Really, I’m not always angry. I’m pretty calm when I’m petting my dog. But reviewing peoples’ finances does tend to show you a million ways someone has figured out how to cheat people out of their money. Recently, I’ve started to wonder whether corporate 401(k) sponsors are better at it than Bernie Madoff. Or Fabrice Torre. Or whoever is the crook of the day.
One of the ways financial crooks operate is that they count on no one paying attention, or people not understanding investments well enough to question anything. So take a moment—do you know what you invested in in that 401(k)? (I could also ask, do you have any old ones laying around from previous jobs that you’ve forgotten about, or, are you even contributing, but those are subjects for another post.) Typically, people pick investments that are labeled “growth”—who doesn’t want growth?—and to those I say, remember the adage, “Give a dog a good name”. Or maybe it’s a Target Date Fund—often I see several different target dates, because who knows when you’ll actually retire. Ugh.
But even setting aside our own individual dumbness, if you work with any number of companies (even the Fortune 100, who should know better), you’re still stuck, even if you know what you’d like to invest in. The choices are limited, the funds offered are often load, actively managed, and with high management fees. Even if the plan has negotiated a lower rate, it’s still the same lousy fund. Yes, you’re supposed to be given more information nowadays on what those fees actually are, but there’s no requirement to offer you a wider selection of funds.
So, pull out that plan document or go to your employee benefits website. Look for the following:
- Are there index funds available in large (S&P 500), mid-cap, and small-cap funds; corporate, government, and international bonds; international developed and emerging markets; and some alternatives (such as real estate, commodities, or, if you must, gold)? It’s pretty hard to build diversification if you don’t have many choices. And if all the choices are stocks, it’s going to be impossible for you to make truly tax-savvy choices as your account builds.
- Is it sponsored by an entity with “private banking” in the name? You’re probably being screwed. Law firms and medical practices are particularly vulnerable to pitches that sound elite. The only thing elite about this is the much higher fees and much poorer investment choices—elite for the “private bankers”.
- Does Morningstar list the funds? If the funds aren’t publicly traded, good luck trying to get a prospectus or even any statement about what investments are actually in the fund. And forget any ability to actually get an independent opinion, rating, or comparison of them. Oh wait, maybe that’s what they wanted. Some of the descriptions I’ve seen of these private investments can only be described as wishful thinking, er, pipe dreams, er, misrepresentation, er…
- Do you recognize any of the funds? Vanguard, Fidelity, American Century, TIAA-CREF—not all have my favorite investments, but at least you’re working with well-observed entitites. You probably haven’t heard of the “Maximize Growth Special-situations Fund”–guess why?
Here’s an issue where well-paid executives are just about as vulnerable as the average receptionist–perhaps more so because their account balances are likely to be larger investments in crummy funds. And even if you’re smart about investments, you still may be trapped without choices.
So, what to do? If you get an employer match, it’s still usually worth contributing. But contributing up to the full legal limit to get the tax benefits? Well, it depends—and for that one, you do need a financial advisor to take a personal look. And, radical thought though it is, you could actually save money outside of your 401(k), where you control the investment choices.
For a really excellent article on what you can do about a lousy 401(k), run out to the newsstand (or subscribe online) to the latest issue of Consumer Reports. They sound pretty angry, too.
