Dealing With a Bad 401(k)

What should you do if your company’s 401(k) plan is no good?

Well, let’s back up. How do you know whether it’s good or bad? Generally, a good plan offers a wide variety of investments with low fees and a healthy company match. Let’s take them one by one.

Investments

There should be a variety of mutual funds focusing on stocks of big, small and foreign companies. There ought to be a good long-term bond fund, as well as a money-market fund for parking cash. Participants are probably best served by index-style funds rather than actively managed funds with higher fees.

These days, a good plan also has target-date or life-cycle funds that automatically move money from stocks to bonds as the investor gets older. These funds also have an often overlooked side benefit: They automatically adjust their holdings every year to keep the asset allocation on track, a chore many investors neglect or don’t know how to do.

A good plan does not put too much emphasis on the employer’s stock, which is often used for the company’s matching contributions. Although participants have the right to get out of employer stock, the fact that the company is using it indicates it is putting its own interests ahead of the employees’. Concentrating a lot of money in one stock is just too risky.

With a little sleuthing, you can find out how your plans funds do against the competition. Find your funds’ ticker symbols and look them up at Morningstar.com.

Match

In a good plan, the employer matches a healthy portion of the employee’s contributions. Some companies make a dollar-for-dollar match up to a maximum, but a 50-cent match for every dollar the employee contributes is common as well. The higher the maximum, the better. A limit of 3% of the employee’s income is common, but some companies go to 5% or 6%. A match in the form of employer stock is less desirable than one allowing the employee to choose the investment.

If you liked this article you might like

Why You May Not Want to Pay Cash, Own Your Home Free and Clear

Now You Can Get That Home Equity Loan in a Comfortable Hybrid

If Retirement Health Care Costs Look Scary, Try These Tactics

Why Buying Bonds With Negative Yield Isn’t as Weird as It Sounds

Investors Turning to Dividend-Paying Stocks See Benefits of Buybacks, But Must Heed Caveats