“The Mole” is a certified financial planner and public accountant who, in his spare time, provides a behind-the-scenes view of the financial planning industry for Money magazine. In his most recent column, The Mole explains how to deal with a bad 401(k) plan.
“401(k) providers don’t actually care how they make money,” he writes, “just as long as they make a tidy profit.” The providers can make money by:
- Offering good choices to employees, but charging employers high administration fees.
- Charging low administration fees, but offering high-cost investment options to participants.
The Mole notes that smaller employers can’t afford to pay high administrative fees, so they may opt for something cheaper, not realizing that they’re simply shifting the cost to their employees. If your company offers a lousy 401(k) plan, the first thing to do is talk about it with your employer. If that’s not fruitful, The Mole recommends that you:
- Always taking the employer match. “I’ve seen some pretty pathetic 401(k) plans, but I’ve never seen one so bad where it made sense to pass on the [employer match].”
- Look into IRAs. If your company’s 401(k) plan doesn’t offer good choices, make funding your IRA a priority. A Roth IRA is an excellent way to save for retirement.
- Consider bonds. Bond funds tend to be less expensive than stock funds. If you have lousy 401(k) options, it may be a good place to hold the bond component of your portfolio.
- Favor index funds. Index funds have lower expense ratios than managed mutual funds. If the other funds in your plan are expensive, try to find an index fund with low fees. (I’m a fan of index funds in the first place, and think they should be one of the first places you look regardless.)
- Opt for a rollover. When you leave your employer, be sure to roll your 401(k) over into an IRA. “That’s the only way to get out of these really lousy selections,” writes The Mole.
I’ve never participated in a 401(k), but we have a similar retirement plan for the employees at the box factory. When we first set this up thirteen years ago, the plan was managed by Smith Barney, a large national brokerage. At that time, I would never have noticed that Smith Barney gave us lousy options. Our returns lagged way behind the market. Fortunatley, my cousin (who is the bookkeeper for the business) knew more about investing.
He discovered that Smith Barney not only offered us lousy investment options, but they churned our account — selling funds and buying new ones in order to generate transaction fees. He dumped them in a flash and has been managing the retirement accounts for the business ever since. Naturally, he has our money in low-cost Vanguard index funds.
Most people don’t have the option of seizing control of their retirement accounts like we did. For them, it’s best to follow The Mole’s advice when faced with a bad 401(k) plan.
[CNNMoney: How to deal with a bad 401(k) plan]
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Great tips. One thing I’d like to add is that you have to be careful before ditching your 401k for a Traditional IRA. Just having a 401k available to you, even if you choose not to contribute to it can limit your eligibility for making tax-deductible traditional ira contributions.
In 2008, a single filer will phase out starting at only $52,000, and a joint filer begins phasing out at $83,000. So it doesn’t take much to find yourself in a situation where you make too much money to be able to make pre-tax contributions, and above the limits, your 401k is going to be one of the only places to accomplish that.
Of course, this doesn’t apply if you’re going with a Roth, since they have separate limits that aren’t tied to being eligible for an employer-sponsored plan. But for those people looking to save money on taxes right now, just make sure you know if you qualify for taking those deductions before abandoning your 401k.
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Good, solid tips. My husband will qualify for the 401(k) plan next month, but the funds they offer avg 2% in fees. We’re used to index fund fees at a fraction of these.
We’re gong to take advantage of the employer match and decide which funds would be a good fit.
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I work for a non-profit that offers a 403b. The company puts in 6 percent of your salary (this is in addition to your salary), and there’s no match until you’ve been here 5 years. I’m contributing to a Roth until the company matches my contributions, at which point I’ll contribute up to the match and keep putting the rest into the 403b.
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How bad does a plan have to be not worth contributing to, beyond maxing the match?
My wife used to work for a temp agency for healthcare workers that offered a 401k sans match. I assume they weren’t paying the administration fees because every fund in the account had a 1.35% expense added on top of the normal mutual fund expenses. It was so bad that the money market fund had a negative interest rate!
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how do you know if your plan is good or bad though? i know this year has been a bad year so it’s hard to really tell
mine has small cap stock options, large cap stock, international stock, global fund, company stock, bonds, and a money market
i have 90% invested in stock (from small cap, large cap, international, and global)
10% in bonds (30 years old)
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My husbands company recently changed from Vanguard to a generic sounding “401(k) Company” Needless to say we complained loudly about the increase in the fees and the decrease in quality – to no avail. They conciously made the decision to pass the buck on to the employees.
The worst part was that because my husband was continuing in his job (didn’t terminate employment), we had to keep five years worth of retirement savings with the company sponsored plan or face tax penalties. So it was transferred, much to our chagrin. We now save only enough to make the company match, and have beefed up our savings in other areas.
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How would you see if your employer is offering a poor plan? And what would be the best way to present some information to your employer to show that the plan is, in fact, poor, and that better plans could be used instead?
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well i just did some research and i guess i’m doing okay.. i had a 9.8% return in 2007 for my 401k.. which is higher than the s&p 500 average at 5.49%
http://en.wikipedia.org/wiki/S&P_500
it’s too bad i’m down 13% this year =(
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Hi everyone.
September will mark one whole year since I’ve started at my company and I will then be eligible for my companies 401K plan.
I don’t know if my 401K is horrible but it seems pretty lousy:
* Allows up to 15% of your pre-tax gross pay to be deducted from your paycheck up to the legal annual limit as determined by Federal Regulations
* My company will match ’25% of the first 4%’ of contributions to the participants. Does this really mean 1%? I’m confused here b/c this seems like a very small amount of a match I’m going to get…
I don’t have more detailed information but my company will be having a ’401K Information Day’ in soon.
I already have a Roth IRA with Fidelity and have maxed out 2007 and 2008 contributions.
What can I do in this case? What are some viable options that will help minimize costs and maximize benefits?
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For the purposes of his article, The Mole defines “lousy 401(k) plans” as those that pass expenses on to the employee investors or offer poor selection. Again, I’ve never had a 401(k), so a lot of what makes one plan better than another is a mystery to me…
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Nice advice, but realize that there are income limits even for Roth IRA contributions (which I make outside of my 401k contributions). Last year, I had to pay $240 in penalties on my tax return just for those–but of course, given the benefit of compound interest, those $240 don’t really matter much in the long run …
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In figuring out if your 401(k) plan is lousy or not, ignore performance. I know that sounds odd, but the true quality of a 401(k) plan (or 403(b) or 457 or SIMPLE IRA or any other employer-sponsored plan) lies in the fund offerings and expenses.
If your 401(k) plan does not offer low-cost index funds, you should complain! Wal-mart was sued a few months ago for not offering low cost fund choices in their 401(k):
http://www.pionline.com/apps/pbcs.dll/article?AID=/20080428/PRINTSUB/565941608/1005
I’d say any 401(k) without access to Vanguard, Fidelity, or other low-cost index funds is a bad plan.
@Steve: A negative return money market fund is a sure sign of a bad plan!
@Albert: 25% of the first 4% does work out to a match that equals 1% of your salary. It’s pretty low, but if you have access to some good low expense ratios funds in that plan it’s probably worth it to participate.
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The negative money market fund was an extreme example. What if the extra cost is 0.5%? 1%? Where do you draw the line?
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I have a Roth IRA with AXA Equitable. They have great service, but they are not cheap when it comes to fees. I was thinking about rolling it over to ING Direct to save money on the fees, maybe in the future. My account with them has done pretty well this year all things considered.
This might be a good time for people to make their contributions since the market is low, but I think better times might come by waiting a little longer too.
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lucky jerks with their employer-matching…
my bosses are such cheapskates so I finally just opened a Roth IRA. these same bosses picked out the best health plan that works for them and their families, but screws over everyone else. thank god I got on the fiance’s health plan.
I have no experience yet with 401k so I have nothing constructive to offer. uh, go Vanguard?
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“kick_push”.. To find out which of the available funds are worth investing in is to write down the ‘tickers’ and go to Morningstar.com. Type in each ticker individually and print out the cover sheet (summary page)…
If you are not involved in investing, Morningstar does a pretty good job of assisting the purchasers. For each fund, they provide a ‘star-rating’. 5 stars is best and so on. That will tell you which funds rate well within their class.
Based on the printouts, you can look at the ‘style-box’. This tells you whether or not the fund is a large cap, mid-sized cap, or small-cap fund. It will also tell you what category it fits into.. Value, Growth or Blend. In essence, they print a box, which is divided into 9 squares… It’s real simple to understand.
If you, as most people seem to be inclined, want to get a nice mix, then you will want to **not** duplicate the style of fund. In essence, if you stick to ‘blends’, you will have a fund that has a mix of ‘value’ and ‘growth’. (If you read this blog, you will note that ‘Warren Buffet…. God of all investors…. Is a value investor. People like Jim Rogers and Soros on the other hand tend to be more growth oriented..To over-simplify, ‘value’ means ‘buying it cheap’ and ‘growth’ means ‘it’s on the fast track to profits’.) A blend means that the manager has a mix of both.
If you want to play the ‘complete world of investing game’. You will look for 4 or 5 star rated funds that are ‘low risk’ and ‘low fees’. Your mix will include large, medium and small cap blends and have an exposure to emerging markets. You may want to include something like the Pimco bond funds (Although to state this makes my skin crawl as you may get better returns by leaving cash in your account at whatever the interest rate is.. Let’s face it, no risk and possibly better over-all returns.)
You can then take the funds you have chosen and place them in a portfolio using Moningstar’s portfolio manager. Type them in and view the mix, and it will show you what they expect the yearly returns will be, risk etc…
Have fun!
Thx jegan
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I wrote about my wife’s lousy 401K, which offers some nice investment options, except that they are wrapped in annuities from John Hancock rather than direct investments in mutual funds, and have higher-than-average expense ratios and fees that are chewing up gains:
http://lippard.blogspot.com/2008/04/john-hancock-401ks-suck.html
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I’ve never had the option of a 401k, but as soon as I do I’ll be taking your advice. Like you mentioned, you need to look into an IRA as an alternative- that’s what I’m doing currently.
You need some sort of tax protective vehicle to get you to retirement!
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jegan thanks for the info.. i tried looking up quotes on morningstar but the ones for my 401k aren’t available (they’re equity and bond index investment options)
i was able to look up my roth though.. it’s a fidelity target fund (4 star) with a “blend” style
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I don’t know how good my 401k is, but it seems good to me, especially for a retail position.
I get a variable match depending on a few factors but average out between 4% – 6% match.
We also have profit sharing that goes in our 401k. More free money!
But what I really love about it is that we can direct our investment ourselves to a degree. I have mine on the high-yield options, although it’s risky I am only 22 so should it take a massive tumble I can even it out over the next 50 years.
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COMPLAIN! I noticed I was paying ridiculous fees for one 401k fund and so I sent an email to the finance department. It wasn’t a loud, wining email. It was a very matter-of-fact “here is why I don’t think this is any good” email and they agreed. They will be adding more appropriate options soon, including the specific investments I wanted! Of course, our 401k plan is actually really good, it was just that one fund that was a rip off.
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Tell me something, please. My employer offers 9% — no matter what — of my salary. I always hear about “matching” employer contributions. But, what to do in the case of a situation like mine? I’m a doof re: money and I’ve not been able to figure out how to serve my interests best under such a plan. Match? Match up to a point? Take the free money and run? Help! Thanks!
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Check whether your company allows in-service withdrawals, not to be confused with hardship withdrawals. My company allows it without the usual 59 1/2 age restriction for their matching funds only. I now periodically rollover the eligible funds to an IRA with better investment choices.
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I would only invest the amount so you get your companies match. That is free money. If the fund invests in mutual funds go with index funds.
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@Steve:
I’d say if your 401(k) plan doesn’t offer any index funds with expense ratios below 0.50% then it’s a bad 401(k) plan. This is especially true with bond/money market funds. Research has shown that “active managers” have little to offer at all in bond type funds, so you should strive to get your fees as low as possible in those. Active managers don’t really have anything to offer in stock funds either, but clever marketing, the media, and greed help keep people convinced otherwise.
Bottom line…keep it to funds with an expense ratio below 0.50%. If you don’t have any of those, complain or find a way to work around it. (e.g., only use the good index funds in your 401(k) and keep the rest of your savings in an IRA or taxable account at Vanguard)
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Guys, Exchange Traded Funds (ETFs) are a great way to invest in your retirement accounts. But you have to know which ones to buy and how to manage them. I work with Teeka Tiwari over at ETF Master Trader and we teach investors how to invest in ETFs, sector by sector. Check us out.
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the thing is i researched everywhere to find the fees and/or expenses but couldn’t find any info.. my 401k is through fidelity
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^ ^ okay nevermind.. i found a prospectus.. fees aren’t too bad at all
bond fund 0.15%
global equity fund 0.17%
international stock fund 0.19%
large cap stock fund 0.13%
mid and small cap fund 0.16%
employer matches 80% of the first 6%
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I read the notes in the photos, JD!
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We seem to have a pretty good return every year from our 401k’s. But sad to say I dont know much about the details. I need to look into that.
Austin Hike and Bike
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hmmm.. never noticed those notes before.. hehe
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Great, now poor JD has to work harder since we’re all going to read the notes from now on.
Anyways, it can be pretty hard to figure out how much your 401k is costing you. It took me a couple months (of non-continuous effort) to find out that my current 401k adds 0.96% to every expense ratio. At least when I had a johnhancock 401k they transparently displayed the 0.5% extra expense ratio… though I do wonder now if there weren’t more hidden fees in there…
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When I started investing many years ago and knew NOTHING at all about mutual funds, I went to Vanguard’s website and started reading in their Education section. It is available to anyone, regardless of whether you have investments there, and it’s a great place to start. You will very clearly be able to see the impact of fees on your investments over time. Fees and asset allocation (the distribution of your $$ between cash, bond funds, stock funds, etc) are the two things over which investors have the most control. It is worth it to take the time to learn about them.
Companies (not the 401k providers) ultimately decide who will foot the bill for the plan. There are real expenses associated with 401k plans that must be paid somehow. Some companies that are struggling with the costs of the plan will choose to offer low cost funds and charge participants a fee (usually small) to participate. This is a much more cost-effective scenario for everyone involved than choosing providers with high cost funds or wrap fees.
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Research pays off:
I found it very hard to get the ticker symbols on my 401(k), but persistence paid off. then, from Morningstar, I found that they had an average expense ratio of 1.1%, combined with performance worse than my Vanguard IRA, with its 0.2% expense ratio.
Then I found out that I could buy Vanguard funds for my 401(k). They charge a slightly higher fee for these ‘outside’ funds, but the net result, after creating a pretty well balanced portfolio that replaced the ‘house’ offerings with Vanguard wherever possible, was a 0.6% expense ratio, and better performance. My employer matches 20% of my contribution, so it will actually outperform the Vanguard IRA, even w/ the slightly higher fees. But look at http://images.businessweek.com/mz/08/05/pop_0805_73plus.jpg
to see what 0.7% will do over 10 years compared to 0.2%!!!
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How many companies have a vesting schedule tied to their matching contribution? I just found out mine does, and if I don’t stick around for 2 full years I get nothing, then 20%, up to 100% at the end of 7 years. I understand why companies have these “loyalty incentives” but I’m pretty disappointed I don’t get to keep all the free money I was led to believe I would get.
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at my company you have to stick around for at least 5 years before being fully vested
i’ve been here for almost 9 years now.. so i’m good =)
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JD, I would be really interested to know if you knew anyone who ran a 401k plan administration company. Do you know what the requirements are?
It’s something I’ve thought of doing in the past — offer cheap investments with low plan administration fees. Everyone wins.
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I have 1 401(k)s myself, one through Fidelity from my old job and the other through a small local regional bank for my current job.
The Fidelity account I wasn’t required to roll over or anything when I left the job, so I kept it open and let the money sit. The plan seems to be decent enough.
The other plan, however, drives me crazy. I can’t check my actual rate of return nnvia the website; it’s calculated by including my contributions, which gives me no idea how well it’s actually doing. I can’t download the transactions into Quicken, or any other format that’s easily used by software (CSV, etc.). They really screwed up one of my transactions about 18 months ago, which I didn’t catch for several months, and it took about a month to get that fixed. Information about the funds they offer is difficult to get at.
I’ve considered taking the portion of my new 401k which is vested and rolling that into a new account, and possibly rolling my Fidelity one into that as well so that everything is in one place for easy management. I think Fidelity even offers that as a service. Is doing that a good idea?
My wife has a Hancock 401k and many of my complaints for my current plan apply to hers as well.
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Andy,
Can’t advise whether or not moving your accounts is a good idea.
Re: I can’t download the transactions into Quicken, or any other format that’s easily used by software.
I have had similar problems with other data on some sites. You can cut and paste web data into spreadsheets.
-Just highlight the area of the webpage you want to collect and right click/copy.
- Open your spreadsheet. I use Excel. Click on an open cell and ‘paste special’. I select ‘text’ and it fills the cells properly.
You can then massage the data any way you wish. There is a caveat. That is that some headers ( For example – Date, deposit amount, transaction code… etc..) reside within their own cell structure and may not transcribe properly. You will have to type them manually.
Thx jegan
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One needs to check the rules for 401k plans. Most of the ones I’ve had in the past had vesting rules that applied to the money in the account and not the time served with the company. For those, I had to let the money stay in the 401k for 3 years after leaving the company in order to get the match. With my current employer, the match vests immediately (=becomes mine right away).
One skill I recommend is that folks learn how to read their plan’s 5500 filings. These are filings that are open to the public and cover 401k-type plans as well as pensions (they also cover some insurance plans like vision and dental). This way one can learn what sort of fees the plan administrators are sucking out of the plan, as most plan documents will not disclose it at all. For this year, almost all 403b plans are exempt from 5500 filings. As of 2009, almost all 403b plans will have to make 5500 filings.
http://www.dol.gov/EBSA/5500MAIN.HTML
Some plans charge a flat dollar amount per year, and as many companies are trying to cut costs, the plan administrators are coming up with new ways to break up the fees. So instead of say, $25k/year for administering the plan, they’ll charge instead $4k/year plus $25/fund/employee. Many mismanagers don’t realize that when the fees are broken up that way, they end up paying more (sometimes double) the fees for administering the plans.
professorh, what you are describing sounds like a typical replacement for a pension in the educational system. Without reading your plan documents, or knowing if you have FICA withheld from your paycheck, from what you’ve described, that 9% is employer contribution towards your retirement – not a match. It is up to YOU to put your own contribution towards your own retirement. 403b limits are the same as 401k limits – which is $15,500 this year. So you can put $0 in your 403b, or up to $15,500, and if your plan is like most university plans, the school put 9% of your salary in the 403b even if you put $0.
If you are not paying social security taxes, then the 9% will replace most/all of your social security benefits – see the Government Pension Offset Reform Act for more details. Essencially, that act was a major FU to the Democratic party by punishing people who work for state governments as well as universities.
In the “for profit” world, the “employer match” would be a percentage of your salary that the employer would put into your 401k plan. For round numbers, let’s pretend you make $100k/year. If the “match” is 3%, then the employer will match $3k/year – if and only if you put at least $3k in yourself. If you put $2k in, then they’d only put in $2k for a match.
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Yeah I’ve done the copy/paste/enter manually deal with those accounts. I’m way, way behind though because it’s so tedious and time-consuming.
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It’s pretty rare to be able to transfer out of a plan while you’re still employed at the same place. It’s certainly not required by law – and thus unlikely to be offered by the worse plans. In fact in my experience even after you leave it can take a little while to get your money from their grubby paws, and they can charge you for the privelage too (I got dinged for 50 bucks personally)
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