Living with the choices we make

Tony Robbins and Tom Zgainer discuss why you should understand how fees in your retirement plan investments will affect your future and that of your employees

600x300_Zgainer_choicesAs this article was written, the presidential campaign had officially started with the Iowa caucus now completed. In each of our states, we’ll soon enjoy the great individual privilege of choosing who we think will be the most suitable candidate in each party. When November 9 rolls around, and the results of the previous day’s election are confirmed, we’ll then have to live with the choices we made, or did not make, for the next 4 years.

When it comes to our retirement planning, the choices we make today related to our investment options and their associated fees need to be made with a much longer time horizon in mind. Twenty to thirty years of life after active work has completed is now the norm. And if we intend to work another 10-25 years, the opportunity for the positive effects of compounding growth in your retirement savings will make all the difference in the quality of life we might enjoy in retirement.

Different from what you might choose for yourself, be it a presidential candidate or a particular investment, if you are the sponsor of a retirement plan, your employees are counting on your decisions, and the ramifications of those choices good or bad. You are choosing for them, as they generally have no say so in the matter. And yet it’s their money, their future. It is a very significant responsibility often overlooked.

We review hundreds of 401k plans per month, and while the employers are certainly well intentioned, so little is often understood regarding the effect of investment-related fees over time. A recent study found that the average total cost for a small business retirement plan declined to 1.46% over the past year, and that within this amount, the investment-related expenses typically borne by participants average 1.37%. This particular study defined small plans as those with 50 participants or $2.5 million in assets.

However, if you own or work for a business that has fewer than 50 participants or less than $2.5 million in plan assets, odds are you’re paying a substantial amount more in 401k fees. Plans in this demographic are defined as “micro” plans. It is not uncommon for the underlying investments in these plans to have expense ratios averaging between 1.50% and 2.50%. This has a major impact on retirement savings over time that can be difficult to decipher.

Why is this important to you? While 1.00% may sound insignificant, the costs of your investments can have a staggering effect on your retirement savings over time. According to the Department of Labor (DOL), paying just 1 percentage point more in expenses over the course of 35 years could reduce a worker’s retirement savings by nearly 28%. For example, Bob is a participant in a plan offered by his employer with a 401k balance of $25,000 that earns 7% over the next 35 years. If Bob paid 0.50% in fees, even if he stopped making new contributions, his account would grow to $227,000 at retirement. But if he paid fees totaling 1.5%, the savings would rise to only $163,000, or 28% less.

A startling statistic is that in a recent survey by the AARP, nearly 70% of participants in 401k plans believe they are paying no investment-related expenses or that their employer absorbs these fees. Nearly 40% of plan sponsors, the business owners bearing the fiduciary liability of the plan, who have chosen the providers and investments in the plan, do not know the average expense ratios of the funds in the plan. Both figures are truly astonishing.

A review of your own 401k fees and investment options should be a near-term action item. Plan sponsors are required by the Department of Labor to compare their current plans against alternatives on a regular basis to be sure all fees are reasonable and prudent. With the proliferation of lawsuits that exist — many very high-profile — recently in the news brought on by plan participants and almost always related to excessive fees or the use of proprietary funds in the 401k plan, it makes all sense to have a documented process and report of your findings in case a DOL examiner knocks on your door.

We’ve made it easy for you to get a quick check to see how your plan compares to industry averages here: https://americasbest A couple of pieces of information are all we’ll need to complete the analysis. You’ll know right away if the path your retirement plan is heading is a place you’ll want to end up — or if a change will do you, and your employees who are counting on you, a world of good.

Nothing is more important regarding your money than knowing how much you have, where it is, and if it is invested, how the costs of those investments will affect your future. Consider taking these steps for you, your family, and those you employ, who most likely do not even understand how your choices affect their future.

Peak performance strategist Tony Robbins and Tom Zgainer, founder and CEO of America’s Best 401k, offer advice on growing retirement savings.

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