Like many financial advisors I generally suggest to most clients that they maximize their contributions to their company’s retirement plan. But what if your organization’s plan is lousy? Lousy could mean poor investment choices, high expenses, or low or no company contributions.
Here are a few tips to help you make the best of a lackluster 401(k) plan:
Find the best funds in the plan
Even in the worst plans that I’ve seen there are usually a couple of funds that are decent. Consider focusing your investments in those few funds. It is always important to consider outside investments when allocating your 401(k), but in this situation its absolutely critical. You will need to allocate outside accounts such as a spouse’s retirement plan, IRAs, and brokerage accounts in harmony with your 401(k) to ensure that your overall portfolio is properly allocated. You will also need to take this total portfolio approach when rebalancing.
Consider the Self-Directed Brokerage option if offered
A number of 401(k) plans offer a self-directed brokerage window for employees who want to invest in areas beyond the basic investment menu offered. These programs vary widely and the percentage of plans offering them is relatively low. If this option is available to you make sure that you understand all of the costs and the rules associated with this program. More importantly make sure that you are comfortable managing your own investments. For those who work with a financial advisor this can be a great alternative as well, I’ve utilized these options with great success over the years with several clients.
Get the full company match
If your company matches your contributions, contribute at least enough to receive the full company match. For example, if your plan offers to match half of your salary deferrals up to 6 percent of your salary, that’s an instant 50 percent “return” on your money. That’s hard to beat. It’s also free money; don’t leave it on the table.
Focus on the overall amount that you need to save annually
Part of the financial plan that you hopefully have in place should deal with the amount that you will need to save annually to meet your retirement goals. Your 401(k) is a piece of the puzzle but there are other vehicles that might be available to you.
Contribute to an Individual Retirement Account (IRA)
Everyone with sufficient earned income can contribute $5,000 for 2012 ($6,000 if you’re age 50 or over) to an IRA. For 2013 these limits increase by $500. For traditional IRAs, the ability to deduct your contributions on your tax return will depend upon your income. Likewise, with a Roth IRA there are income ceilings that determine whether you can make a Roth contribution. With an after-tax IRA, contributions are made with after-tax dollars but all gains on the underlying investments grow tax-deferred. Good records are needed here as a portion of future withdrawals will be attributed to your contributions and will not be taxed; however a portion will also be attributed to gains in the account and will be subject to taxes.
Take advantage of other retirement savings options
If your spouse’s company offers a better plan, try to maximize your contributions to that plan first. Remember to first take full advantage of any matches offered by your company’s plan. Do you run a business on the side? If the business is generating income, consider starting a retirement plan. Among the options to consider are a SIMPLE plan, a SEP IRA, and a Solo 401(k).
Discuss your concerns with your company
Do your homework and outline your concerns with your employer’s plan. With new 401(k) disclosures that were issued to you earlier in the year you are now armed with more information about the plan, its holdings, and the underlying expenses than was available to you in the past. These disclosures have made the issue of plan expenses a key topic for many plan sponsors, your plan administrator may be more receptive to your input than you might realize. Of course, common sense and civility should prevail when bringing concerns to the company’s attention.
Need help allocating your 401(k) account or your overall investment portfolio? Please feel free to contact me.
401(k) plan sponsors, do you want an independent review of your organization’s plan? Feel free to contact me as well.
For you do-it-yourselfers, check out Morningstar.com to analyze the investment options offered in your 401(k) plan and get a free trial for their premium services.
Photo credit: Flickr
Good post Roger! It always amazes me to speak with people that work at companies that offer horrible plans. I think at times it can come down to the company not valuing their employees or ignorance on their part in regards to what a good plan looks like. I would agree though that you should look at other options and at the very least get the full match in order to take advantage of the free money.
Thanks John. Over the years the wide range of quality among 401(k) plans has never ceased to amaze me. I’d like to give plan sponsors the benefit of the doubt and start with the assumption that they generally want to provide the best retirement savings vehicle that they can but don’t always know how to go about doing this.
We have been there. The last 401K my husband had didn’t offer many low cost diversified index funds. We settled on a Mid Cap Index and a cash alternative. I’m happy to have gotten out of that plan and rolled the proceeds into an IRA.
Sadly there are a lot of bad 401(k) plans out there Barb, glad you were able to move the money to an IRA eventually.
Roger, As one who has actively been in the 401(k) business since the 1980′s I was interested in reading your perspective on the 401(k) industry and specifically the platform providers. While there are many things I do not like the federal government mandating, I’m totally onboard and fully endorse the advent of regulations 408(b)(2) and 404(a)(5), as long overdue.
Having worked in the “open architecture” arena, as well as insurance company group annuity contracts I think your slam on the two insurance companies you mentioned in your piece does a disservice to those companies. From my perspective the two “worst actors” in the 401(k) industry today are the wirehouses and payroll service companies (which you did reference). When it comes to non-disclosure of total fees, wirehouses and payroll services are blatant. Hopefully these regulations will incentivize these organizations to do the right thing going forward.
Over the years I have found CEO’s and CFO’s who will make decisions as to their 401(k) provider based upon which wirehouse handles their personal portfolios, regardless of cost or performance. I had another situation where a non-profit moved their plan to a firm who’s president sat on the pension committee. When I politely pointed out the obvious conflict of interest and the fiduciary issues surrounding this move, the other committee members made up of CPA’s and attorneys simply did not care.
The bottom line in all of this is that nearly 75% of all 401(k) plans today are being handled by advisors who have only one or two plans on the books which in my opinion can lead to higher cost. In addition, as I cited above you have decision makers making decisions many times based upon issues totally unrelated to cost or performance.
More government interference in our lives, is not the answer. The answer lies with 401(k) providers doing the right thing, which I believe they will when given the opportunity and more importantly 401(k) participants taking an active interest in not only understanding their plan, but most importantly the total cost for the plan and who (plan sponsor / participant) pays what.
Scott thanks for your comment. I gather you were referring to the mention of Principal and John Hancock in the post entitled 4 Signs of a Lousy 401(k) Plan vs. this post. In any event my comment was not so much a slam on these or any other companies but rather a slam on plans that are full of the product of company who is also the plan administrator. Note I also mentioned Vanguard and T. Rowe in the next section regarding this issue as well, and these are two fund companies for whom I have the utmost respect. My point was that a plan dominated by a single fund family is rarely a good idea, if that fund family happens to be the same group administering the plan it is an even worse situation and may be a conflict of interest.
I couldn’t agree more with your comments about wirehouses and payroll services offering plans, and especially about execs going with the brokerage firm who handles their personal investing.