4 Ways to Fix a Lousy 401(k)
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Carla Fried
Daily Capital
January 27, 2012

There’s no question – a 401(k) is still one of the best ways to save for retirement. They give investors valuable tax breaks and the ability to contribute a hefty $17,000 this year, or $22,500 if you’re 50 years or older. But let’s face it, plenty of 401(k)s offer a lineup of underperformers, and can often come with high fees. A recent survey by 401(k)source.com reports that investment fees among 401(k) plans with at least 100 participants and an average account balance of $50,000 ranged from 0.28 percent to 1.63 percent. If you’re paying 1.63 percent, that extra 1.35 percent is quite a headwind in world where stock total returns are expected to hover in the mid-single digits.

But don’t resign yourself to feeling screwed. Even though you’re captive to what your plan offers, you can often make the best of the situation by staying on top of all the options. Here are a few tactics to consider:

  1. Find out if your 401(k) is a real dog. Size up your 401(k) at Brightscope.com, which has detailed ratings for hundreds of 401(k) plans that takes cost, company match, and fund investment options into account. If you confirm you’ve got a laggard on your hands, by all means harp loud and clear to H.R. that you deserve better options. But even the best-case scenario – that is, they listen! – will take time. So while you’re waiting. …
  2. Search for one strong fund option in your 401(k). Scour your current investment options and look for the fund that offers the best combination of low costs and strong performance. If your plan uses retail mutual funds, it’s easy to size up funds at Morningstar.com.
  3. Load up on the best fund. Yep, this is a recommendation to forget about diversification. One of the common mistakes investors make is to think that each different retirement account – current 401(k), Rollover IRAs, regular IRAs, taxable accounts – must be perfectly diversified. But that’s so not it. You want to think of all your different retirement accounts as pieces of a puzzle that when combined create one unified, picture-perfect diversified portfolio.
    So rather than have a perfectly diversified 401(k) full of sub-standard funds, keep your 401(k) invested in the best option offered in the plan. Then adjust your other retirement accounts accordingly. For example, let’s say your 401(k)’s only decent option is an international stock fund while the domestic stock and bond options are dogs. Consider piling your 401(k) money into the international fund. Then tinker with your other retirement accounts where you have complete investing flexibility – IRAs, Rollovers, regular taxable accounts. In this example you would reduce your international stock holdings in those portfolios and reallocate more into domestic stocks and bonds so your overall retirement allocation strategy remains on target.
  4. Strategize with your spouse. If you’re married and you both have access to a 401(k), here’s another way to sidestep bad 401(k) funds. Let’s say your plan offers up a great bond index fund while your spouse’s plan is full of bond clunkers. Instead of you both owning bonds within your respective 401(k)s it makes more sense for you to overload on bonds in your plan and have your spouse skip ‘em. Or if both 401(k)s stink in the same asset class, take a holistic look at all your other investment accounts and see if you can forego that asset class in your 401(k)s and over-weight them in your other accounts where you have complete freedom to pick the best investments.

This story originally appeared at Daily Capital.