Dear Boss: Fix Our 401(k)

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Unhappy with your 401(k) plan? Many longtime Fools can relate. Until less than 10 years ago, our employer-sponsored retirement plan was best described as "suboptimal," and even that is a generous assessment: It had lousy investment options (just a handful of funds chosen with little regard for their long-term success or costs), insufficient communication with participants, and little -- if any -- oversight of the investment choices.

That's right, The Motley Fool, -- the champion of investment industry reform; the scourge of high-fee financial services providers -- had a downright crummy 401(k) plan. (No, the irony is not lost on us.)

Fortunately for us, we made changes to the plan, and the new 401(k) bore little resemblance to its predecessor. We got a broad range of investment options of every size and style (including index mutual funds at rock-bottom expense ratios), a cost-effective side brokerage option for those who want to invest in individual stocks or choose other funds, and ongoing education from the plan sponsor, which also meets regularly with our 401(k) committee to report on all the investment choices, going so far as to red-flag funds that have lost their luster.

Not to brag, but how does your company 401(k) compare?

Why your 401(k) plan's a stinker Sadly, poor plans are the norm. Many companies -- particularly small ones -- get stuck with suboptimal 401(k) plans because the providers selling them are quite good at convincing buyers that they are (a) getting a great deal and/or (b) don't qualify for plans with better terms.

The trend will continue if people like you -- and us -- don't agitate for better choices.

As our company learned, there is no need to settle. If your company's 401(k) more closely resembles the pre-makeover Fool one, then you're in the right place. Here's how to get your company to fix your 401(k) plan.

30 minutes to a much, much richer retirement Getting the powers-that-be to provide better investment options, or an entirely different plan, requires some research, tact, and The Letter That Will Change Your Retirement For the Better. Don't worry, we've taken the liberty of pre-penning most of it for you. But first, you'll need to do a little research to fill in a few key comparisons.

Fodder for your letter will come from your plan's Summary Annual Report, Summary Plan Description, and/or Fee Arrangement. Request a copy from your company's 401(k) plan point person. (It may be someone in your human resources department, or even the company CEO or CFO if you work for a smaller outfit.)

Buried in these documents is the dirt on the fees your plan charges -- both the investment expenses and the plan expenses -- and whether your boss covers administrative costs or if they are passed through to plan participants (that's you).

"In a half hour, you can figure out what your expenses are," says Stop the 401(k) Rip-off! author and retirement-plan industry veteran Dave Loeper. "If you find out that you are getting ripped off, the next step is to complain to your employer without sounding like a complainer."

How to pen your "Dear Boss" letter Since this topic can be touchy, your aim is to inform, not complain, Loeper says. Don't focus on the needlessly high expenses you're paying. Instead, note that you have calculated the expenses you're paying and are wondering if there are some lower-cost alternatives available. Judiciousness should be your default mode. You've got to convince your company that, in dollars-and-cents terms as well as employee-satisfaction terms, something needs to change.

To strike that perfect balance of selfless concern/"I mean business," keep the following in mind:

  • Don't assume that the folks in charge of picking the 401(k) plan are aware of the expenses, since the revenue-sharing kickbacks and pass-through costs are often not clearly disclosed.
  • Be aware that because of the work involved in creating the plan, they may be a little defensive about your message. So don't go in with an attack mode.
  • Since most human resources professionals don't happen to be investment experts as well, they may also be unaware that there are lower-cost alternatives. And even the most vigilant comparison shoppers can easily fall victim to the industry's slick sales pitches and intentionally confusing fee structures.
  • And, finally, give the benefit of the doubt: Remember that the person or people in charge of the plan at your company are likely doing the best they can with the time, resources, and expertise available.

Address the note solely from you to the person at your company who has the most decision-making power over the plan. If your message is met with resistance, gently point out that a lousy plan robs everyone's retirement savings, not just yours. (We've given you some convincing calculations to present in just a moment.)

If you still don't see any action being taken to improve the plan, you'll have to recruit a few other folks -- via water cooler, social media, or whatever means -- to explain the cost of a lousy plan and have them also make inquiries with the powers that be. Heck, let them cheat off your homework and use the letter you pen.

The Letter That Will Change Your Retirement for the Better We've composed a customizable letter for you to copy/paste/revise and send to your human resources department. It is based on some of the sample letters in Loeper's excellent Stop the 401(k) Rip-off!, as well as our own research and creative-writing class notes. We hope that this letter will get the proverbial ball rolling.

Dear [Benefits Director],

Thank you for providing the information I requested about our 401(k) plan. It helped clarify many things for me in my retirement planning efforts.

While researching my personal situation, I made a few findings that I want to share with you. One of the main things I discovered during this checkup was how much we pay in fees -- fees associated with the actual investments within the plan, and fees that we pay for administrative expenses. [Note: If your company covers administrative expenses and does not pass them through to employees, then delete the reference to "administrative expenses."] These fees greatly hinder the growth that I can hope to achieve with my retirement contributions over the long term.

For example, the funds I previously selected have annual expenses of __%. However, these same funds (or ones that perform nearly identically to them) can be had for much less, ranging from __% to __%. [Note: You can compare fund fees by putting your fund's ticker symbol into Ideally you'll pay no more than 1% in fees for any option -- less than 1% is ideal and attainable.] Including these lower-cost fund options in our plan could make a profound difference to our returns.

I also researched the administrative fees that all of us pay. According to our plan documents, we pay roughly __% to cover plan expenses. [Review your plan for buried administrative costs, such as wrap fees, mortality and expense charges, investment advisory fees, record-keeping fees, per-head charges, fee-based brokerage charges, and surrender charges.] According to The Motley Fool website, which has extensively researched 401(k) industry practices, administrative expenses should be less than 1% and ideally less than 0.75% -- an achievable number even for small companies with not many assets in the plan.

The real bottom line is how small improvements in our plan can pay off big-time. A report by the Government Accountability Office compared the difference between paying 1.5% in fees versus 0.5%. It started with someone with a 401(k) account balance of $20,000 and assumed the investment grew by 7% each year. The person paying 0.5% in fees would have about $70,500 in 20 years. The same portfolio -- same time horizon, starting amount, and returns -- but paying 1.5% in fees (just 1 percentage point more) cuts the retirement balance over 20 years to just $58,400, a 17% reduction.

My 401(k) is one of the most important sources for my future financial security. I just wanted to call your attention to these fees since such expenses affect not just my future retirement savings, but those of everyone here who participates in our 401(k) plan.

Ultimately I hope that you might be able to find a way to offer some lower-expense investment alternatives in our plan [or insert whatever specific action you seek].

Thank you for your attention to this matter.

Very truly yours,

Your Name Here

This article was originally written by Dayana Yochim and published on Dec. 17, 2008. It has been updated by Dan Caplinger, who has no position in any stocks mentioned.

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