Monday, December 14, 2009

Questions for Your 401K Plan Administrators

Not all 401K plans are created equal - some can be pretty good while others lack important features or impose ridiculous costs on participants. In my previous company I was involved in running my employer's 401K plan (read this post for that interesting story). In my current company I haven't done anything about our plan, primarily because I thought it was reasonable from the get-go, but also because I found my work as a new executive to be extremely interesting and challenging - quite frankly, I just didn't have the time. It has been almost two years since I started my current position (it's amazing how quickly time passes), and I am now thinking about pushing for some changes in our 401K plan. This week a plan representative will be coming to visit us for a "lunch and learn" session and I was planning on bringing up a few issues that I think we need to address. Here they are:

Roth 401K - my company offers only a traditional 401K plan. No Roth 401K. Given prevailing expectations that tax rates will only go up in the coming decades, being able to squirrel away retirement savings without having any future tax liability is a pretty attractive proposition. Alpaca and I "make too much money" to invest in a ROTH-IRA, but participation in a ROTH-401K has no income caps. The mission: get my company to adopt a ROTH-401K option.

Expenses - as far as I can tell, Fidelity has been pretty above board with their disclosure of plan expenses. Checking my 401K account the other day, I was able to find a line that stated very clearly a charge of $30 for plan expenses in 2009. Obviously, this charge is on top of any expenses charged by the mutual funds themselves. Nevertheless, 401K plans are renowned for having all kinds of hidden fees and charges. In my former company even the 401K committee (of which I was a member) did not have clear information about what our employees were paying in fees. We were simply unable to get that data from our plan provider. Fees are a major scourge of the long term investor. They can quietly leech away returns without a lot of evidence that this is happening. The mission: get full disclosure of plan fees.

Index Funds - most of my 401K money (70% of my allocation) is directed towards Fidelity's excellent total market index fund, with an expense ratio of only 0.1%. However, this is the only index fund available in the plan. International index? Nope. Bond index? Niet. REIT index? Better luck next time. Once again, it goes back to the issue of expenses. I don't believe that fund managers can beat their benchmark indexes in the long run, and if that is the case, why should I pay them for the disservice they are doing to me? The mission: Let's have more index funds and fewer fees.

Automatic Re-balancing - Fidelity offers automatic re-balancing of plan funds, but it only allows this on an annual basis. I re-balance my funds quarterly (I think it's particularly important after such dramatic asset price increases as we've had in recent months), but I need to do this manually. The mission: can we have quarterly automatic re-balancing options?

Opt-Out Enrollment - I am a big believer in the concept that employers need to nudge employees to make the best long term decisions. Automatically enrolling people in the 401K plan unless they opt out is a great way to send a signal to people that they should be thinking about saving for their retirement.

My company's 401K plan is run by Fidelity and overall, I am very happy with the plan. Documentation is plentiful and simple to understand, the website is easily accessible and manageable, and fund choices (for the most part) are reasonable. Still, there is always room for improvement.

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Joel said...

Hi Shadox

I was thinking of writing a few posts about starting a new business as a way out of unemployment, the temptation to take a job offer, finding the right partner etc.

If you think this could be of interest to your readers, I will be happy to give it a shot.

Anonymous said...

Regarding rebalancing in non-taxable accounts, it would seem that for large sums of money it may be beneficial to rebalance daily (as fees are insignificant). Apparently, this is how David Swensen manages the Yale Endowment Fund. Any thoughts?

Shadox said...

Joel - as I responded privately, I would love that.

Anon - I have no objection in principle to this approach, however, trading costs are rarely negligible. If you plan to follow this strategy, you should ensure that your investment firm will not place excessive trading restrictions or fees on your account. Even if the fee is $5 a day for all your transactions, you will still be incurring a very large charge on an annual basis.

If the fees are indeed negligible for you, there should probably be little harm in that strategy, but probably very little benefit as well. The deviation from your desired allocation on daily basis should be minute.