A recent column (Going for the Gold with 401(k) Plans, Tuesday, October 18) categorized 401(k) and other qualified plans by their expenses. It ranked them from Platinum to Gold, Silver, Bronze, and lead. As you might expect, it brought a lot of mail.

Financial services professionals chided me for putting such emphasis on expenses. They noted that other factors were also important. In fact, there is more to consider than expenses. But for most of us, most of the time, expenses carry the single biggest message about who is going to benefit from the plan, you or the financial services industry.

Readers who put money into qualified plans (rather than sell them) asked a different question: What does my plan cost and, if it is expensive, should I bail out? Many were school teachers in expensive variable annuity based 403(b) plans.

This reveals a painful truth: Most people haven't got a clue about what their qualified plan costs.

To find the clue, I make this modest proposal: Every plan vendor should post an illustration on its plan literature. The illustration will have a remarkable resemblance to the big yellow cards we find inside new refrigerators. The card will show the range of annual expenses for all plans, and then it will have a big black arrow showing where this particular plan is in that range. If the arrow is far to the left, you will know it is an inexpensive plan that is likely to serve you well. If it is far to the right, you will know it is an expensive plan that is serving its sales force well. (See illustration; click to enlarge)


How we have such information posted on refrigerators, ranges, washers, dryers, and dishwashers and not have it on retirement plans, which are a lot more important, is a great mystery.

But let's suppose that you have learned the expenses of your plan. How high do they have to be to bail out? And if you bail out, what are the alternatives?

It turns out there are good alternatives, particularly for households that earn less than $80,000 a year or so. That's most people.

When do you make a change? Anytime you can put your money in no-load retail index funds that cover major asset classes and save one percentage point a year or more, it's irresponsible NOT to find another venue for your retirement savings. If you can save close to 2.00 percentage points, it's plain foolish not to find another venue. I'll show you what it can mean for your retirement in a minute.

Today, you can reproduce my diversified Margarita Portfolio--- one-third total U.S market index, one-third total Foreign index, and one-third Treasury inflation protected securities at an average cost of about 25 basis points a year at major fund houses like Vanguard and Fidelity. So any plan with costs of 1.25 percent a year or more should be examined very closely. There IS an alternative.

In 2006 workers 49 years old and under can put $4,000 a year into traditional or Roth IRA accounts. Workers 50 and over can put $5,000 in these plans. In 2008 the limits will increase to $5,000 and $6,000 for those 49 and under and those 50 and over, respectively.

That's not as generous as the limits on 401(k) or 403(b) plans but it's more than most people save in any year. Remember, 90 percent of all households in America reported Adjusted Gross Incomes (income after qualified plan contributions) of $94,891 or less in 2003. Most of those were two earner households. A whopping 75 percent of all households in America reported Adjusted Gross Incomes of $57,343 or less in 2003 and many of those were two earner households.

The median income for public school teachers in 2002 was about $40,000. So teachers trapped in expensive 403(b) plans can save about 10 percent of their income without exceeding the contribution limits of traditional and Roth IRA accounts.

You can understand what is at stake by comparing how much you will accumulate over 30 years while investing $333 a month ($4,000 a year) at different returns.
  • At 6 percent it will grow to $335,000;
  • At 7 percent, $407,000
  • At 8 percent, $497,000
  • At 9 percent, $610,000.
As you can see, a difference of just 100 basis points (which can be taken out by fees) can be about $100,000.

School teachers, the largest single group subject to excessive fees in their retirement plans, can learn more by visiting http://www.403bwise.com/. Start with the "403(b) Must Reads" section.

On the web:

Tuesday, October 18, 2005: Going for the Gold with 401(k) Plans

Summary of U.S. Income Tax Data