This post is part of a series where retirement expert Dan Solin offers simple answers to the ten toughest retirement questions. See all 10.
Q: How can I tell if I have a good 401k plan?
A: The best possible 401(k) plan would have no actively managed funds. It would have Target Retirement Funds, where the underlying funds are low cost index funds (like the Vanguard Target Retirement Funds).
It would also have a broad domestic stock index fund, a broad international stock index fund and a broad domestic bond index fund. All of these funds would have very low expense ratios.
This is the kind of excellent plan provided to the United States Congress and to other government employees, including the military.
Most 401(k) plans have brand name actively managed funds as investment options. My advice is to ignore them.
As long as you have at least three low cost, broadly diversified stock and bond index funds, and a selection of Target Retirement Funds, you have a decent plan.
A good plan would also have an independent advisor who agreed to be a "fiduciary" to the plan. This means that the advisor would have total allegiance to the plan participants and would not accept any compensation, directly or indirectly, from any fund that was included in the plan or from any other provider of services to the plan. Most 401(k) plans are not good plans -- at least not for the participants in the plan!
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008)
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Reader Comments (Page 1 of 1)
8-11-2008 @ 1:37PM
Jessica said...
If you are saying that the best 401(K) plans have no actively managed funds, why have you not included ETFs? ETFs, in my opinion are a much better investment choice than mutual funds, and I would prefer to have them in my 401(k) plan. If you are unfamiliar with these funds, I would suggest that you take a look at http://www.etfmarketpro.com/investors/ . I found it very easy to ready and very infomative.
8-11-2008 @ 2:25PM
Dan Solin said...
Jessica,
I am familiar with ETFs. In the Canadian version of my prior book, The Smartest Investment Book You'll Ever Read, I recommended ETFs to Canadian investors. I did so because low cost index funds are not available in Canada.
In the U.S., where we do have low cost index funds, I believe they are a better choice for 401(k) plans (and for investors generally) than ETFs, although the gap is narrowing. For an excellent article setting forth the difference between the two, please see:
http://www.altruistfa.com/etfs.htm.
8-13-2008 @ 12:36PM
Dennis O'Donnell said...
Mr. Solin...
My company's 401k is with Transamerica and has what I think are rather unusual practices. Are the following standard? If not, how can I complain? Thanks, Dennis O'Donnell
Transamerica 401k Conditions:
1) It has no prospectus for any offered funds because they are "blends" combining branded funds with annuities.
2) Price history is non-existent since prices are published only for the current day. Also, no one has been able to explain how prices are calculated. No one, certainly not me, has any idea how many shares I get for my monthly contribution.
3) In addition to fund fees, there are "transaction fees" that require a lot of digging on T-A's opaque website.
4) They do not do electronic transfers, only hard copy checks and charge a $50 "check fee" for any withdrawal of funds. If I want a regular monthly withdrawal (I'm over 60), it's $50 per withdrawal, even for the $250 minimum.
5) It took eight weeks to complete a roll-over from this account to one of my IRAs (plus the $50 check charge).
8-13-2008 @ 2:12PM
Dan Solin said...
Dennis,
The practices you note are inconsistent with my views of a good 401(k) plan. I set forth details in my book, The Smartest 401(k) Book You'll Ever Read.
For an example of a stellar plan, check out the plan the government has for its employees, including members of Congress at: tsp.gov. Compare it to your plan.
You could consider discussing this matter with your HR Department or sending them a copy of my book. It is an eye-opener.
8-19-2008 @ 1:33AM
odonnell12 said...
Thank you. I've ordered the book and look forward to it.
Dennis O'Donnell