How to get what you need in your 401(k)
Reprinted courtesy of MarketWatch.com
Published: March 20, 2013
To read the original article click here
In my previous column, I named 10 asset classes that will turbocharge the all-important equity part of your 401(k) retirement plan. Over the long haul, they have the ability to significantly improve your financial future.
But there’s a problem.
Very few 401(k) and similar plans give you access to all these asset classes. When I studied the 100 largest plans in the U.S. two years ago, I found not even one that included everything I recommend.
Fortunately, there are solutions to this problem, and I’ll discuss three of them here.
To recap what I recommended last week, your 401(k) investments will serve you best if the equity part of your portfolio includes the Standard & Poor’s 500 Index, U.S. large-cap value stocks, U.S. small-cap stocks, U.S. small-cap value stocks, U.S. real estate stocks (REITs), international large-cap stocks, international large-cap value stocks, international small-cap stocks, international small-cap value stocks, and emerging markets stocks.
I recommend that you own those 10 in equal proportions. If you can. And there’s the rub.
Here’s what a reader named Andrea told me in an email: “Wouldn’t it be great if most 401(k)s actually had ALL those asset classes? Sadly, most don’t.”
She’s right.
Every 401(k) plan will let you invest in the type of stocks that make up the S&P 500 Index. Most will give you a U.S. small-cap option and at least one international stock option. But it’s very rare to find international small-cap value stocks, for example, in such plans.
Things are gradually changing for the better. As I said in a reply to Andrea, I remember how few 401(k) plans offered low-cost index funds 10 years ago. Now that is common, though not universal. What’s needed is to keep educating investors, and eventually the trustees of retirement plans will get the message. Meanwhile, what can you do?
I see three major ways that you can get access to the asset classes you need and deserve.
One: If your plan has an option to direct your own investments, use it. I believe that nearly every plan run by Fidelity has a self-directed option. You’ll retain the convenience and tax advantages of your 401(k), and you’ll gain the ability to choose what you want. It’s like having a brokerage account inside your retirement plan, with all the options you need.
If you take this route, by all means avoid the temptation to buy and sell individual stocks or mutual funds run by “hot” managers. Instead, find low-cost index funds to gain access to the 10 equity asset classes that I recommend. Or buy ETFs. You will find my specific Fidelity, Vanguard and ETF recommendations here.
A self-directed plan, if you can use it, is most likely your best bet. But there are other options, too.
Two: Consider doing what’s known as an in-service transfer or in-service distribution, if this choice is available to you.
After your leave your job, you can move your 401(k) to a Rollover IRA. If this is done properly, there are no tax consequences and you get the benefit of being able to invest in everything I recommend. What you might not know is that many retirement plans have provisions that let employees roll over some (but not all) of their 401(k) balances while they are still working.
The details can be tricky, and you’ll need to make sure you are doing this properly so you avoid a potentially expensive tax bill. Whether — and how — you can do this depends on your age and the rules of your specific plan.
You can read up on the subject in a good article that you’ll find here.
Three: Persuade the trustees of your plan to offer more options. This will take some work, and the probability of success is uncertain. Still, if you can succeed in making a change, it will be well worth your while.
If you and enough of your fellow employees make your wishes known, you may be able to get the trustees to add options such as funds that invest in small-cap stocks, value stocks and international stocks.
To do this successfully requires that you know who makes the decisions about your plan and to understand what you want and why it is to your benefit and the benefit of your fellow employees.
This may sound daunting, but remember, the trustees of your plan are likely to be executives or officers of your company. Most likely they have their own money in the same plan. That means that what you want — better options — is in THEIR best interests as well as yours.
When you contact them, make sure they have copies of this great article that lays out the case for these important asset classes.
Next week: Four more smart moves you can make to get the most from your 401(k) plan.
Richard Buck contributed to this article.
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