Do Not Trust Your First 401(k)
Credit: Finnur Magnusson/flickr
By ZACH NOBLE
Sometimes saving is stupid.
John Oliver tackled retirement plans this week, to the delight of personal finance subreddits and this author. He focused on the broad percentage fees that 401(k) administrators use to slowly suck away your life savings over many decades. He took a dimmer view of those fees than the Department of Labor, and thank God, because those fees typically justify “active management” which cannot generally beat the market.
But there’s another fee that we Millennials, in particular, ought to watch out for: the “haha we have your money and if you want it back you need to give us $100” fee.
That fee turned my first 401(k) into a money-losing investment.
Not long ago, in one of my first post-college jobs, I signed up for the 401(k). The company’s benefits manager told me they might be able to match a percentage of contributions at year’s end, and my dad always told me to find those company matches — free money! And the stock market was doing great.
Less than a year later, I needed to job hop (as most Millennials are doing).
The 401(k) administrators wiped me out.
I’d invested more than $1,000 into the 401(k) by that point, and made an $80 return. Not bad, especially considering the management fees topped 1 percent.
But the company decided not to match my contributions. And when I went through the rollover process, I learned about another fee: more than $100 to transfer the money.
More than $100 to cut me a check.
I was mad. I called my bosses, and my benefits manager, and the mutual fund company holding the 401(k). I learned that the plan’s “third-party administrator” was the one gobbling up that fee.
No one could justify the fee to me. It was just there. A Ben Franklin and change, just for writing a check.
Ultimately, of course, it was my fault. I didn’t read. The fee was right there in the plan documents’ fine print.
So, after nearly a year of saving, in a year the stock market as a whole returned more than 10 percent, I walked away losing a net $20.
Nowadays I stick to IRAs in companies like Charles Schwab, Fidelity and Vanguard, where fees are more like 0.1 percent than 1 percent. Since they’re my personal accounts, I don’t have to worry about paying some shadowy figure to move the money around.
And for the low price of $20, I learned that doing what seems responsible, and gambling that your company has your best interests at heart, is sometimes very dumb.
Zach Noble is a journalist who has covered everything from the OPM hack to a rescue dog’s retirement party. He’s been wrestling to reconcile his bleeding heart Catholicism with his pragmatic libertarianism since that freshman year love affair with Ayn Rand. He tweets erratically as @thezachnoble.