How to Cut Expenses From Your 401(k)

Plan particiapnts will become aware of the total costs they are paying after the 3rd quarter statements are mailed. Are you ready for their questions?

Expense Reports
Expense Reports (Photo credit: mynameisharsha)

An even more pertinent question is how much of the expense burden is being borne by your employer. In most cases, you’re paying most of the expenses out of your fund assets because 73 percent of plans surveyed pass along all the costs to participants, the Government Accountability Office said in a report earlier this year.Often employers had no clear idea what their plans cost, the G.A.O. found. They may not have had a clear incentive to fully evaluate them and reduce expenses because they typically aren’t paying for them. The new disclosures may not prompt more employers to pick up the bill for middlemen expenses, but they could lead to paring expenses passed along to you. It also helps if major executives have money invested in the plan; then you can solicit their support for a plan audit and overhaul.

Many plan participants believe that their employer knows best and will provide the best funds available. This is often not true, although plan sponsors are unaware of this fact.

Please comment or call to discuss.

Posted via email from Curated 401k Plan Content

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How To Financially Prepare for Entrepreneurship

Everyone wants to be their own boss, make the rules, stop living under the proverbial “man,” but it can be a scary plunge to take.  Owning your own business requires financial responsibility and risk that many people aren’t willing to take on, but if you are up for the challenge and are going to chase down that elusive American dream then there are a few ways to keep things from coming to a screeching halt before they even start.  The transition into the life of owning your own business can be an expensively slow and rocky road, but there are some things you can do put yourself on the right path, from the start.  Before you venture on this journey, here’s what you need to do prepare for the ride.

1.       Payoff all your credit cards.  If you can’t pay off the balances on your credit cards now, you certainly won’t be able to once you start your business.  You will also find yourself tempted to use those cards to cover the expenses of your business.  Use these as your last resort.  Paying off those cards now will give you some room to use them later, but relying on them for too many things in the startup process can quickly shut everything down.

2.       Find your monthly budget, and then reduce it.  You need to keep track of your basic expenses for the month: rent, food, insurance, gas and so on.  When you do this think about how this will change when you start your small business.  Will you save money on gas with a shorter commute?  Will you eat out more when you have less time?  Once you have a number in front of you that highlights your current expenses, try to make that number smaller.  This isn’t anyone’s favorite part, but you will appreciate the savings later.  Do you need the run the air conditioning at home, or can you open the windows?  Do you need the super fancy touch screen phone?  Do “Fruity O’s” really taste that different from the real thing? It’s cutting back on little things that can send money your way from places you never thought about before.  Also, it’s smart to make the transition to these saving habits months before you make your move into entrepreneurship to reduce the shock you may experience when you lose those extra 30 channels during hockey season.

3.       Fill your piggy bank.  Before you take a single step towards your new business, you need to have a stock of money saved up.  You should take the cost of your monthly expenses determined earlier, multiply that by six months, and set the bar there.  You should have at least six months of your expenses saved up before you begin.  With this, you need to make sure that you are realistic about how often you will be cracking into that piggy bank.  A lot of people get the “do-it-yourself-bug” when they start their own projects.  They think that they will do it all by themselves to save money.  Know what you can do, and what you will need others to do.  Will you hire an accountant? Will you need a handyman for small changes to your business space?  Think about these future expenses when you are saving for your plunge.

4.       Understand the benefits that you will lose.  One of the biggest changes that small business owners incur is the cost of individual health insurance.  Think about how to reduce this cost, for example switching your insurance plan before prior to your next birthday before they can increase the premiums based on age.  Look at your retirement plans and understand how your investments will change when you don’t have a 401(k) matching plan to double your contributions.  These changes don’t have to be life altering, but they are simple things that, if planned for in advance will remain simple.

5.       Don’t get hasty and quit your job.  You need to give yourself time to startup your small business, and keeping your source of income can be a huge help during this time.  There is a long list of expenses you need to pay before you can even think of opening up your doors, and it’s smart to keep your current job until you have those taken care of.

Entrepreneurs are some of the hardest working, committed individuals in the workforce.  It can be the most frustrating and rewarding experience at the same time, but taking the time to plan before you plunge can save you some of that frustration and bring forth more of the rewards.

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3 Simple Steps to Create a Seriously Savvy Budget

No, budgets are not attractive, fun or exciting in any way shape or form.  They are, however, the necessary evil that can assist in getting you and your family’s spending and saving habits back on track.  It’s difficult to understand why more individuals don’t already adhere to a budget, what with the economic crisis and unemployment still looming above us.  It would seem that the majority of individuals without a budget either don’t think they need one, are unaware of its benefits, or simply don’t like discussing or even thinking about their financial situation.  The unfortunate part about that last point is the fact that implementing a personal or family budget can help dig those individuals out of the financial holes they’ve already put themselves in.  And the best part?  It’s ridiculously easy to do.  From writing everything down on your own to downloading or purchasing budget software, technology has made it extremely simple to execute.

The first step in creating a budget (and all these tips go for individuals to families alike) is gathering every financial statement you can find.  Examples include bank statements, credit card statements, investment accounts, utility bills, and income information.  The idea is to gather any piece of information regarding an expense or income for you or your family in order to process the information into a monthly average.  Record all your sources of income – any type of cash flow that’s coming to you needs to be recorded.  Next, create a list of monthly expenses.  Examples include the mortgage payment, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, auto insurance, retirement or college savings – essentially everything you spend money on (even that daily latte from Starbucks!).

After you’ve created your list of expenses, you’ll want to break it up into two different categories – fixed and variable.  Fixed expenses are those that stay relatively the same each month and are essential parts of your way of living.  Examples of fixed expenses include your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments and so on.  For the most part, these expenses are essential yet not likely to change in the budget.  Variable expenses are those that will change from month to month and include items such as groceries, gasoline, entertainment, eating out and gifts, for example.  This category will be important when making adjustments.

The last steps include totaling both lists of expenses and income.  This is where you’ll need to make adjustments and determine what types of changes you’ll want to make to your spending and saving.  If your end result shows that your income outweighs your expenses, you can start prioritizing the excess to areas of your budget such as retirement savings or paying more on credit cards to eliminate that debt faster.  If you are in a situation where expenses are higher than income you should look at your variable expenses to find areas to cut.  Since these expenses are typically adjustable, it should be easy to shave a few dollars in a few areas to bring you closer to your income.  Once you’ve made your adjustments and have a reasonable budget to stick to, make sure you review it regularly to determine whether you are staying on track and all your numbers are up-to-date.

In addition to the steps I’ve mapped out, I’ve also put together a list of snapshot tips to help you in your budget creation and execution:

  • Be honest!
  • Track your spending to make sure it stays within your guidelines.
  • Use software to save grief – personal finance programs have built-in budget-making tools that can create your budget for you.
  • Don’t drive yourself crazy, or stop buying groceries!  Monitoring your spending can sometimes lead to overly-attentive detail – don’t go overboard.
  • Monitor your cash flow – it’s much more difficult to track where your cash is going, so keep those ATM receipts and watch your cash flow with more scrutiny.
  • Beware of expenses that may seem fixed – do you really need that $50 bottle of wine?
  • Aim to save at least 10% of your income for your future, such as investments and retirement planning.

Budgets aren’t easy to create, let alone stick to, but they are essential in getting a grip on your financial situation.  Looking over this list of tips, I’m sure you’re thinking, “okay, easy enough.”  But it’s not.  It takes time, effort and active dedication to continually be aware of your saving and spending habits.  The best part?  You won’t regret it; it is guaranteed to pay off in the end. Think of your personal budget like your map and journey to financial peace of mind.

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Why 401(k) Fee Disclosure is a Big Win for Small Business Owners

WASHINGTON, DC - JANUARY 26:  Internal Revenue...
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Improving the quality of retirement plans to their employees can reduce anxiety and improve results. This employee benefit is becoming more and more important as the number of defined benefit plans decrease. Just today GM announced it would freeze pension benefits for their salaried staff.

Look to pay 1% or less for all-in participant feesSmall and mid-size businesses have historically been subjected to the most confusing and, unbeknownst to most, the highest-cost plans.  Many providers have designed their plans so that employers pay a small administration fee while their employees pay large participant fees that go well beyond general fund expenses and typical asset management and recordkeeping services.   They often include extra loads, wrap fees, 12b-1 fees, and often consist of high expense actively-managed mutual funds or even annuities versus lower expense equivalent fund options.  This can mean employees are paying two or even three percent in all-in fees – an amount that’s two to three times more than an appropriately priced plan.

All-in participant fees including fund expenses should come in at one percent or less.  Just paying one percent more in fees can cost employees tens if not hundreds of thousands of dollars in retirement savings over their career.

Plan sponsors will realize added responsibility when the new fee disclosure rules become effective later this year. Many employees will begin asking why they are paying such high fees. This will result in greater scrutiny and should help plan sponsors provide a true employee benefit.

Please comment or call to discuss how this affects you and your company.

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You Pay More for Your 401(k)

Horse And Handler Statue,  Department Of Labor
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Studies have revealed that plans provided by insurance companies and brokerage firms tend to be higher in cost. The retirement plan is far too important to allow Wall Street to cash in.

Participants in smaller 401(k) plans pay higher expenses on average than participants in larger plans, according to study results announced in a press release by Financial Research Corporation(FRC). But this may change as the result of greater awareness of costs.”The average participant-paid costs as a percentage of assets for the smallest plan groups was more than three times those of the very largest plans,” said FRC. Even small differences in expenses can make a big difference in 401(k) investors’ long-term returns, as Smart Investor has discussed in “One Percent Can Make a BIG Difference to Your 401(k) Plan Participants.”

Here’s an even more disturbing fact, cited by Leslie Prescott, the FRC study’s author: “…comparably-sized plans within an industry often had substantial differences in the actual dollar amount of annual fees that a participant would pay, amounting to hundreds and even thousands of dollars a year.” This suggests that the higher-paying participants’ plan sponsors didn’t research and hire competitively priced providers.

Cut 401(k) Plan Costs Today

If your plan participants are paying above-market fees for comparably sized plans, you can fix that.

For starters, you can ask your current providers about more competitively priced approaches. Also, conduct research on plan providers and their offerings. Don’t automatically pick the cheapest plan. Remember, sometimes you get what you pay for, as Smart Investor discussed in “Should Your 401(k) Plan Pick the Lowest-Cost Investment Provider?

Costs May Fall with More Fee Disclosure

Pressure is ratcheting up on 401(k) providers to offer more attractively priced plans ahead of the Department of Labor‘s requirement for better disclosure of fees. Stay tuned for more developments!

Costs do matter. One solution is to have your plan benchmarked against your peers.

Please comment or call to discuss.

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Why Fees Matter for 401(k) Plan Fiduciaries, But Not Defined Benefit Pension Plans

401(k) Fee HELP Hearing Mitchem
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Defined Benefit: Plan Sponsor Bears Risks

Plan sponsors more or less guarantee a predetermined benefit to participants in traditional pension plans. This is why they’re called defined benefit (DB) plans. Whether plan sponsors spend wisely or foolishly on their plans, the sponsors are still on the hook for paying the agreed-upon pensions to their retirees.

For example, let’s say a plan sponsor invests in a global index fund with an expense ratio of 2% instead of 1%. The additional 1% in expenses has no direct impact on plan participants’ retirement income because participants’ benefits are set independently of investment returns. Also, the extra 1% in expenses comes out of the plan sponsor’s pockets, not the plan participants’. Pensions’ investment portfolio assets belong to corporations, not employees. This contrasts with the situation for defined contribution plans.

Defined Contribution: Plan Sponsors “Off the Hook” for Benefit Level

Plan sponsors make no promises about the level of benefits that participants in defined contribution plans will receive. In fact, the only thing participants know for sure is what is contributed into their defined contribution (DC) plan. The plan sponsor isn’t even required to contribute to participants’ retirement. Moreover, in contrast to the DB situation, the assets in the DC plans don’t belong to the corporation. They are held in trust for the benefit of the participants and their beneficiaries.

Here’s why plan expenses matter in 401(k) plans: The level of portfolio returns will affect the participants’ retirement income. Expenses—along with contributions and investment performance—are an important factor in long-term returns. Plan participants bear all of the risk if their portfolios don’t return enough to provide the retirement income they anticipated.

Higher expenses mean lower returns. This is why DOL sets high standards for DC plan sponsors’ expenses, yet pays little attention to expenses of their DB peers.

Plan sponsors maintain the responsibility to monitor plan expenses. The new fee disclosure regulations will show employees that they the employees are paying all or most of the fees associated with their plan. Questions will begin soon after the regulations take affect January 1, 2012.

Please comment or call to discuss how you will be affected.

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