What's your advice for a non-PP-friendly 401(k)?

[concerned752]

Been a while since I've posted here. Hope all is well with everyone.

My company switched to a new 401(k) plan at the beginning of the year, and we just had the plan presentation this morning. As you'd expect, the fund options are less than stellar--they're all through American Funds, all actively-managed (as far as I can tell), and all but one has an ER over 1.3%. Ugh.

I'm in my early thirties, and I actually haven't saved for retirement for the past two or three years as my income and expenses have changed dramatically--we've had two small kids, and we're trying to manage on just one income so my wife can be a stay-at-home mom. We're working on moderating our lifestyle, but it's a process. I'm also ramping up the income I'm bringing in on the side.

That said, my company offers a 100% match on the first 3% of income contributed to retirement, and it's dumb to turn down free money even if the fund options aren't great. I figure we can stretch to at least hit that minimum, and then start contributing to a Roth IRA once we've made the transition to living well under our means.

Until then, all I've got is the "3% of income" contribution. I've searched the forums and read through a few threads on what to do with less-than-stellar 401(k) fund options, but I couldn't really tell if there's "standard" advice.

The way I see it, I've pretty much got these options:

1) Allocate the money to the stock fund that most resembles a broad-based index, or that has the lowest ER (if anyone familiar with American Funds can make a recommendation, I'd appreciate it).

2) Allocate the money to the US Treasury money market fund, which has the lowest ER (0.63%). From what I can tell, though, only 21% is in US Treasuries, with the bulk (64%) in "Government Agency Securities" (no idea what those are).

3) Count the contributions toward my Variable Portfolio, and just drop them into a target date fund.

Advice? Suggestions?

[Dieter]

Yuck. If it were me, I'd go with a Target Date fund, selecting bases on allocation, not date. The most conservative probably is closest to the PP stock allocation.

But then, I'd probably go 50/50 to 70/30 in a Bogglehead style portfolio. Aka, that is roughly the allocation I have in my 401(k).

[KevinW]

Those funds are pretty bad. I would just put 1/3 in whichever stock fund has the lowest ER and 2/3 in whichever bond fund has the lowest ER.

Have you inquired about whether there is a brokerage window option?

[concerned752]

Thanks for the help, Dieter, Desert, and KevinW.

How many target date fund choices do you have in your 401k?

Ten, in five year increments from 2010 through 2055. ERs range from 1.5% to 1.7%, increasing the further out the date is. The 2020 appears to be the most "balanced" across growth, growth-income, equity-income, and bonds.

https://www.americanfunds.com/funds/det ... 020/a.html

I honestly don't know what those terms mean since I've been perfectly content with how a total market index fund just distributes across all sectors.

Have you inquired about whether there is a brokerage window option?

Yes. There isn't. 

[concerned752]

Do you have access to all the funds in that drop-down list in the link?

No. I have access to all the retirement target date funds (not the college series). Also the following:

• AMCAP
• The New Economy Fund
• New World Fund
• SMALLCAP World Fund
• The New Economy Fund
• Fundamental Investors
• Investment Company of America
• Income Fund of America
• Global Balanced
• High-Income Trust
• Bond Fund of America
• Capital World Bond Fund
• US Government Securities
• American Funds Money Market Fund

[KevinW]

I honestly don't know what those terms mean since I've been perfectly content with how a total market index fund just distributes across all sectors.

They are all different types of equity (stock) funds. You can look up terms like these at http://www.investopedia.com/ .

Also the following:

• AMCAP
• The New Economy Fund
• New World Fund
• SMALLCAP World Fund
• The New Economy Fund
• Fundamental Investors
• Investment Company of America
• Income Fund of America
• Global Balanced
• High-Income Trust
• Bond Fund of America
• Capital World Bond Fund
• US Government Securities
• American Funds Money Market Fund

I still recommend a conservative blend of the cheapest stock fund and cheapest bond fund. If I'm not mistaken they are Income Fund of America and The Bond Fund of America. Average ER would be around 0.60% which isn't great but could be worse. BTW, these fund names are hokey!

[Pointedstick]

I still recommend a conservative blend of the cheapest stock fund and cheapest bond fund. If I'm not mistaken they are Income Fund of America and The Bond Fund of America. Average ER would be around 0.60% which isn't great but could be worse. BTW, these fund names are hokey!

I'm sure the high ERs go toward funding the marketers and psychologists who come up with the fund names. Jeez, who wouldn't want to invest in the Income Fund of America or The New Economy Fund?

[KevinW]

I'm sure the high ERs go toward funding the marketers and psychologists who come up with the fund names. Jeez, who wouldn't want to invest in the Income Fund of America or The New Economy Fund?

To top it off, they're all registered trademarks. 

[concerned752]

I'm sure the high ERs go toward funding the marketers and psychologists who come up with the fund names. Jeez, who wouldn't want to invest in the Income Fund of America or The New Economy Fund?

Sad thing is that the ERs listed in the marketing materials they sent us are higher: 1.36% each for the Bond Fund and the Income Fund. I'm guessing that's including whatever commission the 401(k) plan advisors get when we buy the funds.

[number5858]

How about lobbying for a better 401K. And I agree with the suggestion to see if they have a brokerage window. If they do, then problem solved.

[concerned752]

How about lobbying for a better 401K. And I agree with the suggestion to see if they have a brokerage window. If they do, then problem solved.

Hey there number5858 -- you'll see earlier in the thread that I did ask about the brokerage window, and they don't have one.

I have lobbied for a better 401(k) -- I'm thankfully in the position to talk frankly with leadership, and I did several times before they selected this advisor, specifically advocating for low-expense index funds, and going so far as to recommend a few. Unfortunately, I'm no match for a well-rehearsed sales pitch.

The curious thing is that during the presentation, he said a lot of things that are sound advice, but that don't square with the funds he selected, e.g. the power of compound interest, not trying to time the market, etc.

One thing he said that did rub me the wrong way is that he framed American Funds as an underdog who don't spend a lot to market themselves, while Vanguard and Fidelity sponsor events like "yacht races and golf tournaments." Of course, the implication of that language is that the cost for all that expensive marketing is built into the funds that Vanguard and Fidelity provide, and that they must therefore be expensive.

I went up to him after the presentation and asked if it would be possible to add other funds to our portfolio options, but he said that's up to my management. So I might have an opening there, but I'm doubtful--I'm pretty sure the advisor's firm is under the same corporate umbrella as American Funds, so it wouldn't surprise me if that's all they'd offer.

[Pointedstick]

Love the ticker. AAAAAAA! GTX! It's like it's encouraging you to run far, far away.

[concerned752]

Holy crap!

The 2040 Target Date fund has a 5.75% up-front sales charge AND a 0.76% expense ratio?  Am I reading that correctly?

5-year comparison with Vanguard's 2040 fund:



Vanguard's expense ratio is 0.18%. 

I think I know who is buying the yachts.

Thanks for this! I just sent it in an email to leadership.

[concerned752]

Holy crap!

The 2040 Target Date fund has a 5.75% up-front sales charge AND a 0.76% expense ratio?  Am I reading that correctly?

I think he has a different share class, one with higher ER but without a front-end load.  This summary prospectus shows the dizzying array of possible share classes:
https://www.americanfunds.com/pdf/rpgei ... d2020p.pdf

Do you know what share class your 401k offers? 

Honestly, this fund doesn't look too bad, other than the ER.  And at a small company, sometimes you just have to suffer through, build your account balance, and then roll it over to an IRA when you leave the company.

I don't know what share class we're in ... all I know is that the ER in the pamphlet said something like 1.5%. I think if you do the math, that works out to the ER plus the 5.75% up-front charge. At least, the numbers happened to match up when I ran it through the FINRA analyzer.

When you say "this fund doesn't look too bad", are you referring to the 2020 or the 2040?

[Ad Orientem]

My sympathies. That is indeed one of the crappier 401Ks I have seen. I will second the suggestion to go with a blend of the cheapest stock fund and the cheapest bond fund available. And definitely have a talk with management about the 401K. Be polite, but let them know that it contains a very poor selection of funds that are grossly overpriced. Give them a copy of the Bogleheads Guide to Investing or something.

And DO NOT put a dime into your 401K once you have tapped out the matching funds.

[concerned752]

401k plans almost always waive the front end load by using a different share class than retail A shares. They also layer on additional fees to compensate the brokers [if any] and the administrator who takes on duties such as filing annual form 5500 returns, record keeping, etc.

That makes sense. The ERs we're quoted in the pamphlet are about double the percentage that American Funds lists on their website.

Thanks again for all the advice, folks. I think I'll just treat it as part of my variable portfolio, pick the 2040 target date fund, and allocate no more than 3%.

[foglifter]

I've been thinking about the question of a less than desirable 401k plan for quite awhile. After reading lots of articles on the Web that cover the topic I've stumbled upon this brief and well-written post by Mike Piper. Being a CPA the author presents a logical set-by-step process of thinking which makes the article quite practical. I found it very helpful.

http://www.obliviousinvestor.com/how-ba ... o-skip-it/

[concerned752]

I've been thinking about the question of a less than desirable 401k plan for quite awhile. After reading lots of articles on the Web that cover the topic I've stumbled upon this brief and well-written post by Mike Piper. Being a CPA the author presents a logical set-by-step process of thinking which makes the article quite practical. I found it very helpful.

http://www.obliviousinvestor.com/how-ba ... o-skip-it/

Good read -- thanks for sharing. Pretty much the direction I'm taking -- go for the match, then to an IRA, then consider taxable vs. 401(k).