My column last week probably prompted many readers to panic when I asked a simple question: Do you know how much your mutual funds cost? I should have mentioned that this is a two-part quiz. And here's the second question: How much are you paying for your 401(k)?
I've already guessed what the two most common answers will be:
A, I have no idea. Or B, my 401(k) is free.
If I had a red Sharpie in my hand, I'd mark both answers wrong. If you've got a workplace account, your chances of picking up the tab for your 401(k) is as likely as tomorrow's rush hour. What's more, the costs can be far higher than the price of a closet full of office supplies.
Those who read last week's column will already appreciate why so many people remain unaware that their 401(k) is a parking meter that must be fed. When you invest in mutual funds at your workplace or on your own, you never receive a bill - the money is deducted from your accounts. If you did receive an invoice, you'd be more likely to decide whether a fund with platinum expenses and leaden returns should be tossed.
It's understandable that people never ask about 401(k) costs, but what's inexcusable are the thousands of employers who are just as complacent. In fact, even the most well-intentioned companies don't necessarily know the cost of their employees' retirement plans.
I observed this phenomenon firsthand while I was at a corporate Christmas party a few years ago. During a conversation with the human resources director, I asked her about the employees' 401(k) expenses. At first she looked perplexed by the question before she assured me that the workers didn't pay anything. Yikes, I'm thinking to myself, as I tried not to choke on my chardonnay. How would she know if her employees were overpaying when she wasn't even aware that they paid anything at all?
What's alarming about corporate ignorance or indifference is this: With increasing numbers of companies shamefully ditching their pension plans, the 401(k) has become a financial firewall for many workers. If the firewall doesn't hold, millions of employees could be forced to work far into their retirement years, or live on peanut butter crackers.
And, unfortunately, workers can't go out and find a better 401(k) if the investment choices in their corporate plan stink. They can only hope that their superiors will select top-notch mutual funds with low costs for their retirement plans.