Getting Your 401(k) In Shape

If managed properly, this account should far exceed the monthly social security check as a source of retirement income

workers roll 401(k) balances into Individual Retirement Accounts. A very rough rule of thumb might be that expenses ought not to exceed 1% of assets in a moderate-sized company.

You should carefully study differences in management fees among different investment options. You should also press your company for information on administrative costs, if it’s not already provided. Administrative costs include sending out quarterly statements, paying auditors and lawyers, answering questions, and maintaining account balances.

At first, companies paid the bulk of plan administration expenses, but now they are increasingly passing those costs on to participants. For instance, in 1999 participants picked up 38% of record-keeping fees, up from 29% in 1995. Workers paid 41% of trustee fees, up from 33%, and 4% of miscellaneous fees, up from 18%.

Meanwhile, some companies are pressing the money managers and mutual fund providers handling their workers’ 401(k) funds to grant rebates or revenue-sharing agreements. These considerations can offset a company’s administrative costs. Or they can be provided in the form of additional services to workers, such as an investment education program.

But such practices raise ethical concerns. Workers’ contributions fund the 401(k) system, and so workers should get their fair share of any rebates. But very few workers know of these arrangements, and employers are not required to disclose the details. This is not right. You should press your company to itemize any administrative fees and any rebates received from a fund company.

If I need cash, should I borrow from my 401(k)?

Borrowing from yourself might sound attractive, but remember: There can be service fees, both one-time and annual; the money must be paid back; the interest rate is high–usually one or two percentage points above the prime rate. Here’s the kicker: If you leave the company with a loan outstanding, you must pay it back immediately, and if you can’t, the amount is considered a premature withdrawal subject to taxes. You’ll owe a 10% penalty as well.

If you borrow from your 401(k), your money can’t earn returns while you have borrowed it. True, you will be paying yourself back, with interest, but it may not be as much as what your money would have earned if left in the 401(k). In addition, if you stop making contributions to your 401(k) while you are repaying your loan, as many participants do, you are losing out on the earnings your own contributions would have made. You are also giving up any company match and earnings on the match, for the life of your loan.

Before you borrow from your 401(k), consider that a home equity loan may be a less expensive way to obtain funds, especially since the interest payments on most home equity loans can be deducted from your income taxes. The interest on a 401(k) loan is not tax-deductible. There may, however, be times when borrowing from your 401(k) makes sense, depending on the interest rate you’ll pay and whether leaving your money alone would produce greater returns than borrowing from it. Luckily, there are several Web-based

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