What can I do if I have a bad 401k plan

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
nepenthegu
Posts: 3
Joined: Sun Aug 18, 2013 9:03 pm

What can I do if I have a bad 401k plan

Post by nepenthegu »

Hi, Everyone:
I work for a small company. Although the company sponsors a 401k plan, the fund selection in the plan is pretty bad. There is no low-cost index fund. Almost all funds available are actively managed with a high expense ratio (1-2%). I am basically stuck with the plan for a few years. Without looking for a new job, is there anything I can do about my retirement portfolio? Thank you very much for your help!
User avatar
Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: What can I do if I have a bad 401k plan

Post by Duckie »

nepenthegu, list the funds with names, ticker symbols (if they have them), and especially the expense ratios so we can see what you've got. A "few" years of high costs is probably worth it. Is there a match? Do you have an IRA?
User avatar
JamesSFO
Posts: 3404
Joined: Thu Apr 26, 2012 10:16 pm

Re: What can I do if I have a bad 401k plan

Post by JamesSFO »

(1) Contribute if you are planning to only be there a few years, the "drag" of the high ERs may be worth it to build up tax deferred space. 3-5 years of 17.5K/year then rolled over to an IRA at that point is probably worth it if there are some decent, albeit, expensive index funds.

[This assumes the amount of your contributions would be greater than the IRA limits, if not, then just contribute to an IRA and skip their pricey 401K]

(2) Talk to management for change, a smaller company may be more amenable to changes.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: What can I do if I have a bad 401k plan

Post by Watty »

If your income is low enough then you may still be able to contribute to a deductible IRA. Be sure to look at the actual numbers since the income cutoff level is determined after a lot of adjustments are made.

If you are married then you can save more in your spouse’s retirement accounts if they have better options.

You can set up your asset allocation between your 401K and other investing accounts so that least bad funds in the 401K are being balanced out by better funds in your other accounts. For example if they have a large cap fund with a 1% expense ratio than you could hold that in your 401K but invest in bonds in an IRA.

Once you are 59.5 you may be able to do an “in service non-hardship withdrawal”(Google this) and be able to roll the money out to a better IRA while you are still working there.

Getting any employer match is almost always a good choice. The reason is that the match amount will likely earn enough to pay for the high fees. For example if you put in $1000 and get a $500 match, then a 2% fee will cost you $30 next year (1500 * 2%). If that extra $500 earns 6% then that is also $30 so you breakeven. In a few years you might leave the company, or they might improve the 401K. If you are still there 20 years from now and the plan is still bad then the high expenses on your $1000 that has grown will get bigger and start costing you more which can be a problem then.

I didn't look up the link but there is a wiki on how to campaign for a better 401K. A number of posters have been able to do this successfully.
User avatar
ruralavalon
Posts: 26353
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: What can I do if I have a bad 401k plan

Post by ruralavalon »

nepenthegu wrote:Hi, Everyone:
I work for a small company. Although the company sponsors a 401k plan, the fund selection in the plan is pretty bad. There is no low-cost index fund. Almost all funds available are actively managed with a high expense ratio (1-2%). I am basically stuck with the plan for a few years. Without looking for a new job, is there anything I can do about my retirement portfolio? Thank you very much for your help!
What are the lowest expense ratio funds offered? There are actively managed funds that are well worth using: Vanguard has funds like Wellington, and Wellesley; some American funds are good; some PIMCO funds are very good; and any Dodge & Cox fund is fine.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
User avatar
swimirvine
Posts: 371
Joined: Tue May 28, 2013 7:51 am

Re: What can I do if I have a bad 401k plan

Post by swimirvine »

If you're investing 8k per year (pre-tax) or less into the 401k and the company is not matching any of those funds, I would stop investing in the 401k. Let the money come to you in your paychecks (it would end up being around $5,500) and put that money into a Roth IRA (assuming you don't make too much) or do a backdoor Roth IRA (if you make more than $175k ... I think that's right). You could have the Roth IRA on Vanguard and do low cost index funds. Also, take into account your tax bracket now and what your think it will be when you retire to see if this makes sense. It would make sense for me because I'm assuming I'll be in the same tax bracket when I retire.

If you're investing more than 8k per year into the 401k then it's not as simple:
1. Direct or backdoor spousal Roth IRA - an additional $5,500
2. Taxable brokerage account
3. Decide on the total amount you want to invest. If it's 17.5k, let 8k come to you in your paychecks at $5,500 and put that in the Roth and invest the other 9.5k into the 401k as best as you can. You're overall ER would probably come down to below 1.0.
4. Talk to the company and other employees, perhaps you could have your 401k moved to a more respectable company or get them to add better investment choices.
The way I invest my money is not the right way to invest, it's the right way for ME to invest.
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: What can I do if I have a bad 401k plan

Post by pkcrafter »

It would be helpful if you posted funds and ERs. Keep in mind that your company may change to a better 401k. There is currently a lot of attention being focused on bad plans and high fees, so maybe your company will get the idea.

See Frontline, The Retirement Gamble

http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/

Also, it's likely you will change jobs at some point and you can then roll this plan into your new one or roll it over to an IRA. So, list the funds and we can help you select the least objectionable ones.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
gerrym51
Posts: 1679
Joined: Sat Apr 27, 2013 1:44 pm

Re: What can I do if I have a bad 401k plan

Post by gerrym51 »

one percent is not great-but it's better than 2. without knowing anything else about your plan the advice is stick with the 1 percents
slbnoob
Posts: 528
Joined: Thu Jul 25, 2013 1:31 pm

Re: What can I do if I have a bad 401k plan

Post by slbnoob »

I don't intend to hijack the thread but I wanted to know others' opinions on another issue while evaluating if a 401K is "bad".

Everyone agrees to avoid high ERs. How about the quality of the actual fund and the management running it? How can we better evaluate that? For instance, my megacorp's 401K is administered through Hewitt. The underlying funds are managed by a bunch of other entities, one of them is Northern Trust. I understand that it is common for big companies to have their 401K funds managed this way and it does result in low ERs. Mine for example are 0.04% for a US equity fund. However, these funds have no ticker symbols. They cannot be tracked conveniently like other retail funds.

Am I still fine by aiming to max out my 17.5K to this non-retail fund or should I be trying to diversify towards other more common/popular retail funds in a taxable account? I assume maxing out employer's match, Roth IRA.
The basic question I am trying to ask is: Is there a greater sense of security with bigger/more popular retail funds compared to the CIT type of thing that my employer has?
User avatar
Duckie
Posts: 9777
Joined: Thu Mar 08, 2007 1:55 pm

Re: What can I do if I have a bad 401k plan

Post by Duckie »

slbnoob wrote:Am I still fine by aiming to max out my 17.5K to this non-retail fund or should I be trying to diversify towards other more common/popular retail funds in a taxable account? I assume maxing out employer's match, Roth IRA.
The basic question I am trying to ask is: Is there a greater sense of security with bigger/more popular retail funds compared to the CIT type of thing that my employer has?
These are "trusts" and they are secure. You're better off contributing to the 401k. 0.04% is a great expense ratio. You're probably not going to get something that cheap retail.

I don't know what information you have access to online but check this Northern Trust page. Under "Analysis & Research" click on "Visit Northern Institutional Funds" then "Select A Fund" to find out details about the various funds. You'll see some of them follow an index and many of them have ticker symbols.
slbnoob
Posts: 528
Joined: Thu Jul 25, 2013 1:31 pm

Re: What can I do if I have a bad 401k plan

Post by slbnoob »

Duckie wrote: I don't know what information you have access to online but check this Northern Trust page. Under "Analysis & Research" click on "Visit Northern Institutional Funds" then "Select A Fund" to find out details about the various funds. You'll see some of them follow an index and many of them have ticker symbols.
Thanks for your response. Yes, I had checked that link earlier. Our funds are not there at least by name. As I understand, our 401K funds are in different pools, each pool managed by different companies (Northen Trust being one). These pools are then perhaps weighed differently to form the different funds offered in our 401K plan. For lack of clarity on this arrangement, it makes me not entirely comfortable.
Post Reply