401(k) ATTORNEY: Don’t Touch Your 401(k) Until You Watch This

Bonnie Triel, a partner at Endeavor Law, specializes in retirement plans, particularly 401(k)s, and works with financial advisors and employers. She explains that 401(k) participants have significant protections under the Employee Retirement Income Security Act (ERISA), a federal law passed in 1974. Unlike individual brokerage accounts, 401(k)s involve fiduciaries—individuals or entities with a legal obligation to act in the best financial interest of the plan participants. This fiduciary duty means they must prioritize the employees' financial well-being above their own, even if it results in personal disadvantage. This fiduciary responsibility impacts investment options within 401(k) plans. Employers, as plan sponsors, are fiduciaries from the moment an employee's contribution is made until the last dollar is withdrawn. They must select investment options that are in the best interest of the entire employee population, considering their varying levels of investment sophistication. For instance, introducing volatile assets like cryptocurrency might be suitable for some sophisticated investors but not for a broad employee base with less experience. Similarly, ESG (Environmental, Social, and Governance) investments can only be included if they are financially beneficial to participants, not merely due to popular demand. Employers, often not retirement plan experts, may not fully grasp the extent of their fiduciary duties. ERISA requires them to hire knowledgeable individuals or service providers to help manage the plan, as running a 401(k) involves complex aspects like compliance testing to ensure fair treatment of all employees, including non-highly compensated individuals. Cybersecurity and data protection are also crucial fiduciary responsibilities that evolve over time. Employees can assess the quality of their 401(k) plan by examining their annual fee disclosures. These disclosures, provided at least annually, detail investment-related, administrative, and optional transactional fees. Quarterly statements show the actual costs incurred. Understanding these fees is crucial, as they can significantly impact investment returns. Fees can be structured on a per-participant basis or as a percentage of assets. The former can be disadvantageous for those with smaller balances compared to those with larger ones paying the same fee. Investment costs for index funds are generally lower than for actively managed funds. Target-date funds, which automatically adjust their asset allocation over time, can be a cost-effective option, sometimes as low as 0.04% to 0.08% (4-8 basis points). Actively managed funds can range from 0.50% to 1.50% (50-150 basis points). Beyond investment costs, administrative fees, advisor fees, audit fees, recordkeeping fees, and TPA (Third-Party Administrator) fees can also be layered on. While investment costs are typically borne by individuals, some employers opt to cover administrative fees as a risk mitigation strategy to avoid lawsuits related to unreasonable fees. For smaller plans, fees can range from below 0.10% to 2% or more of the total assets. When comparing plans, employees should consider fees, investment options aligned with their personal interests and overall financial goals, and plan features like loans, hardship withdrawals, or emergency savings provisions. Online tools can help benchmark plan fees against industry averages. If an employee has concerns about high fees or unsuitable investment choices in their 401(k), Bonnie suggests several steps. First, they should inquire with their employer about fee benchmarking and seek explanations. Second, they can consult with the plan's financial advisor, who is often an ERISA fiduciary, to understand the fees and assess if the plan is in their best interest. If, after gathering information, the plan still seems suboptimal, employees might consider investing outside the plan. However, this means foregoing the tax advantages of a 401(k). Consulting a CPA is recommended to understand the tax implications of such decisions. Regarding access to advisors, Bonnie notes that many plans include access to an advisor at no additional cost. If an additional fee is involved, it's worth considering for services like managed accounts or for the accountability and personalized guidance that an advisor can provide, especially if it helps build confidence and understanding about retirement planning. When transitioning between jobs, individuals have four options for their 401(k)s: leave it with the former employer, move it to the new employer, roll it over to an IRA, or cash it out. The latter is generally discouraged. Bonnie emphasizes the importance of asking the advisor assisting with this transition what "hat" they are wearing – specifically, if they are acting as an ERISA fiduciary. This ensures the advice given is in the client's best interest. Comparing fees, investment options, and features across different plans and IRAs is crucial, as the perceived superior service of an IRA may not always hold true, and 401(k) plans can offer institutional pricing and other benefits. Some employers may even charge terminated participants an additional fee to remain in the plan. A newer trend involves in-plan income solutions, such as annuities, designed to provide a guaranteed income stream in retirement, mimicking defined benefit plans. This is partly driven by the decline of traditional pensions and a recognition that defined contribution plans need mechanisms to help participants manage retirement income. Some employers are even defaulting a portion of balances into these annuity options. ERISA-covered plans like 401(k)s offer stronger creditor protection and bankruptcy protection than traditional IRAs, which are subject to varying state laws. However, this protection does not necessarily extend to divorce proceedings, where qualified domestic relations orders (QDROs) can lead to the division of plan assets. Regarding inheritance, employer plans generally have stricter guidelines than IRAs concerning distribution timelines. While IRAs typically allow for a 10-year distribution period, employer plans may hold assets longer until a beneficiary claims them, provided the employer fulfills notification responsibilities. Small balances may be forced out. For individuals five years from retirement, Bonnie advises focusing not just on financial accumulation but also on preparing for life in retirement. This includes developing a sense of community, purpose, and planning for how to spend their time and income. Building a "retirement paycheck" from various sources like Social Security, annuities, and rental income, and aligning it with desired lifestyle goals, is essential. In a rapid-fire Q&A, Bonnie noted that the choice between a traditional and Roth 401(k) depends on individual and future goals. Whether to leave funds in a 401(k) or roll them into an IRA depends on the current account balance, though she leans towards leaving it in the 401(k). Target-date funds are considered somewhat underrated for their utility. A significant red flag for 401(k)s is not understanding or encountering hidden fees. The most underused workplace benefit is often the access to an advisor, who may be available at no extra cost. A common rollover mistake is underestimating the actual cost of a plan by not accounting for employer-paid fees. The one thing everyone should do five years before retirement is to get to know themselves and what they want to do with their time. A successful retirement, she concludes, is about finding purpose.