The Best 401k Plan

Here's the next item I wanted to cover from Kiplinger's "The Best List". Today, we're highlighting the best 401k plan:

The Best 401k Plan: It could be yours.

There's a good chance your plan will get better as a result of a new law that allows plan providers to give one-on-one investment advice. Or you may be able to participate in a managed 401(k) account, in which financial professionals make investment decisions for you for a flat fee. More 401(k) plans are expected to adopt target-date retirement funds -- which invest in a mix of mutual funds that grow more conservative as you near retirement -- as their default investment.

I am a huge fan of 401k's -- especially when the employer matches a portion of your contribution. There's nothing better than FREE MONEY, huh?

My employer matches the first 3% of my contribution dollar-for-dollar. That's a 100% return on 3% of my salary even before the money gets invested into a mutual fund (where it will earn even more.) I don't know about you, but anything that gives me a 100% return is a good thing!

I think 401k's should be used in conjunction with Roth IRAs to maximize your retirement savings. To see my thoughts on this issue as well as a whole host of information on retirement, review Best of Free Money Finance: Retirement Posts.

Comments

[Jeremy]

The best 401k plan is simply one that you participate in!

It is a shame more people do not see the value in the wealth building tool that most employers provide them with. I help manage a 403(b) plan for a company and it is my job to get people enrolled, help them with their investment options, and hopefully secure a better retirement. Unfortunately, it is still difficult to have enrollment top 75%. We even offer a match like yours, dollar for dollar with a 3% max, and people will still turn down a 100% return, I don't know why.

Luckily I have one of the best jobs I could think of having, and I am in a position to hopefully convince people the importance of enrolling in their plan. I get to speak at all of the new employee orientations to talk about the plan and outline why it is so important.

My biggest roadblock right now is getting through to the younger people, who of course are the least likely to enroll. It doesn't matter how you explain it, or paint a picture of what retirement will be like without social security or a pension, a lot of people under 30 just refuse to have any concern.

Some employees I talk to about the match, even though it is free money, they still don't want to enroll. Yet, I'll ask them if their bank offered a savings account of 100%, would you put your money in that bank? They always say yes, but then I immediately say ok, sign up for the retirement plan and that can happen. They still won't sign up.

Oh well, hopefully with help from all the finance bloggers out there we can help encourage people to take advantage of a wonderful tool at their disposal.

[Binary Dollar]

Yeah how can you pass up free money?

[Foobarista]

I've been in a couple companies where the 401K was truly awful: no match (fairly typical in startups) and a small set of awful funds with big loads and tons of fees. The problem is that small companies are too small to directly use big outfits like Vanguard or Fidelity, which won't work with a company unless its total employee 401K universe is over $1M. There are a few "aggregators" that let small companies use these, but they're fairly expensive for the company.

"Cheap" 401K providers for small companies make their money by getting kickbacks from the expensive funds they put in as "choices".

Even with this, a 401K can still be useful for tax deferral, especially if you change jobs frequently - or end up as a "serial lifer" like me in startups that die :( In this case, the best move is to either go with the cheapest fund, find a fund that balances your general asset allocation (ie, there's usually an international or emerging-market fund - these usually have some fees even in the open market, so it's often the least awful fund in the mix expense-wise), or just dump your money in the MM fund and fight like heck for them to move to a new 401K provider. If this doesn't work, roll it over to a self-managed IRA as soon as you leave the company.

If you're in this situation, fund the Roth _first_, then use the 401K if you need the tax deferral.

[Lazy Man and Money]

I have the same situation that Foobarista has, with a no-match 401K and funds with high fees (one fund was something like 2.5%). Still I will max it out every year, probably before September if I can.

I wish I could participate in the "Free Money" - It's much better than having to pay for your money :-).

[Foobarista]

Fortunately, my current company has a S&P index fund, with lowish fees - it's the Schwab fund. It ain't VFINX, but it's definitely vastly better than anything I've had in my previous three companies. All my 401K deposits go there - I use other accounts to round out the asset allocation.

[Foobarista]

One thing I'm glad to see in the Kiplinger article is it's promoting of Self-Employed 401Ks. These _are_ truly wonderful, and PF bloggers - not to mention a shocking number of accountants and advisors - seem to not know much about them.

[Janet]

I love the 401K even though I'm not elgible for company match until I've been there at least a year. But my company offers a variety of low cost funds from Vanguard. And the 401K lowers my taxable income which in California is better than nothing.

But the company allowed me to sign up and make contributions after a month of employment, which is amazing. My previous job of which I last a lousy three months wouldnt let me sign up for the 401k unless I worked a year! I had to wait a whole year before signing up. That didn't make sense to me.