CNBC’s screaming analyst Jim Cramer recently postulated on a recent show:
“However, as much as I like the tax-favored status of 401(k) plans and IRAs, I need to tell you something heretical, something almost nobody else will come out and say: Most company 401(k) plans stink,”
Is he right? I have no idea as to the percentage of lousy 401(k) plans out there, but anecdotally in my experience there are many. Two main characteristics of a bad plan are:
- High fees and expenses. This includes not only the expense ratios of the mutual funds or other investment alternatives offered, but also high fees for recordkeeping and administration.
- Poor investment choices.
As plan sponsors and participants receive mandated disclosures regarding plan fees and expenses, further attention is being brought to this issue. Even with these disclosures and the related publicity, many plans will continue to be sub-par.
What should you do to get the most out of your company’s retirement plan? Here are a few steps that I suggest:
Pick the best choices. Over the years I’ve worked with a number of clients with so-so or worse company retirement plans. If you have outside assets, weight your 401(k) dollars into the funds that are the best choices with less regard for their investment style. Perhaps your plan has a solid S&P 500 Index fund, a decent bond fund, and a solid International stock fund among the choices. You might consider utilizing these three funds exclusively or with most of your 401(k) dollars and using outside holdings (a spouse’s retirement plan, IRA accounts, taxable brokerage accounts, etc.) to balance out the rest of your portfolio in accordance with your overall financial plan.
Use the plan’s brokerage window if one is offered. Not all plans offer this option, but if yours does this might be a viable option for you. The choices available to you may be limited to mutual funds, but in many cases you have access to not only a full array of funds, but also individual stocks, ETFs, and more. If the menu of core choices is pretty weak this may be the way to go. Also if you are working with a financial advisor, this allows the advisor more flexibility in advising you in line with your financial plan. One caution, you may be tempted to actively trade this account because you can. This is generally a bad idea for most us.
Make sure that you contribute at least enough to earn any company match. In even the worst plan make sure you contribute enough to earn the maximum company match. For example if your employer matches 50% on the first 6% of your salary, be sure to contribute 6%. Where else are you guaranteed a 50% return on your money?
Voice your concerns to company management. Do your homework, but if you find that your plan offers mediocre or bad investment choices and the overall fees are high discuss this with the appropriate people within your organization. As with anything else, common sense needs to prevail here. Don’t be adversarial, but rather offer constructive suggestions and voice your concerns about being able to accumulate a sufficient retirement nest egg. A better plan for the participants doesn’t necessarily mean higher costs for the sponsor. Many plan sponsors just aren’t aware of the better alternatives in terms of providers available to them. I have found that most sponsors do care about their employees and want to help them save for retirement. This benefits the organization as well as the employees.
Do many 401(k) plans stink? The answer is clearly yes. However they are the best retirement savings vehicles available to many American workers, so be sure to use yours to your best advantage.
Please feel free to contact me with questions regarding your 401(k) plan or about your retirement planning needs.
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