Not all 401(k) programs are created equal, that’s a fact I’ve known for quite some time and one cemented after reviewing The Smartest 401(k) Book You’ll Ever Read by Daniel Solin this past weekend. While the idea that 401(k) plan administrators may pay kickbacks to companies turns your stomach, the reality is that it occurs and we must adjust to the world we live in.

So, what can you do? Review your company’s 401(k) plan options and find the cheapest funds that satisfy your needs. The best options are those that most closely mimic index funds, such as the S&P 500 Index or a Total Market Index fund. It’s best to avoid the actively managed funds as the vast majority of those can’t even beat their benchmarks, let alone earn enough to beat it after the fees.

You can’t control the fund options but you can control how much you pay in fees with your fund selection.

Every quarter, I receive disclosure forms from my employer’s 401(k) plans. They discuss my current account balance, my gains and my losses, the fees I’m paying, and a broad look across all the funds available to me. It’s a good quarterly snapshot and one that I felt was adequate. I had online access to my account, so I could review my holdings whenever I wanted to, but for the less technology savvy the once a quarter look was probably adequate.

Looks like the Department of Labor said it wasn’t enough. The Department of Labor recently recommended improved 401(k) disclosure regulations that would require 401(k) plan administrators to provide more information about funds starting in January 1, 2009. This includes 1-, 5- and 10- annualized performance tables for every fund along with their benchmark. It would include annual expense ratio figures and other cost figures. It’s information that my plan administrator always provided so it’s surprising it would have to be mandated. Actually, it’s sad that it had to be mandated.

This simply means that there are workers out there who didn’t have access to this information. While you probably could’ve dug deeper for it, all funds will give you expense ratio figures, making it easier helps everyone.

There are some things missing from the regulations but it’s not a horrible start.

The High Cost of Poor Disclosure [Yahoo! Finance]

I’m not a big fan of 401(k) debit or credit cards because I’m not a fan of raiding your retirement accounts to pay for non-retirement expenses. I think that the retirement bucket should essentially be a lockbox (*gasp* the dreaded lockbox phrase) that you don’t touch unless you’re actually retiring.

However, the cat’s been let out of the bag with 401(k) debit cards and they do improve 401(k) loans as a whole. Before debit cards, you would have to take out a lump sum loan rather than borrow only as much as you needed. With debit cards, you draw down the funds as you need it and it reduces the interest you do pay. While I don’t like the idea of borrowing from your 401(k), at least this minimizes the damage.

Senator Charles E. Schumer of New York, recently in the news a lot for his letter that the Office of Thrift Supervision said caused IndyMac’s collapse, and Senator Herb Kohl of Wisconsin introduced new legislation that would outlaw credit or debit cards associated with 401(k)’s and retirement plans.

If you’re like me, you recently saw your retirement accounts take a pretty sizable hit. In fact, since October of last year, the markets have been down 20%. 20% puts it into bear market territory and something that probably makes you shudder to think about it (I know I do). You might be tempted to change directions, pull out of what you’ve invested in so far and going with something riskier to make up the losses. Please don’t.

Your retirement nest egg is your retirement safety net. You can gamble away your taxable investments, you can put your emergency fund into a hot new tech startup (I wouldn’t), and you can take your Latte Factor and blow it on the ponies - just don’t mess with your retirement accounts. Let them stay the course and you’ll be rewarded in the long run.

To put our current difficulties in perspective, consider that since the 1920s, the S&P 500 has returned a historic 11% year over year. That’s through numerous bear markets, including the recession in the 1980s and the tech bust the few years after 2001.

If you can’t stomach it and want to pull out, pull out. Just don’t gamble it on a potential shooting star.

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My Retirement Blog was included in this week’s Carnival of Personal Finance at Greener Pastures.

No matter who takes a crack at 401(k) mistakes, they invariably come up with the same advice over and over again. That’s not to say it’s not worth reading, it definitely is, but it shows that the basics of how to take advantage of a 401(k) are easy and simply bear repeating.

The latest 401(k) mistake post is by Lauren Tara LaCapra at Main Street, a personal finance blog by TheStreet.com. This post is slightly different from your standard 401(k) mistake post because it actually points out a few mistakes that, while aren’t absolutely drop dead critical, are certainly important and not echoed elsewhere (at least not often).

Going beyond the standard don’t withdraw early, don’t pay penalties, and contribute more, Lauren adds that you need to keep your paperwork in order. “Participants who don’t inform former employers about their relocation could lose out if the company is unable to locate them when it comes time to distribute benefits. Van Fleet says this happens to a “surprising” number of people, when a simple change-of-address card could have kept thousands in their retirement coffers.”

If you have a Traditional IRA or 401(k), you are required by tax rule to start taking required minimum distributions (most of the major brokerages have tools to help you manage this) by April 1st of the year after you turn 70 1/2. One of lesser known benefits of a Roth IRA is that there is so such similar requirement to take required minimum distributions. You are in total control when it comes to RMDs and Roth IRAs.

Granted, you can begin taking distributions at 59 1/2 on 401(k)s, so by the time you reach 70 1/2 you may need those distributions. However, it’s always nice to know that you can take out your funds on your terms, especially since the government won’t have let you touch it without penalty (outside some generally negative situations, first home excluded).

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My post on Naming Beneficiaries on Retirement Plans was selected as an Editor’s Choice at the Money Hacks Carnival #17 - Music of the ’80s hosted at Mrs. Nespy’s World. Thanks!

I have no idea why 401(k) participation wasn’t automatic in the first place and why it took the Pension Protection Act of 2006 to make it possible. The benefits of the law are already being seen as Nationwide Financial Services reported that 96% of employees are now saving for their retirement versus 74% in 2006. While the cynics will say that defined contribution plans like the 401(k) take the burden of retirement off employers, I saw we need to face the realities of the day. The reality is that defined benefit plans like pensions carry their own set of risks, ask anyone who had a Delta pension. I’d rather we face reality rather than fight it for the sake of pointing fingers.

The findings come as Americans face a shortfall in funding their retirements. The average balance in a 401(k) account was $61,346 at the end of 2006, according to the Washington-based Employee Benefit Research Institute. The savings will matter more in the future, as the number of companies offering traditional pension plans has declined by two-thirds over the past 20 years, according to the Retirement Security Project, a Washington-based group that advocates policies to help Americans become financially secure.

[Washington Post]

It’s been reported in Money on CNN Money that approximately 25% of employers with 401(k) plans are now offering professional investment advice for their employees for a fee of 0.4% to 1%. What they’ll do is take a look at all of your funds and help you select the right mix given your situation and other investments, according to Money.

It seems to me that, given limited options, having a professional planner take a look at your funds at a cost of 0.4% to 1% is a big pricey. I’m not entirely sure what they offer besides knowledge of asset allocation fundamentals and what you should do based on your risk tolerance, both are concepts you can read from a book. Considering your 401(k) shouldn’t be touched until you retire, it’s not like you have savings goals in the near term (don’t borrow for a house, please please don’t) that you need help planning for.

It seems like a pricey service for 0.4% to 1%, unless you simply don’t want to do it yourself.

Every retirement plan you own has a spot for you to designate a beneficiary. It seems like a simple problem right? Just pick someone you trust and everything will be okay. Couples name their spouse, singles name their parents or their children, everyone can think of at least one person they’d want to leave their money to and simply put them. Some people neglect to put anyone. Either scenario can be dangerous for numerous reasons and here are a few things to consider.

Beneficiary Rules

The rules of naming a beneficiary are not as simple as they may seem. A prime example is that many pensions and employer sponsored retirement plans (401Ks, etc) require that you name your spouse unless your spouse waives that right in writing. If the plan doesn’t require it, the state might. Other accounts will not let your assets directly transfer to a minor and will require the funds be given to a trustee or guardian instead. Be sure to check those first because they will hold precedence.

Here’s where the fun begins. Selecting a beneficiary, once you get past the laws and rules of the program, comes down to the mechanics.

Selecting a Beneficiary for Employer Retirement Plans

Spouses: If your spouse is the beneficiary, he or she will inherit the assets without paying federal estate or income taxes. However, starting at age 70.5, the spouse will have to start taking the required minimum distributions as mandated by his or her life expectancy. Those required distributions are taxed as income, as they would if you were taking it.

Everyone Else: Any nonspousal beneficiary (that’s what they call everyone else) must cash it all out (bad) within one to five years or roll the funds over to an IRA in a trustee-to-trustee transfer (same thing that happens when you rollover a 401k into an IRA). The rollover option was added effective 2007 but many plans haven’t changed their rules to allow this option, it’s best to double check.

Selecting a Beneficiary for IRAs

IRAs differ slightly from employer sponsored retirement plans.

Spouses: Spousal beneficiaries can just designate themselves as the account owner. There are no additional taxes.

Everyone Else: Everyone else has to cash out over the next five years or take annual distributions determined by life expectancy of either the beneficiary or the decedent, whichever would’ve had the higher life expectancy.

Given the recent Supreme Court ruling that upheld the tax advantaged status of investments such as municipal bonds, you may be tempted to begin investing in these instruments. If you do, don’t invest in them through a 401K or an IRA (either Roth or Traditional). You want to take full advantage of their tax advantaged status by investing in them in a fully taxable brokerage account.

The benefit of municipal bonds is that they are exempt from federal, state and local income taxes if they meet certain qualifications. If you live in Maryland and purchase a Maryland municipal bond, then those earnings are exempt from federal, state, and local income taxes - thus pushing up its yield (because you’d be paying taxes on the earnings of any other investment).

If you invest in those types of securities in a 401K, you lose the tax exempt status because you ultimately pay taxes on distributions in the 401K (the same for a Traditional IRA). If you invested in a Roth IRA, you are still exempt but all appreciation in a Roth IRA is exempt from taxes. You are essentially no longer getting the same advantage and thus not maximizing your yield.