Understanding Your 401(k) Fees, Tax Implications

With more pension plans floundering or failing altogether, workers are advised to step up their knowledge of their company's 401(k) plan.

Financial advisers say workers should understand the overall structure of these popular retirement savings accounts, as well as the fees they are paying and the tax implications of 401(k)s.


Advertisement



A Better Budgeting and Planning Solution is here.

Microsoft® Forecaster is an affordable way to customize your budgeting and planning to give you the control you need to manage your business' performance. As soon as you enter a number, it's available for analysis, allowing you to see how it impacts revenue and costs. This streamlined budgeting and planning solution helps decrease the chance for errors and miscommunication. And with Microsoft Forecaster, changes are easy to make. Even last-minute ones.


Visit www.microsoft.com/forecaster for more information.


Generally, companies that serve their shareholders well offer solid 401(k) plans to their employees. Poor plans suggest the boss is “comfortable with low morale and high employee turnover,” writes Jeff Brown, a Philadelphia Inquirer columnist.

"The purpose of these plans is to attract, retain and motivate high-quality workers. Employers are not offering these plans because they are philanthropic," said David L. Wray, president of the Profit Sharing/401(k) Council of America, a nonprofit organization representing 1,200 employers with six million plan participants.

Watson Wyatt Worldwide Inc., a consulting firm for employee benefits, surveyed thousands of employees on their attitudes about their retirement plans and their employers. From 1999 through 2003, total shareholder return averaged 38 percent at firms whose employees were very satisfied with their plans, versus 24.6 percent where workers were not, the Inquirer reported.

Brown writes that one element of a good 401(k) plan is variety. Companies should offer at least 12 mutual funds, and the employer should match contributions up to 6 percent of workers' gross annual pay. Fees should be low. Expense ratios charged by the funds should be less than 1 percent a year.

Administrative costs can be hard to pin down. In general, workers pay 0.50 percent to about 2 percent a year for investment management and administrative-related services, said David Huntley, a principal with HR Investment Consultants in Towson, Md. That means a worker with the average account balance of $60,000 could pay anywhere from $300 to about $1,200 a year in fees.

“It's a safe bet that many workers don't know how much they are paying on their 401(k)s,” said Baltimore Sun personal finance columnist Eileen Ambrose. “Even some employers are in the dark, relying on outside experts to handle the 401(k) details.”

Benefit experts advise workers to ask their employers about the direct and indirect fees they pay. With so many people dependent upon their 401(k)s for retirement, it's important that these questions be answered, Barbara Roper, director of investor protection for the Consumer Federation of America, told the Sun.

"This is the primary way that Americans participate in the securities market," she said. "It's important to get it right."

The tax implications of 401(k)s are also important to get right. Rules that take effect next year will bring an important tax benefit to people who receive an inheritance in the form of a 401(k).

Currently, only a spouse can roll over 401(k) money from the account of a deceased person without paying taxes on it immediately. Under the new rules, a son or daughter, domestic partner or even a parent will be eligible for a similar tax benefit, Dow Jones Newswires reported.

The rules are included in the Pension Protection Act of 2006, which passed in August. To get the break, however, an inherited IRA account must be set up in the name of the deceased through a trustee-to-trustee transfer. For instance, Dow Jones reported, after the death of John Doe Sr., an inherited IRA account would be set up in his name, and designated as being "for the benefit of" John Doe Jr., his son. This step would allow the trustee-to-trustee transfer that shelters the 401(k) transfer.

Another point to remember is that non-spouse beneficiaries are required to regularly withdraw the minimum amounts, as dictated by the IRS, every year, starting the year after death.

You may like these other stories...

The IRS has announced the special per diem rates for 2014-15 that taxpayers can use for substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. The new per diem rates...
The issue of international assignees was, for a long time, limited to a small number of companies – meaning only those that operated on an international scale. But in recent years, global expansion has shifted into...
Exclusive: Lois Lerner breaks silenceIn her first press interview since the IRS Tea Party targeting scandal broke 16 months ago, ex-agency official Lois Lerner told Politico that employers won’t hire her, she’s...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 21
Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience's communication style.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.