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Dealing with a Crummy 401(k) Plan

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Is your 401(k) plan good, bad, or ugly? Frank Armstrong tells you what to look for and some investment alternatives.
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The 401(k) is an investment plan first and foremost. But merely having a plan is not the same as having a good plan. As investment solutions, plans divide themselves into the Good, the Bad, and The Ugly. Since you have to provide most of the money from your own pocket, you must decide if the plan is worth participating in. Remember, tax advantages are not the whole picture. The chief tax advantage of a qualified plan is deferral of tax on investment earnings. And by far the biggest advantage of a 401(k) is that it makes savings automatic. That's a good thing, but you can perhaps get a better result if you set up another more effective investment plan.

In my experience, many 401(k) plans can't stand on their own as superior investment programs. The knee jerk advice to max out you plan may not be the best possible course.

The Good

Of course, some are world class with low costs, superior funds, and great underlying features. Of course, if it's a great plan, you can't go wrong by maxing out your contributions. Lucky you! Go for it!

The Bad

Some plans are tolerable with a few good choices. Some have a strong match by the employer, which overcomes some of their flaws. When we consult with our executive clients we are often in the position of having to select the least awful choice from a dismal lineup. But forget about being able to construct an appropriate asset allocation plan within the plan. Sometimes we will invest the minimum to get the match and invest your other retirement savings elsewhere.

The Ugly

And finally some are simply not worth investing in. The plan is expensive, the choices are awful, and the match by the employer is little to none. We routinely see 401(k) plans where the total cost approaches and even exceeds 3% of the entire employee’s account each year! How do you think anybody can meet their reasonable retirement objectives with 3% of the account being sucked out each year? In some cases the account expenses can far exceed the employer’s match!

First, Work with Your Employer

If your pension plan sucks, you have alternatives.

The first and best option should be to work with your employer. Depending on the circumstances you might either urge them to offer a plan or improve an existing plan. Squeaky wheels get oiled far more often than silent ones. So, squeak up.

Most employers have a strong preference for happy secure employees. So, they may be sensitive to your needs for a decent retirement plan. But, it's unlikely that they will spontaneously decide to offer a plan or improve an existing plan without a little prodding. After all, they are in the business of making widgets. While the quality of the 401(k) plan may not exactly be topmost of their concerns, they really don’t ant employees to be unhappy with the benefit package. And in most cases they are participants too.

Even in large companies many professional HR people may not understand the fiduciary obligations of a plan sponsor. Frequently they are unaware of the basics of plan design and funding. To put it bluntly, they may be completely clueless about plan defects. However if you show them ways to improve the plan while cutting costs and reducing the employer's liability, they just might get motivated.

Other Alternatives

  • If the plan is mediocre, perhaps with a strong match, find the best choices, invest the minimum to get the match, and look for other investment opportunities.
  • If your spouse has a better plan, cram everything you can into it. Together you may be able to meet the family retirement savings goal.
  • If your income is within the IRS limits, set up an IRA for yourself. Don’t forget that if your spouse isn’t covered, you may be able to set up an IRA for her too. Consider the Roth IRA if your income falls within appropriate limits.
  • Invest in a tax-efficient family of index funds. You will want the minimum tax drag from your portfolio, and the minimum cost. Just two index funds like the Vanguard Total Stock Market and Total International Stock Index provide effective, economical tax- efficient global equity diversification.
  • Whatever you do, don’t invest in an individual fixed or variable annuity for your retirement investment account. That’s a product that exists only to make insurance agents and stock brokers rich.


A bad 401(k) won't get you where you want to go. And you shouldn’t invest in it if it doesn’t stack up on its own merits as a superior investment plan. Take the time to evaluate your plan and decide if you want to participate or not. If your employer won't fix it, you still have alternatives that make good economic sense.

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