Tag Archives: department of labor

5 Things Employers Should Consider When Offering a 401k

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Starting this July, 401k participants will receive more disclosures about the fees they are paying inside their 401k plans.

The Department of Labor wants more transparency and disclosure on what kind of fees employees are paying inside their 401k plans. Why? Because many employees have no idea how much they are paying in mutual fund fees. A recent survey by AARP said that 71% of people saving for retirement thought they didn’t pay any investment fees whatsoever.

The fees inside a 401k are either paid by the plan sponsor (you – the employer) or by the participants, which are the employees. Over the last few years more of the fees have been paid by the employees. According to a report issued by the Investment Company Institute and Deloitte, employers are moving more of the plan charges onto their employees. For instance, employees are now paying for 91% of plan expenses, which is a substantial increase from 2009 when they paid 78% of such charges.

So how does this happen? Say an employer wants to start a 401k and calls a bunch of mutual fund families to get some pricing quotes to see how much it will cost to set up and administer. Most of the bids come back at $5000 a year. But one comes back at $1000 a year. Why is this one so much cheaper? Because the fund is making the money on the back end – higher mutual fund fees. So the employer goes with the cheaper option, and the little guy ends up paying more in fees.

A report issued last month by the U.S. Government Accountability Office highlighted that many employers aren’t really aware about the fees charged by retirement plan providers (the mutual funds). The most obvious known fee is the expense ratio inside the mutual funds offered inside the 401k plans. Many 401k plans do not offer enough low cost mutual funds such as index funds. That’s because they are usually not as profitable (to the fund company) as an actively managed fund is.

Not sure what the difference between an index fund and actively managed fund is? Further explanation along with the five things to consider if you offer your employees a 401k program and what it means for them are below.

1) Offer index funds inside your 401k plan (for an explanation of index funds vs. actively managed funds, click here)

2) Be proactive. Tell your employees about the upcoming information they will receive about the fees they are paying.

3) Calculate the average expense ratios of the funds in your 401k.  Shop your pan and see how competitive your current 401k is.

4) Remember that if you are most likely a plan fiduciary, which means you are personally liable if you breach your duty as a fiduciary to the plan participants and beneficiaries.

5) Consult with 3rd party professionals like plan administrators and ERISA attorneys to make sure your 401k plan is compliant.

Some Additional Statistics to Keep in Mind…

In the 1990s, when the average stock mutual fund was making 10% year after year, no one was complaining about mutual fund expenses inside 401k plans.  Everyone was making money.  But today, stock market returns have averaged 3.77% for the past 10 years.  Mutual fund fees inside 401ks have decreased over the past 10 years.  According to the Investment Company Institute, the average expense ratio for a stock fund in 1997 was 1.04%.  In 2011, the average fee was 0.93%.

Remember: higher fees mean lower returns for 401k participants.

If the average investor made 3.77% net of fees and the average fee paid by the investor was 0.94%, the average investor paid nearly 20% of his/her profits in fees.

The trend is for more transparency in 401k fees that people will pay.  Get in front of this and be proactive.  Remember what Wayne Gretsky said – “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”

Justin Krane is a Certified Financial Planner with Krane Financial Solutions. Follow Justin on Twitter @justinkrane.

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3 Pieces of Internship Advice for New (or Recent) College Grads

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For everyone of the class of 2011… or 2010… or 2009, or maybe even 2008, finding a job is going to be a difficult and trying process. Finding someone who will actually pay you money for work is exciting, but the economy is in a volatile state, and has been for a few years. So what should the recent graduate going to do? Graduate schools, years off, and temporary positions in retail and food service are all on the table as newly minted professionals attempt to “wait it out.” Many are also looking to unpaid internships, which are an old source of college credit and experience. In a recent release, the Department of Labor revealed that the only sector of the job market that is truly showing growth is the unpaid internship. More and more are hoping that, with another sentence emblazoned on their résumé, dream jobs will be that much more attainable.

Don’t think that way. While unpaid internships are great when you have something else on your plate, like finishing college, they are simply not worth the time or effort once you are out of school for three main reasons.

1. It is HIGHLY unlikely they will lead to a full-time job.

Having your diploma is something to be proud of, but it is also the sign that your loan providers are going to be looking for payment. And, trust us, loan providers are ruthless when it comes to getting paid back. Success stories from unpaid internships have a way of winding down the grapevine, but for the most part, unless you are really lucky, this position will not lead to a paid, full-time, job with the company. Companies hire unpaid interns when they want an extra pair of hands without paying for them, and the economy is a slow moving beast.

While things will get better, you probably do not want to, and cannot afford to, stick around with a company for two or three years without pay. Experience and name recognition are great, but with the unemployment rate around ten-percent, there is probably someone who has the jump on you. Companies may also begin to value your work as being worth the price they pay for it: nothing. So try and find a company willing to pay you for a job well done. The pay may be lower than you expected, but it will at least show that they value you enough to give you money for your work, instead of dead-end promises.

2. These positions are signs that employers are willing to cut corners.

This is less applicable to smaller companies and non-profits that depend on people to do a little extra for a little less pay, but still is something to keep in mind. Having a cadre of unemployed laborers means the company is trying to save as much money as possible, and cutting corners is a well established, though very ill advised, way to do that. Horror stories of terrible bosses and evil companies are bountiful, and most people would agree to avoid them at all costs, but you are agreeing accept these abuses by working as an unpaid intern. The Department of Labor recently hired 250 more people to enforce the Fair Labor Standards Act, which it feels many employers are violating with their unpaid internship practices. If they are not willing to put in the effort and investment to hire an actual employee for this position, then they probably are not too concerned with the Fair Labor Standards Act.

3. At this point, you are worth more than “experience”

It is said that most stereotypes have a grain of truth within them, and the image of the overworked intern is so prevalent for a good reason; interns are, typically, worked to the bone. Internships are competitive opportunities, so many of the poor souls who agree to work in an unpaid spot feel they beat out a bunch of other applicants for it and they have to prove their worth as a result. Again, while you are in college, this is a good mentality to have, but when you get your degree you have to begin to see your work as worth a little more. This can be hard as when you walked off the stage, you were not inspected and stamped like a piece of meat; Grade A, worth five dollars a pound. But you went to college to add to your own, personal self-worth so you can get a good wage for the work you do. You probably worked late into the night for four years, but came out of it worth more than when you went in. Remember that when looking for a job. Don’t over-value yourself, but don’t undercut all of your hard work either.

This is all a bit pessimistic and frightening, and is definitely not “one-size fits all” advice. But, for the most part, there is no reason at this stage in your life to accept an unpaid position. Instead, put all of that hard work and effort in sending out your résumé, networking, and finding a good job. Your alma mater probably has a career services office and an extensive alumnus network; use these for your benefit. It is very easy to get discouraged, especially since you are not going to receive any feedback during this process; no one gets an A in looking for a job. But it is worth it if you can find an employer willing to value your work as it rightly deserves.

Plus, it will help end those incessant phone calls from the bank.

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