I came across a poll by The Wall Street Journal recently that asked participants to grade their 401(k) plans. Since a large number of Americans use their 401(k) as a primary means of saving for retirement, we all deserve a good plan – but how do we know if ours is at the top of its class or just barely passing?
Here are four traits of a top-tier 401(k) plan you can use to determine whether your plan deserves an "A."
1. Two or three funds from each of the major asset classes are represented.
Mutual funds can be categorized into asset classes or types of investments they'll hold, like large companies or bonds. A 401(k) plan that offers a couple of quality funds within each of these categories makes it possible for investors to diversify appropriately. Investing across three or four of these asset classes can go a long way towards mitigating risk. At minimum, your plan should include funds that cover these asset classes: International stocks, small- and mid-cap stock, large-cap stocks and bonds.
2. The plan inclues high-quality mutual funds.
When it comes to analyzing individual mutual funds in your plan, you should look for the following traits:
- Consistent management from a person or team who's managed this fund for several years;
- How a fund peforms relative to its peers during both market up-cycles and down-cycles;
- Investments that follow the fund's mandate, which is the fund's defined purpose or style.
3. The plan offers saving and investing advice specific to you.
Unbiased retirement planning advice is one of the most helpful things your 401(k) plan can offer. A good advisor can develop an investment plan for your situation. An advisor should also help answer the most difficult question for many investors: "How much money do I need in order to retire?"
4. Fees are reasonable.
Your plan needn't have the lowest fees, but they should be appropriate. Compare your plan fees and features with companies of similar sizes and asset bases. This information can be obtained from websites like Brightscope.com, a 401(k) rating and information site.
What if your plan doesn't get good grades? There are some things you can do to optimize any plan. Specifically, be sure you're taking advantage of all the features available with the plan you've got. Many popular and useful features of 401(k) plans are often overlooked and underused, including investment advice, calculators, tools and other online resources, as well as automated features that can help you easily increase your contributions and rebalance the investments in your 401(k).
Unfortunately, most of us can't call our 401(k) plan providers and tell them to add funds or lower the plan's fees. But a step we can take is finding time to talk with our human resources department about any questions you may have. Not only will this discussion help keep your HR department accountable, but it can also open up the lines of communication – and possibly start spinning the wheels of change for your plan. Here are three questions to have in your pocket:
Are my fees competitive with that of similar plans? Be prepared with your findings from Brightscope to show what similar plans offer in fees, and have your HR department detail why your fees are at their current rate.
How did you choose the amount of funds in my plan? Your plan should have access to enough high-quality funds to appropriately diversify your investments. This doesn't mean your plan should have an endless list of fund options, though. If your plan has more than 25 fund options, discuss ways to cut down on the plan's fund choices. Too many options may lead to incorrect investing decisions or lack of participation in the plan: a popular study from Columbia University found that for every set of 10 additional fund options above 15 in a company plan, the number of employees who enrolled dropped by about 2 percent.
Is there an advice component to my 401(k)? Making an advice option available is a growing trend in 401(k) plans, as nearly three-quarters of existing plans offer some sort of help with fund selection. Find out what, if any, advice your 401(k) comes with, and discuss the ways you can benefit from the feature.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.