Nov 11 2009

5 Things to Do When You Have a Bad 401(k) Plan.

401(k) plans can be a great way to save for retirement and let your savings grow tax-free. But the plans are chosen by employers and managed by 3rd parties and don’t always have the best options. IRAs give you the entire universe of investments to choose from, but most employers offer a free match on a percentage of contributions to the 401(k) plans by the employee. So what’s an employee to do when the 401(k) plan has lousy investment options?

Here are 5 options, though there may be more.

1. Be an index hugger.

If your 401(k) plan offers index funds, then you can still get broad-based exposure and diversification at a low cost. You won’t be beating the market, but you won’t under perform the market either.

2. Take the best and move on.

If your 401(k) plan has one or two excellent funds and a dozen other mediocre funds, take the one or two and skip the others. This may seem like you’re not properly diversifying, but you should consider your entire collection of assets when diversifying, not just a single account.

For example, say your 401(k) plan has one excellent blue chip stock fund, and an equally excellent small cap stock fund, but the bond funds are lousy. You should invest in the stock funds offered by your 401(k) and invest the overall bond allocation in some other account, like an IRA account or maybe your spouse’s 401(k). Each individual account will be non-diversified, but when taken together your total assets will be diversified.

3. Look into the “window”.

More and more large employers are offering 401(k) plans with a “brokerage window” or “self-directed accounts.” These options allow the employee access to hundreds or thousands of other mutual funds, ETF’s and even individual stocks that aren’t part of the standard 401(k) plans options.

Be sure to investigate the details and learn about any additional fees or transaction costs that may be associated with the use of the “window”. There may be additional work on your end as well, since this option is unlikely to be available for automatic contributions like the standard 401(k) options. You may need to fill out additional paperwork or make other such declarations.

4. Talk to HR.

If you think your 401(k) plan stinks and you can get other coworkers to join you, you can petition your HR department to change the plan, or go with a new plan provider altogether. The more employees unhappy with the status quo, the more likely you can get your employer to change things.

5. Check out other options.

If all else fails, you can always go it alone with an IRA account. But if you get a company match on your contributions, then pick the best fund that’s offered and contribute at least enough to get the full company match and put the rest in an IRA. There’s no point in passing up free money, no matter how lousy the fund options are.


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