This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

10 Signs Your 401(k) Plan Is a Clunker

5. Retail share classes are in the plan when institutional classes are available: I recently reviewed a plan that had 13 mutual funds as investment options. All were retail shares. Every one had institutional shares available. What's the difference? The retail shares have higher management fees. Otherwise they are exactly the same. The only reason to include retail shares when less expensive institutional shares are available is to increase fees and lower returns. This practice is indefensible.

6. The money market fund has high fees: In many plans, the money market fund is the default where assets are placed if the plan participant does not make another choice. The management fees charged by money market funds can really affect your returns. If the money market fund in your plan has an expense ratio higher than 0.25%, it should not be in the plan.

7. The mutual funds in the plan have high fees: Brokers typically populate fund options with high-cost, actively managed funds (where the fund manager attempts to beat a given benchmark). The fees charged by these funds range from 1.5% to 2% (or more). A blend of comparable index funds has fees under 0.50%. The difference comes right out of your returns.

8. Mutual funds in the plan underperform their benchmark: Most actively managed mutual funds underperform their benchmark index. I looked at a plan where more than 70% of the funds failed to equal their benchmark. Why are those funds in the plan when low-cost index funds will equal their benchmark 100% of the time (less low expenses)?

9. Funds drop in and out of the plan: A charade takes place at most companies with 401(k) plans. The investment committee meets periodically with brokers advising the plan to decide which funds will be dropped and which ones will take their place. This makes everyone feel they're doing something useful, but it's a useless activity. Past performance is not an indication of future performance. Poor-performing funds may or may not outperform in the future. Stellar-performing funds typically underperform in the following five years. It also ignores a key issue: If the broker really had the expertise to pick superior funds, why is this exercise necessary at all?

10. Many investment options: Many fund options confuse plan participants. Few participants know how to put together a risk-adjusted portfolio in an asset allocation suitable for them. Instead of offering a boatload of funds, your plan should have a limited number of pre-allocated, globally diversified portfolios of stock and bond index funds, ranging from conservative to high risk. Plan participants should fill out a simple asset-allocation questionnaire to determine their risk level. They should then select the portfolio suitable for them. If all 401(k) plans followed this practice, returns would increase significantly.

>To submit a news tip, send an email to: tips@thestreet.com.

RELATED STORIES:



Follow TheStreet.com on Twitter and become a fan on Facebook.

2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,669.36 -211.00 -1.25%
S&P 500 1,940.83 -29.24 -1.48%
NASDAQ 4,387.2720 -75.63 -1.69%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs