Why do 401k options suck so badly?

[DespotInExile]

Between my wife and I, we have a reasonably large amount of money in three different 401ks.

We've left money in 1 of my old 401ks, rather than rolling it out, because it has excellent investment options that I would not have access to through an ordinary brokerage account.

However for our current 401ks, the investment alternatives really bite. High fee, incomplete sector coverage, all active management, etc. Consequently, it is really hard to get my asset allocations right.

My wife and I have been in a number of retirement funds since I started working many years ago, and with the exception of the 401k plan I initially discussed, they all blow and I couldnt roll the money out fast enough when I changed jobs.

So answer me this: Why do 401k plans suck so much?

[Perplexity]

They don't have to. You've just been unlucky. A lot of 401k plans have great options. Complain to your HR people. Get your coworkers to complain too.

[Brad1970]

Simple solution. Put only the bare minimum in your plans to get the employer match (if you have one) & invest the rest in a mutual fund on your own. Vanguard has excellent funds & you can pretty much do everything online. Probably can set up automatic deposits from each paycheck too. If I were you, I'd do some homework & find a good fund & consolidate all of those 401's you have still around into it.

As for the 401's at work, you are at the mercy of your employer. Usually they will pick whatever brokerage & fund(s) are the cheapest & most risk adverse for them...not you.

[DespotInExile]

Sorry, my question was less than clear.

Really, I'm trying to understand how 401k options are selected, who gets paid for selecting certain options, whether my employer gets a kickback for chosing certain options, whether somebody is making 12b-1 fees or sales loads or CDSC payments, how the administrator and brokers get compensated, etc.

I'm pushing for changes at my work, but I want to understand first how the 401k system works, and what the various financial incentives are for the parties involved.

[defixated]

[ QUOTE ]

Really, I'm trying to understand how 401k options are selected, who gets paid for selecting certain options, whether my employer gets a kickback for chosing certain options, whether somebody is making 12b-1 fees or sales loads or CDSC payments, how the administrator and brokers get compensated, etc.

[/ QUOTE ]

All of these are possible, but the primary reason for reasons for severe 401k constraints is that companies have been sued for allowing too much choice (i.e., employees had lots of options, traded their retirement accounts for a big loss and then sued the company for redress). An employer might feel safer wrt ERISA fiduciary liability by offering a small set of "safe" mutual funds (even if they are awful in terms of fees, mgmt, etc.).

This is really boring stuff, but fund managers and plan administrators have to worry about it:
IRS on fiduciary duty

From Jackson Lewis:
"Historically, participant investment education has been a difficult problem. On one hand, 401(k) sponsors risk liability if they influence participants in the investment decision process. On the other, most participants lack the savvy to make decisions involving investment time horizons, modern portfolio theory or, in some cases, assessment of risk versus reward."
"...and perhaps exposure to liability -- for 'not saving participants from themselves.'"

So if you want your employer to allow self-directed options, you'll have to work through the issues in this Findlaw article with HR.

[Brad1970]

Defixated pretty much said what I was gonna say...so here's the cliffnotes:

Your employer doesn't want to get sued when you gamb00l away your lifesavings by buying shares of the internet startup company...Stealum & Cheatum Inc...that is offered by them in your 401k. Therefore, they stay with the old conservative non-sexy funds that have been around forever but don't give much back in returns.

To address the kickback issue...well that could be anything. It could range anywhere from low administration fees for your employer & to a free all expense paid vacation to Maui for the committee members who approve a crappy 401K plan...or both.

[jut111]

you think you have it bad. try working for an active management, load asset management company. Our options are restricted to our companies fund. We do get the benefit of I-shares and reduced fees but they are still pretty high and we have no indexing option. not to mention that it feels a lot like being forced to invest in company stock.

[Brad1970]

[ QUOTE ]
you think you have it bad. try working for an active management, load asset management company. Our options are restricted to our companies fund. We do get the benefit of I-shares and reduced fees but they are still pretty high and we have no indexing option. not to mention that it feels a lot like being forced to invest in company stock.

[/ QUOTE ]

Did they not learn anything from the Enron debacle? [img]/images/graemlins/smirk.gif[/img]

[maxtower]

Intel still offers its company stock as an investment option and I know people who work here who are 100% invested in that. I think there are a lot of people who didn't pay attention to Enron.

[Jeff W]

Maybe it's to get you to invest in company stock? (Horrible idea because of consumption risk, btw).

The safety arguments don't begin to explain why 401ks don't just use the "safest" Vanguard or Fidelity bond and broad market funds.