One of the tasks that goes with my job description is looking over clients' 401k plans and offering suggestions based on the choices available.
I had the occasion to do this yesterday and was dismayed at the lack of choices in terms of quantity and that almost all of the choices were from the firm administering the plan.
This is something that comes up a lot. Most of the plans I have ever looked at are extremely limited. The one yesterday had one foreign fund and one small cap fund. There were however eleven target date funds which in this case means fund of funds.
I find this to be despicable. I don't have statistics on this (this post is a rant after all) but many Americans work for big-ish companies and so their primary savings vehicle is a 401k. A crappy selection is usually the employer's fault. The plan in particular was with one of the two biggies and I have seen better plans for other employers at this same financial firm--I've also seen worse BTW.
Both Schwab and Fidelity have programs that allow access to the market via an account that quacks like a brokerage account so you can by anything you could through your brokerage account (stocks, ETFs and however many thousand mutual funds). Of course some people would blow themselves up but that can happen in any 401k plan.
I don't know if activism (IE complaining to the benefits department) can work but it is worth a try. Anyone having a 401k plan they believe to be unfriendly might want to only contribute enough to get the full benefit of any employer match and put the rest of their annual savings into an IRA of some sort (I'm not a planner, you need to figure what, if any, IRA could work for your situation). Obviously this would require a lot of discipline and if you can get a match on the entire $15,500 limit (I did not look up the catch up numbers) you need to stick to the 401k.
Now if you get a $0.25 on the dollar match for all $15,500 I think an argument for zero stock market exposure and zero bond market exposure could be made. You're already getting 25%. Not saying that's right but it is something to think about.
I'm self employed so I put money into a SEP (and also an HSA) which depending on how much you make can allow for much larger contributions than a 401k.
The bigger macro is of course saving money. As a matter of philosophy I think the amount you save should be a number that is a little difficult to get to. I also think there needs to be an element of resourcefulness and discipline. Resourcefulness to seek out other ways to save (HSAs, nondeductible IRAs and the like) and discipline to stick to it.
15 comments:
I have never liked 401Ks, especially since Enron collapsed and teh plan for employees was in transit and by the time it had arrived at the new administrator the stock had fallen to $0.50. The executives were in a different plan.
Some plans even have loaded funds (A & B shares). Many have funds created just for the specific plan to mirror funds.
I have been reading that many have stopped company matching. But, one of the problems with company matching over the years has been that the match was in stock and not in cash with sell restrictions. It was a killer for Lehman and Bear employees. I do not believe that company stock is appropriate for the 401K.
Roger,
I am surprised you use a sep. I switched to an individual 401k at fidelity a few years ago and glad I did.
BTW, I agree with Larry company stock should not be in a 401k
I'm fortunately in a plan that allows the "quacks like a brokerage account" option.
My guess is most companies rubber stamp the recommendations of plan providers because it's easy and they know no better. The people who make 401k plan decisions are probably just as ignorant of investing fundamentals as the employees they represent.
I also believe there's a lot of big brotherism going on here; God forbid if we give employees choices and responsibility for their own investments.
My company rolled out target retirement funds to HUGE fanfare a couple of years ago. "We're doubling the choices in our 401k!"
I've called and lodged complaints 3 times to no avail. The person on the other side doesn't understand the issue and is, of course, the cheapest person that could be hired.
On top of that, I'm hit with the "high income earner" issue or whatever the IRS calls it, so I can only contribute 10% of the salary instead of $15.5k. After several discussions with the IRS and my employer, I still can't figure out why the new employer has this limit and the old one doesn't (I was outsourced).
I fully agree with the criticism leveled at most employer's handling of these plans.
Also,why are 401k's and IRA's so often referred to in the media as "Savings Plans" as opposed to Defined Benefit Plans always being referred to as "Pension Plans."
That only adds to the confusion.
Maybe what is needed is for an employee to sue his employer for negligence in not allowing him/her to protect the assets in a market downturn. Boy, that would bring improvement fast.
OG
Roger - I agree and do a lot of the same anaylsis re client's 401(k)s. The target date data coming though is simply - not good, but better than if you did nothing. In addition, there is an inverse of participants v. choices - simply the more choices, the less people participate. I'm on your side on this one, but you can find the studies on-line. Is it better to get the matching and invest it poorly - or not get anything? If people were "wide awake" this wouldnt be an issue, but like most things - they sleep. Love the posts....
My company had a pretty decent 401K and was then taken over by people who swapped our good 401K for cheap crap. The company benefits, the plan distributor benefits, and the poor sap who is depending on the money for his retirement is last in line with nothing to say about the plan or the investments offered. He's screwed.
I am reminded of the vending machine "cafeterias" at companies. The company rents the space to the vendor and makes money on that. The vendor stuffs the machine with "choices" that resolve to several kinds of salted carbohydrates and several kinds of sugar carbohydrates. All cheap crap with high returns to the vendor.
The employee is captive to this scheme and has zero chance of finding a good meal. He has no say in the choice of vendor. He has no say in the choices offered by the vendor. He's screwed.
Roger, this was in the commentary on Fund Alarm today.Make any sense to you? I know you have used the fund.
Rydex Managed Futures (RYMFX): Here’s a surprisingly tough question. If a fund is making outrageous amounts of money in the worst market in 80 years using a strategy so odd that Morningstar reports that the entire portfolio only accounts for 17% of the entire portfolio (?), is that an argument for running toward the fund or away from it?
I reject the premise that the strategy is odd. Long/short based on relative strength. Good or bad can be argued but odd?
The comment about 17% of the fund seems to not understand that swap are used to create the exposure. It is like buying a call option struck at $50 for $200 and keeping the other $4800 in the moneymarket to buy the stock.
If you want to worry about something, that thing would be counter party risk.
"outrageous amounts of money?" the fund is up nicely not a lot due in large part to be long the the things that were going up when they were going up then after a one month lag being short the things that were going done (ex-oil). The fund will probably have a bad month if all the things that went down start to rocket higher.
I find it ironic that my employer, which provides an outsourced 401k solution to our clients, has garbage choices when it comes to option in my 401k.
I have dropped my contributions down to the minimum needed to get full company match. But I see no compelling reason to keep putting money into subpar investment options.
To me, "which account to put money in" is a different issue from "the choices in that account;" I do have a total bond market and S&P 500 index choices in my 401k.
I think you can make a case for "put the money in now 'cause I might be in a lower tax bracket when I retire and it can grow tax free" vs. "put it in a taxable account now and get taxed on it every year."
I am no longer convinced that I'll be in a lower tax bracket when I retire as I have always believed. They will eventually have to pay for this mountainous debt and higher tax brackets, taxing social security income, etc., etc. will be on the table.
Problem is, I have spent a career believing I would be in a lower bracket so my portfolio is very heavy in tax DEFERRED accounts.
DE {late baby boomer on the short end again}
"Now if you get a $0.25 on the dollar match for all $15,500 I think an argument for zero stock market exposure and zero bond market exposure could be made. You're already getting 25%. Not saying that's right but it is something to think about."
You get the 25% once off for one year on each contribution you make. Over 20-30 years it's only adding about 1% to the annualized returns.
Most bad 401K plans exist because the employer wants to offload all of the plan administration costs and ERISA requirements to the plan participants. To do this, the company hires an insurance firm (like AIG) to administer the plan an provide "advice". AIG then collects their kickbacks from the mutual funds to generate a profit. The best of these plans at least offer decent fund choices. The worst, only offer proprietary high cost choices. The index funds in my wife's AIG plan have an ER of 0.5% - that's high I think.
My understanding is that the Dept. of Labor is in the final stages of rule-making with regards to fee and overhead disclosures that will be required. Let's hope that the Wall Street lobby doesn't water these down.
There are even worse options and choices for teacher's 403(b) plans. Until recently, my sister was able to opt out of the group Lincoln plan and use Vanguard (but still couldn't buy ETF's etc). Now that is no longer an option.
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