Most people should maximize their contributions to their company’s retirement plan. But what if your organization’s 401(k) 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 most of a lousy 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 it’s absolutely critical. You will need to allocate outside accounts such as a spouse’s retirement plan, IRAs, and taxable 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 has been steadily increasing over the past few years. If this option is available to you make sure that you understand all of the costs and the rules associated with the program.
More importantly make sure that you are comfortable managing your own investments. For those who are, or for those who work with a financial advisor a self-directed brokerage option can be a great addition to a 401(k) plan.
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 $5,500 for 2016 ($6,500 if you’re age 50 or over) to an IRA. For traditional IRAs, the ability to deduct your contributions on your tax return will depend upon your income. With a Roth IRA there are income ceilings that determine whether you can make a Roth contribution.
After-tax IRA, contributions are made with after-tax dollars to a traditional IRA account, 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 and to pre-tax contributions in the account and will be subject to taxes. There are no income limitations on after-tax IRA contributions.
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 take full advantage of any matches offered by your own company’s plan, however. 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 401(k) disclosures that have been required for the past several years, 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.
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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.
As a teacher, I do not have access to lousy 401k plans. Instead, I get to choose from fee-bloated 403b and 457 plans. I used to complain about it, but that did no good. So, I decided to make lemonade out of the lemon grove by fully funding both my 403b and 457 plans (my wife did the same). We parked our money in the short-term fixed account and maxed out our accounts for three years straight. We saved a lot of money in our “horrible” retirement accounts, roughly $220K. Then, we did the logical thing and quit our jobs in order to be able to roll our money over to Vanguard. Quitting is often needed to roll 403b money out of fee-bloated accounts.
Ed thanks for your comment. Boy I agree with you, some of the high-fee, low investment quality plans offered to teachers are just pathetic. Sound like you are making the best of a bad situation, kudos to the two of you.
I’m really lucky that I have an excellent 401k but my dad had a lousy one. They didn’t offer a match so he instead opted to max out his money into an IRA and HSA instead.
Thanks for the comment.
401K plans seem like they take power away from the individual in favor of dubious corporate strategies. As you say, not all investments are bad but there seems to be much better ways to optimize your portfolio by controlling the direction of your investments yourself. This isn’t to say we shouldn’t take professional advice in our investments, but rather that we shouldn’t be limited in what and where we choose to invest.
Thanks for the comment. I disagree that the 401(k) is part of some dubious corporate strategy. In fact there are many good 401(k) plans out there and those provide an excellent retirement savings vehicle. While doing things on their own is great for those who are comfortable doing so, the reality is that many investors are uncomfortable picking their own investments and lack the skill or the tools to monitor them. Further the automatic savings feature if a 401(k) plan is what many folks need to be sure they allocate this money to retirement savings. I think where the ability to manage one’s own retirement investments is key is the need to manage old 401(k) plans when folks switch jobs. Also there are some really rotten plans out there and at that point people do need to decide whether the advantages offered by the plan are worth the negative features such as a lousy, costly investment menu and others.