Tuesday, July 03, 2007

New 401K Plan & Features

This is the second post in my 401K week series. Yesterday's post explained why we are dumping our current provider, ING. Tomorrow's post will cover the topic of ROTH 401K.

Without further delay, let's get to business. Here are some of the interesting features that we will be including in our new 401K plan:

1. Opt-Out 401K - I am happy to report that we have decided to go the opt-out route. From this point forward, every employee joining the company will be automatically enrolled in the company's 401K plan unless they explicitly opt-out. The default investment amount will be 6% of pay, which will give people full benefit of the company match. Regular readers of this blog probably remember that our 401K committee deliberated long and hard about this feature, but in the end we reached consensus and adopted this feature. Money contributed to the plan under the default option will go directly to the target date fund most appropriate for that employee's age.

2. ROTH 401K - this is another issue on which we reversed position. Previously we were thinking that this option will be utilized by only a small number of employees and will only add to employee confusion, however, last week we decided that the benefits out-weighed the risk of increased confusion. Tomorrow's post will cover this feature in more detail.

3. Self Directed 401K - employees that choose to do so will from now on be able to invest their retirement assets as they choose. Employees will be able to open a brokerage account within the plan, and transfer up to 70% of their assets to that account. Within that account they will be free to trade stocks, mutual funds, and options as they see fit. The downside is that the such accounts are subject to fairly high trading fees. Personally, I intend to utilize this option in order to invest in low cost Vanguard mutual funds. Even with the relatively high trading fees, the cost of investing in this manner is lower than the cost of investing in the actively managed 401K funds that predominate our plan (that is a story for another post, and a topic well worth a discussion in its own right).

4. Expanded Fund Selection - our plan offers a total of 20 funds, including 3 target retirement date funds, three index funds (international; S&P 500 and Russell 2000), a real estate fund and a commodities fund. These in addition to your everyday run of the mill funds that cover all standard asset classes. As mentioned above, most of our funds are actively managed and the average expense ratio is 1.14%. Even the index funds are fairly expensive, with the cheapest one clocking in at 0.63%. 401K plans are an expensive investment option - but more about that later this week.

Generally speaking I think that this new plan is far superior to our old ING plan. For one thing, we now have a clear understanding of the costs we will be charged. We listed them all on one form and have written confirmation from our provider that these are all the expenses that we will incur. Another big advantage is the fact that our funds are real, actual mutual funds, which have ticker symbols, MorningStar ratings and daily quotes. Now we will finally be able to understand what our money is doing... what a novel idea.

1 comment:

Traciatim said...

Wow, what I would give to have an RRSP(401K) like that. We're extremely limited in our choices where I work. We have only 13 funds available and of those 5 of them are Guaranteed income 1, 2, 3, 4, and 5 year (CD's for those not in canada, we call them GICs in Canada.). Three more are called the 'LifePlan', which are actually just preset mixtures of the remaining 5. Then we have what's left which is 5 funds:
1) A fixed Income Fund (I think my Grandma would like it)
2) A Money Market Account (Hmmm, I could open a high yield savings account)
3) A 'Balanced' Fund - Balancing doesn't mean 36% in bonds on my scales.
4) Canadian Equity Fund
5) Global Equity Fund

It's near pathetic, I can't complain too much with a 6% match I suppose. Free money is free money no matter which way you slice it. So far I just have it split up 60/40 in the Canadian and Global Equity, I sure wish we had the plans that you are offering though.

I think this may inspire me to write a suggestion letter to the Benefits Specialist tomorrow.