Your Personal 401(k) Handbook |
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How to Spot a Bad 401(k) Plan
Don't fool yourself. Merely signing up for your company's 401(k) plan is not going to guarantee you an easy retirement. In fact, it could fool you into a false sense of security. Give your 401(k) a good look and -- if it shows any of the characteristics listed below -- you might want to start thinking about bolstering your other investments. You may also want to raise your concerns with the benefits manager.
Low contribution limit: Watch out for plans that won't let you contribute more than 5 percent of your earnings.
No borrowing: A few plans do not allow their participants to borrow against their principal in cases of hardship.
Low or no match: Cheapskate companies may not match your contributions at all, in which case you might want to think about diversifying your retirement investments (while still keeping in mind the tax-deferred advantage that even a lousy 401(k) can offer). About 15 percent of plans out there make no match whatsoever. Others may match you with company stock, which is better than nothing, but not nearly as good as a cash match.
"Cliff" vestment schedule: For those who don't plan to stay long with the company, being vested all at once after, say, five years will significantly affect the back-end value of your contributions. It's better than nothing.
Limited investment choices: Beware of 401(k)s that won't let you distribute your contributions among a wide array of investment choices.
Infrequent statements: If you hear from your plan managers less than once a year, something is wrong.
Load pass-alongs: Does your plan make you pay the loads on mutual funds? They shouldn't.
High annual asset base charge: Whether you know it or not, your plan managers are charging you an invisible fee to manage your account. The average yearly fee, deducted directly from your account, is 1 percent of the fund's value. Some funds can charge as much as 2 or 2 1/2 percent. Watch out for these.
No trade access: You should have the ability to move your assets from category to category on a daily basis. After all, it's your money.
High-minimum mutual funds: Some plans offer mutual funds that require you to make a high minimum contribution -- such as $1,000 -- to participate, according to John Cheplick of Pension Analysis, a California investment firm.
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