What to Do if You Have a Bad 401(k) Plan
The federal government's General Accounting Office (GAO) recently issued a new study warning that 401k service providers may be conflicted when providing financial education about investment funds, due to revenue-sharing arrangements with the institutions that provide these funds.
So while you might think you're receiving general investment education, providers of the funds might actually be highlighting their own funds as examples of funds in each asset class, particularly if the 401k provider receives greater compensation from the financial institution sponsoring the funds. The report also warned that you might be directed to IRA rollovers that have higher fees or products that may not be appropriate for your situation for this same reason.
According to industry experts, many sponsors of small plans may not be fully aware of their fiduciary responsibilities, or know that participants may be bearing high administrative costs. I agree with this observation; I've seen executives of small businesses wear many hats, and they often don't have the time or expertise to pay attention to their 401k plan. This usually isn't the case with larger employers that have trained staff members who take the time to study the most appropriate investment funds for plan participants. These larger companies use their buying clout to negotiate arrangements with 401k providers and financial institutions that are typically better than what you could arrange on your own.
For the purposes of this article, I'm defining a "small plan company" as one having under 500 employees, although this definition is somewhat arbitrary. You can find plans much smaller that are being run quite well, and you can find larger plans that have the problems mentioned above.
So what can you do to protect yourself, particularly if you work for a small employer? First and foresmost, take the time to analyze the funds in your 401k plan. Are the fees higher than average? Is performance below average? You'll find this kind of information about thousands of mutual funds at www.morningstar.com. You can get some information with a free membership, though you'll need a paying membership to view the full range of information. If you have substantial 401k accounts, it might be worth it for you to pay the annual fee. You could also ask if your employer would pay for a membership for its employees. If not, you might want to share the cost of membership among a few of your friends at work.
Suppose you do this analysis and find that the performance of your funds is below average? What can you do about it? First, tell your employer, who might appreciate the legwork you've done. This might help encourage your employer to negotiate better funds with your 401k provider, or to shop around for a better deal. You might also get asked to volunteer to be on a committee of concerned participants -- say yes!
If you're stuck with below-average funds, then your decision is whether to contribute to the plan. In this case, I'd still contribute enough money to get the full employer match. Even with poor fund performance, you'll accumulate more money when you add in the employer match, compared to just saving on your own.
It's a tougher decision whether or not to contribute unmatched money to your 401k plan -- do the tax advantages outweigh poor performance? That's a complex analysis that's really beyond the scope of this post -- and beyond the capabilities of people who are mathematically challenged. But here are some ideas and considerations:
- If you think you'll leave this company for another job or retire within a few years, you might still contribute to get the immediate tax advantages. Then when you leave, roll the money into an IRA that you've carefully researched to maintain these tax advantages.
- Your 401k plan might allow in-service withdrawals at age 59-1/2. If you're close to or have attained this age, contribute to get the immediate tax advantages. Withdraw your accounts when you reach age 59-1/2 and roll the money into an IRA. Each year thereafter, you can continue to contribute to your 401k plan, then periodically withdraw your new contributions and roll them over to an IRA. Be aware of any restrictions your 401k plan may have on how frequently you can withdraw from the plan.
- Choose index funds if they're offered by your 401k plan. There's a good chance they might outperform actively managed funds that have higher fees.
- Some plans may offer "broker windows," where you aren't confined to the investment options in the plan and you can direct the investments to almost any mutual fund or individual stocks and bonds. While you'll be required to pay an annual fee, most of the time, this fee is small enough that you'll accumulate more money compared to staying with the underperforming funds in your plan.
While all this work may seem like a lot of trouble, you'll be putting thousands of dollars more in your retirement pockets over your working career if you put in the effort, so it's well worth it. Don't wait for future government regulation to address the problems identified by the GAO report -- take matters into your own hands now!
More on MoneyWatch:
- 9 Signs Your 401(k) Stinks
- 12 Dumbest 401(k) Mistakes
- How to Get Retirement Income from Your 401(k)
View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
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