This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
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
TheStreet Open House

How to Make the Best of a Bad 401(k)

NEW BERLIN, Ill. ( TheStreet) -- Chances are, you have a 401(k) or some other sort of Qualified Retirement Plan such as a 403(b), 457 or some other numerical combination. And chances are, unless you're in the extreme minority, your 401(k) plan has some features that are lacking. Most often, we'll see such things as limited options for diversification (although this is less likely these days), expensive fund choices and limitations for access to funds (not necessarily a bad thing).

How do you make the best of a bad 401(k)?

Unless you're in the extreme minority, your 401(k) plan has some features that are lacking, and you'll have to go through the funds to see where the weaknesses lie.

Review your fund options carefully. You should have the basics available to you in terms of diversification choices: domestic stock, international stock, money market (often referred to as stable return or something similar) and fixed income or bonds. If you don't have at least these basic allocation options available to you, you need to have a serious talk with your administrator.

Determine what your allocation plan should be. Chances are, you don't need all of the funds in the list. Often the list of options is much more than is necessary to get appropriate diversification in your investments. The basic options I mentioned earlier should be enough to cover the bases -- domestic stock, international stock and bonds. As your assets increase you may want to diversify further, such as by splitting your international stock into emerging markets and developed markets, but that's a topic for more advanced portfolio design.

The key is to determine what your allocation needs are and match them to the fund choices in your plan. Studies of portfolio construction have shown that 90% of success in investing comes when you have the appropriate categories represented, and the remainder is based on the actual investment choices used, expenses, timing, and taxes, among other things.

Look at the internal expense ratios for the funds. If your fund choices have expense ratios of 1% or more, these are some expensive fund options. Look at it this way: If the benchmark for your allocation category has a 7% return for the year and the fund you're using has a 1.5% expense ratio, just doing as good as the index will leave you with a 5.5% overall return once the expenses are removed.

If you truly don't have lower expense options to choose for a particular allocation category, all is not lost. As I mentioned, it's actually much more important to have the diversification, even with the drag of excess expenses, than to not use a particular category in your diversification.

Consider your investment options outside the plan. You should also diversify with regard to tax treatment of your investments. In addition to the 401(k) plan, you should have a Roth IRA and possibly even a taxable investment account. When you set up these accounts and contribute to them regularly, you can make it so you have much better choices to take the place of some of the more expensive options in the 401(k).

In addition to providing yourself with better investment options, these accounts can give you additional access to funds that could be limited in your 401(k). An example would be the ability to access Roth IRA contributions without tax impact.

Readers Also Like:

>> 5 Bank Stocks Yielding Over 6%

>> 4 Resilient Tech Stocks for a Tough Economy

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
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!
SYM TRADE IT LAST %CHG
AAPL $126.37 2.53%
FB $83.20 -0.13%
GOOG $552.03 0.67%
TSLA $190.57 3.01%
YHOO $44.95 -0.33%

Markets

DOW 17,976.31 +263.65 1.49%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

Partners Compare Online Brokers

Free Reports

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