roth 401k and a traditional 401k plan are:

• Rollovers allowed
• Account holders can begin withdrawing funds after 59 ½ and are required to withdraw funds after 70 ½
• An early withdrawal penalty of 10% plus taxes is imposed
• Account holders can withdraw funds if they experience financial hardship, early retirement or termination of service

Making some sound investment decisions well before retirement can help you grow your savings within a few short years, and ensure that you will be paying less taxes on your income, no matter what your tax bracket ends up being.

Choosing a Roth plan may mean paying more tax in the year of the contribution, but this won’t reduce your taxable income. The main difference will be in the total amount you end up saving, so there is a very positive cumulative effect from this investment approach.

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Benefits of Investing in a 401k versus an IRA

Many people open an IRA account in their early twenties in hopes of saving a significant amount of money for their retirement and cashing in on the tax-free benefits. IRA accounts do offer several benefits, but so do 401k plans. Company 401k plans are very similar in scope to traditional IRA accounts because the contributions are invested before any taxes are taken out.

This lowers the account holder’s adjusted gross income, which means the account holder pays less taxes each year without any penalties. However, there are a number of benefits of shifting contributions to a 401k plan. Here’s a close look at the benefits of investing in a 401k when compared to an IRA:

Understanding Types of IRA Accounts

Individual Retirement Accounts (IRAs) are a popular investment strategy for many people. These are individual investment accounts, so there are no company matches involved. The two types of IRA accounts available are Traditional IRA and Roth IRA accounts. The biggest benefit of having a traditional IRA account is that the funds can be deductible and any money invested before taxes will give you an immediate tax break.

Roth IRAs are non-deductible, but the distributions made during retirement are exempt from taxes. This is one of the key reasons why people choose a Roth IRA instead of a traditional IRA. If you are interested in becoming an IRA account holder, you need to meet certain tax and income requirements, and eligibility is based on your overall income, marital status and filing status.

Choosing Between 401k and IRA Accounts

One of the key reasons why people choose a 401k plan is because many employers will be able to match contributions throughout the individual’s career. However, some company 401k plans have several limitations and may end up costing you more in the long run. IRAs are attractive investment accounts for others, because they are individually-owned and controlled. The account holder gets to choose how much they want to invest each month, and where their investments are going. For example, IRA account holders decide whether they want to invest their money in ETFs, stocks, bonds, or other types of funds. Roth IRA plans have the added benefit of allowing for tax-free withdrawals.

If the company you are working for doesn’t offer a company 401k plan or contribution match, your best option may be to open a Roth IRA account. Roth IRA accounts give you a lot of flexibility and allow you to withdraw your money without paying taxes during retirement.

There are a number of benefits of investing in a 401k, instead of a traditional IRA or Roth IRA. However, 401k plans may have some limitations. Talk to your financial advisor or human resources department at your company to discuss the benefits and drawbacks of these accounts, and make the most informed financial decisions for your future.

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Understanding 401k Asset Allocation

When you have a company-sponsored 401k plan, you have several options for asset allocation, a process that divides your money between different asset classes to help you get the highest return. The most conservative approach to managing your 401k plan is to invest in a Treasury bill or bond, or any other type of investment that is guaranteed by the United States government.

A less conservative approach is to invest in international stock funds or by investing in companies that are headquartered outside of the United States, because these types of investments typically carry more risk. Here’s a close look at the risks and rewards associated with various types of asset allocation classes and categories:

International Stock Funds

This is considered to be the highest risk of all asset class categories, but also has the highest rewards. These types of investments usually experience more volatility but do have a higher potential for high return than other investment options, especially those that are based in the United States.

Small or Mid-Cap Stock Funds

These types of fund are invested in U.S.-based companies and have market caps between $300 million and $10 billion. These types of investments also typically carry a higher degree of risk and return, and may be an attractive addition to your portfolio.

Large-Cap Stock Funds

If you are investing in U.S. based companies that have market caps above $10 billion, you may be positioning yourself to receive a high rate of return on your investment. However, these types of investments also carry a higher degree or risk.

Bond Funds

If you are investing in loans made to companies or government entities, you may be investing in accounts where values fluctuate over time, but generally provide a steady rate on your return. These types of investments typically do carry more risk than their cash equivalents, but usually less than equity accounts.

Short-Term Fixed Income

This type of asset class includes Certificates of Deposits (CDs), Treasury Bills and Money Market instruments. These are the least risky of all investments, and generally provide a very low yield on investment. Most people with limited funds or little experience in investing will focus on these types of investments.

If you are looking for a more aggressive asset allocation, you may consider investing over half of your 401k in large cap stock funds, and approximately a quarter in small or mid cap stock funds. Over ten years, you could potentially generate a very high return on your investments. A more conservative asset allocation would be a 40 percent investment of cash and short-term fixed income, and investing about 25 percent of your 401k in bonds.

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How to Make the Most of Your 401k

Investing in a 401k is an important financial decision and it’s in your best interest to start making contributions as early as possible. The American Savings Education Council reports that almost 25 percent of people with access to a 401k don’t even participate, so it’s important that you take control of your finances and take advantage of a 401k plan when it’s available.

Here are some essential tips for making the most of your 401k:

1. Contribute as much as you can, as often as you can. Plan limits change by year, but you will be helping yourself by contributing as much as you can as frequently as possible. Put in the maximum amount each year if you can afford it.

2. Diversify your portfolio. If you want to enjoy the fruits of your labor during retirement, take the time to meet with a financial advisor so that you can spread your assets. It’s usually a good idea to invest in your own company’s stock, but you should also branch out to other investments if you want to maximize the return on your investment.

3. Consider investing in equity mutual funds as part of your 401k plan. Even though the stock market fluctuates a lot in the short term, you can still get a solid return on your investments when you invest in equity mutual funds as part of your 401k plan. Discuss your options with a financial advisor so that you can make the best financial decisions.

4. Find out about employer contributions. Many employers will match your 401k contribution each year that you are building up your retirement fund. Make sure you have submitted all the paperwork and have a copy of all contributions each year so that you know what your 401k looks like at any given time. Make the employee contribution a part of your asset allocation strategy.

5. Don’t withdraw before the withdrawal period. The only way you will be able to get the best return from your lifelong 401k contributions is to leave it there until you reach retirement age. If you withdraw from your 401k early, you will have to pay a penalty and pay taxes on all of your funds. Financial experts recommend making changes to your spending habits and turning to other sources of cash if you need to so that you can leave your 401k fund intact.

There are several ways to maximize the return your 401k, and working with a financial planner or financial advisor can help. Use these tips to make the most of your 401k investment.

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How to Manage Your 401k and Protect Your Investment

Contributing to your 401k regularly puts you in an attractive financial position and may help you look forward to a comfortable retirement. However, not everyone is able to manage their 401k successfully and protect their investment for the long term.

If your 401k account was set up by your employer, you may be like many employees who don’t have any knowledge of investing, and you may be vulnerable to making some financial mistakes. Here are some tips for managing and protecting your 401k investment:

1. Get help from a financial advisor. Many people overlook the benefit of speaking with a financial advisor about their 401k plans. Even though this type of retirement plan is self-managed, you don’t have to make all the financial decisions on your own. Seek help from a certified financial planner or investment advisor so that they can help you plan your investment decisions for the oncoming years.

2. Review your investments at the end of each quarter. Get into the habit of meeting with your financial advisor to take a close look at your investment portfolio, and see how your investments are performing at least once each quarter. Some people get caught up in monitoring their stocks on a daily basis, but those daily fluctuations won’t have much of a long-term impact. Checking in a few times per year will help you make the best decisions about reallocating your funds to stocks and other investments if needed.

3. Don’t put off your contributions. It can be tempting to avoid making contributions to your 401k, but you need to keep making contributions and avoid putting it off for an extended period of time. There really is no ‘ideal’ time to invest, so you just need to make sure you are investing as much as possible with each paycheck – or on a monthly basis.

4. Avoid borrowing money from your 401k. Protect your 401k investment for the long term so that you  can earn the highest possible return when you retire. If you withdraw from your 401k early, you will be responsible for paying high fees for the withdrawal and taxes on the amount of the withdrawal. Avoid the high costs and penalties by keeping the funds in your account for the full length of the investment. Congress mandates that everyone pays a 10 percent penalty if they withdraw from a 401k before they reach the age of 59 ½.

5. Remember that it’s a long-term investment. Your 401k is a long-term investment, not a stock fund or money market account. The only way you are going to reap the rewards of your investment is to leave it untouched and keep making frequent contributions. Keep that in mind as you make your financial decisions.

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