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May 18, 2010
How to Make the Most of an Employer Sponsored 401(k)
Should you even bother continuing to invest in a company plan that doesn't measure up? If you're not earning a match on your contributions, your first step should be to consider a traditional IRA or Roth IRA - before steering funds into a company retirement plan that's inferior. But if you determine that the tax-deferred nature of the company retirement plan offsets the weaknesses therein, it's possible to at least make the most of that subpar plan. Here are some tips if you find yourself with a less-than adequate 401(k) retirement plan.
Go the index route
Maybe your plan doesn't feature mutual funds managed by topnotch stock-pickers. But if the plan's options include index funds - offerings that track a given market benchmark rather than attempting to beat it - you can obtain broad market exposure at a reasonable cost. Even if the index funds in your plan aren't the best, you're probably still better off going the index route than opting for a lackluster active fund. True, active managers - even the ones with subpar past records - have a shot at beating their benchmark, at least in theory. In practice, however, the active fund's expenses - as well as transaction costs that aren't reflected in its expense ratio - weigh heavily on that manager's ability to beat the benchmark.
Take the best and leave the rest
It's natural to want to design a 401(k) portfolio that's diversified across all of the major asset classes (bonds and U.S. and foreign stocks), but that might not be practical or prudent if your company plan doesn't offer viable options in all of these areas. If your plan features a few standout options and the rest are subpar, load up on the few decent funds and avoid the rest. You can use your IRA, your taxable accounts, or your spouse's retirement plan to explore asset classes and investment styles that your own plan lacks.
Investigate the brokerage window, but do so with care
Increasingly, 401(k) plans - particularly those from large employers - are offering so-called "brokerage windows," also called "self-directed accounts." If your plan offers such an option, you'll have the opportunity to get into hundreds of other mutual funds, stocks, and even exchange-traded funds that aren't part of your 401(k) plan's preset menu. But before you jump aboard, it is important to read the fine print. You may pay an extra fee to participate in the brokerage window. In addition, you may pay separate transaction costs to buy and sell securities that are part of the brokerage window.
Talk to HR
If the employees in your company are grumbling about a subpar retirement plan, let your human resources department know your dissatisfaction. Because a lot of factors - not just the quality of investment options - figure into a company's decision to opt for one retirement-plan provider over another, you may not be able to enact change overnight. Still, it is important your employer be aware that its benefits package isn't measuring up.
Check into other options
If you've determined that your company plan is weak, that means you'll have to make the most of all of the investing options available to you, tax-sheltered and otherwise. Investigate whether you're eligible to contribute to a Roth or other IRA, and plan to max out your spouse's plan if it's better than yours. Also be savvy about investing in your taxable accounts.
If you have any questions regarding the details discussed herein, please call us to schedule a meeting to discuss which options are available to you, and what best suits your situation. If you have any 401(k)'s still with a previous employer, now is the time to roll them over to a self directed retirement account.  We invite you to schedule a meeting to discuss the advantages and disadvantages of your company 401(k), your Traditional IRA, or Roth IRA. We look forward to being of assistance to you.
Joseph M. Dowling, CPA                                Sean Dowling, CFP
President, The Dowling Group                         Vice-President, The Dowling Group