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Dealing with a Crummy 401(k) Plan

By Frank Armstrong

By now you should have received your first mandated disclosure on your 401(k) plan. If nothing else, requiring employees to be furnished with relevant information on the costs features and performance of their retirement plans will prod plan sponsors to clean up crummy plans. There is nothing like potential liability and class action law suits to focus the mind on reforms.

Take the time to read it. It's important to your future. I hope you have the world's greatest plan, but some of you will find that your plan sucks. Now what?

The 401(k) as an investment plan

The 401(k) is an investment plan first and foremost. Merely having a plan is not the same as having a good plan. As investment solutions, plans divide themselves into the Good, the Bad and The Ugly. Since you have to provide most of the money from your own pocket, you must decide if the plan is worth participating in.

In my experience, many 401(k) plans can't stand on their own as superior investment programs. The knee jerk advice to max out you plan may not be the best possible course.

Tax advantages are not the whole picture. The chief tax advantage of a qualified is deferral of tax on investment earnings. But, someday that tax and tax on all the account earnings will come due. Unless you are in a lower tax bracket after retirement, the tax advantage is negligible.

By far the biggest advantage of a 401(k) is that it makes savings automatic. That's a good thing, but you can perhaps get a better result if you set up another more effective investment plan. Of course, you will have to supply the discipline to make sure you actually save.

The Good: Of course, some are world class with low costs, superior funds, and great underlying features. Of course, if it's a great plan, you can't go wrong by maxing out your contributions. Lucky you! Go for it!

The Bad: Some plans are tolerable with a few good choices. Perhaps those have a strong match by the employer which overcomes some of their flaws. When we consult with our executive clients we are often in the position of having to select the least awful choice from a dismal lineup. But, forget about being able to construct an appropriate asset allocation plan within the plan. Sometimes we will invest the minimum to get the match and invest your other retirement savings elsewhere.

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