Getting the Most Out of Your 401k Plan

401k Plan Pluses and Minuses

With the disappearance of defined benefit pensions, 401k plans have become the principal vehicle for retirement savings by employees. Serious questions about 401k plans have been raised by John Bogle in testimony before Congress and by others. These reservations include excessive administrative costs charged against participants' accounts, excessive trading costs, excessive mutual fund costs and fees, inappropriately risky investment options and low participation rates.. Many believe that significant changes in 401k Plan regulations are needed in order to deal with excessive costs and risks and to encourage greater participation.

Employer Bankruptcy Can Also Pose Risks Due to Delays in the Distribution of Plan Assets

Another risk which has been appearing more frequently is delays and excessive costs associated with the return of assets in event of the sponsoring company's bankruptcy. The New York Times reported February 2, 2014, on a case involving Penn Specialty Chemicals bankruptcy in 2008 in which the participants' assets took five years to be distributed. Fingers are being pointed for delays and excessive fees at the trustee of the bankruptcy, C.P.A. George L. Miller of Miller Coffey Tate in Philadelphia and at the Comprehensive Consulting Group of Melville, New York, overseer of the 401k plan where fees continued to pile up for five years while plan participants awaited the distribution of their money.

Advice for 401k Participants


Before signing up for your employer's 401k plan financial advisers suggest the following:

1. Inquire about who is administering the plan and whether the fees are being paid by your employer or charged against participants' accounts. Excessive fees significantly reduce prospective returns.

2. Does the company match or contribute to participants' accounts? If not, an IRA may be a better vehicle for retirement savings. If there is a company matching contribution, most financial advisers suggest participating in the plan at a level sufficient to take advantage of the employer matching contribution.

3, Does the 401k plan offer low cost index mutual fund options such as those offered by Vanguard? Many advisers recommend no-load, low cost index funds as the best option for retirement savings in 401k plans and IRAs because the fees and trading costs of managed mutual funds reduce returns significantly in the long run. Investment of employee savings in company stock is not recommended. If the employer contribution is invested in its own stock the stock should be sold and reinvested in index funds once the required holding period has ended.

4. If you have funds in a 401k plan and change employers, consider rolling your 401k plan assets into a simple IRA investment in no-load, low cost index mutual funds rather than leaving the funds in your original employer's plan or rolling the assets over to your new employer's 401k plan. This can reduce your costs and improve your returns.

Saving for retirement is more important than ever before because of the disappearance of defined benefit pensions and the inadequacy of Social Security benefits. 401k plans are the best vehicle available for savings by most people, but you should participate with eyes wide open.


Jack Bogle Testimony on 401k Plans

John T. Bogle
John T. Bogle

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17 comments

WillStarr profile image

WillStarr 2 years ago from Phoenix, Arizona

Another great benefit would be a total tax exemption on retirement plans after the participant reaches Social Security age. There should be an age cut-off when Americans have paid enough.


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

I'm old enough to qualify for that!

401k and IRA plans can be very advantageous. My IRA is the main thing saving me from poverty. I saved regularly via payroll deductions and avoided investing in the company where I worked. I stuck with no-load, low cost, index mutual funds.


UnnamedHarald profile image

UnnamedHarald 2 years ago from Cedar Rapids, Iowa

Mr Deeds, I agree ABSOLUTELY with your statement "... and avoided investing in the company where I worked." This is rarely brought up, but many 401ks have this option. My thought on this was: if my pension is invested in my company and the company goes belly-up, I'm not only out of a job but my retirement is screwed.


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

Good point. Also, in the Detroit area where I live, home prices are affected by troubles of GM, Ford and Chrysler. Unless you happen to be an early employee of a Microsoft, Apple or Facebook, it's wise not to invest in the stock of your employer. Beyond that, investing in individual stocks is a dicey proposition. Most of us are better off in no-load, low cost, tax efficient index mutual funds like those offered by Vanguard.


JamesBenjaminJrMD profile image

JamesBenjaminJrMD 2 years ago from USA

Excellent advice : "no-load, low cost, tax efficient index mutual funds like those offered by Vanguard." Thanks Mr. Ralph Deeds.


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

2-6-14NYTimes "Ideas to Help Workers Afford to Retire" by NYT Chief Financial Writer Floyd Norris

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"The Obama plan will offer workers the chance to, in effect, get a Roth IRA. administered by the gov't, starting with as little as $25 and contributing as little as $5 each pay period. At first, it will be limited to some employers who volunteer..."


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

2-9-14NYTimes "Minimizing the Tax Drag on Your Investments" by Carla Fried

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"Unless you're a CPA the topic of taxes you pay on your investments probably has as much appeal as a root canal. Understood. Nonetheless, it’s a topic well worth focusing on. "That’s especially true if you invest in mutual funds, which are required to distribute realized gains and income to shareholders."


erinshelby profile image

erinshelby 2 years ago from United States

Useful information. Would love to see you write about "investing for dummies" and the like.


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

Thanks for your comment. A couple of thoughts: 1. Don't carry credit card balances beyond the end of the month. The interest most of them charge is outrageous. 2. Save as much as you can and put it on automatic pilot via a 401k or other automatic savings plan. 3. Invest in broadly diversified, no-load, low cost, tax-efficient mutual funds like those offered by Vanguard. 4. Instead of taking expensive vacations, freeload off your relatives in the name of family values if you have any in warm places.


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

2-15-14NYTimes "Beware of Year-end Employer 401k Match"

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"...how much it would cost employees if every employer tried to do what AOL did. The answer? Close to $50,000 in today’s dollars by the time they retired, according to calculations that the 401(k) and mutual fund giant Vanguard made this week. "


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

2-15-14NYTimes EDITORIAL "Making Retirements Less Secure"

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"It's easy to see why companies are switching to lump-sum contributions: It saves them money. They get to keep until the end of the year the money they would have ordinarily put into workers’ accounts every week or every two weeks. "


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

2-16-14NYTimes "An About-Face for the Stock Market"

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"At least this much is clear: The long view may need to be very long indeed. Sometimes five years aren’t nearly enough. "


suzettenaples profile image

suzettenaples 2 years ago from Taos, NM

Wow! Great information here on 401K's. You give some great advice and raise some good questions. Very interesting and informative to read.


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

Thanks for you kind comment, Suzette.


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

3-12-14NYTimes "The Best 401ks Set a Higher Bar" by Fran Hawthorne

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"BrightScope, a San Diego financial firm, has published a list of the top 30 401(k) plans. These standouts provide, among other qualities, generous company contributions, quick access to that corporate money, low fees and a wide array of options...."


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

3-12-14NYTimes "Annuities Not for Everyone"--(plenty of fishhooks and pitfalls)

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"Variable annuities and indexed annuities offer buyers a poor deal — even if they can figure out what the deal entails. they tend to be overly complex, as well as expensive and hard to understand, and they they are often riskier than they appear."


Ralph Deeds profile image

Ralph Deeds 2 years ago Author

3-31-14NYTimes "A Lone Ranger of the 401ks" by Gretchen Mongenson

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"The arithmetic could not be simpler. The more fees you pay in your 401(k) plan, the less cash you’ll have for retirement. But sponsors don’t always push providers like mutual funds to reduce fees or cut costs."

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