Tuesday, January 25, 2011

Retirement Frustration

As I mentioned a while back, I've started up my retirement contributions again. They're small mind you, but they are there. When I received my last pay raise the entire raise went into retirement savings. No pain no gain? That seems to me like a gain without the pain to me. What really spurred me into action was an e-mail from my employer saying that they were re-instituting part of their contribution matching program. The program had been cut during the downturn as a cost savings measure. Better to keep more people employed with most of their benefits than keep fewer people employed with all of the benefits. For employees working at the company for 1-5 years, they would match up to 2% of your pay, providing you put at least that much into the account. My last raise was 3%, so I met that requirement. My 1 year anniversary was earlier this month, so as of this pay period I'll be receiving their contributions as well.

When I signed up for the contribution matching, they had a little section on the form where you put down which funds you wanted the money dispersed between. I selected a couple funds with low MERs (management expense ratio - the percentage of your fund that goes to them every year), and submitted the form. A couple weeks later I received a letter from the company holding the mutual funds, saying that the funds I selected were not available in my program. I'm not entirely sure if it's because I didn't have the minimum balances for the funds, or if they're not available to my company's plan? They had another form asking for different funds, which I never sent back to them. The money has been sitting in the account making whatever their interest rate for cash is (super low).

Not having the cash in an actual fund isn't going to stop me from getting my employer's contribution, so I've been just letting it sit there. A 67% straight return is better than nothing in the short term.

The reason why I didn't select one of their other funds is because they have absolutely ridiculous MERs (2.5%-3% was common, and even higher). What's really frustrating is that they don't tell you that when they send you the paperwork to fill out.  I received another form this week, with a list of mutual funds again. They list the Gross Annualized Rate of Return for the last 1, 3, 5 and 10 years, but no other information. Besides the fact that you can't predict the future returns based on the past, the Gross ARR is meaningless. If anything, I'd wan't to see the Net ARR. There would be a lot more negatives on this sheet if they did show that, that much I can promise you. It's frustrating that they don't show you the fees, they just mention in small print that you can contact them or find them online.


So, for the time being, I'm leaving my money in cash. I'll let it accumulate for a while and see if the other funds open up for me. If they don't, I'll probably just let the money build up and then periodically make a bulk transfer from it to my other institution which has cheaper fees. Better to get free employer money in a crappy account than not.


FireWynd said...

That stinks. Honestly it's shameful how terrible most 401k / retirement programs are. A lot of them are so bad that at least from my perspective, I see it as highway robbery. Some of the practices quite frankly need to be illegal. I am sorry to hear the pain that yours is. If possible I would recommend that you talk to your HR person in charge of overseeing the plan, and complain and try to get it changed to a different company.

2-3% ERs are completely unreasonable. Even more questionable is when you can only invest in funds that are not traded on the open market (IE they don't have a ticker symbol that you can go lookup @ finance.yahoo.com).

I wanted to warn you that the default cash account is probably a money market fund. (This is how all of the 401k companies I've worked with do it). The money market fund also charges an Expense Ratio. In some cases the ER is greater than the annual interest! So you can actually lose money just by leaving your money in there! It's a total sham - but it is a reality.

You would have to dig through the paperwork to see, but I bet that is exactly how they do it. You cash is actually a "sweep account" that is backed by a money market fund.

I was successful at my current company to convince them to dump the retirement company we were using that was charging 3-4% ERs. Unfortunately they didn't involve me in the process of picking the new company - which has ~1.5% ERs. But it's funds are openly traded, and we have a much larger fund selection. Not ideal (I would have wanted fidelity or vanguard), but still much better than what we had.

Cassie said...

Oh geez, I didn't even think of that! Just when you think your money is safe they hook you again. Argh! Looks like I'll be reviewing funds this weekend :s