My Company’s 401k Plan Sucks

I’ve been at my new job more than 90 days now, which means I’ve finally eligible for benefits, including the company 401k plan.  Being the finance nerd that I am, I couldn’t wait to get home and research my new investment options on Morningstar.  Boy was I disappointed.

First, the good part:  my company matches 50% of the first 6% of my own contributions.  Not a great match by any means, but I’ve never had one before so I’m pretty excited about it (benefits at small companies tend to be lackluster at best).  The bad news?  This is by far the worst 401k plan I’ve ever had the pleasure of investing in, and I’ve had some pretty bad 401k plans in the past.

Who Wants To Make Somebody Else A Millionaire?

401k plans like this exist for one reason:  to make everybody except the investor rich.  What does a bad plan look like?  Let me share.

• Not all asset classes are represented – The plan has plenty of large-cap growth and value funds, but only one extremely expensive small-cap fund and one (likewise expensive) bond fund.  There are two international funds, but they are both expensive actively-managed funds with poor long-term performance records.  Real estate or commodities?  Nothing even remotely close.  It is simply impossible to build a decent, well-diversified portfolio with what’s offered.
• Only one index fund – My plan does have an SSgA S&P 500 index fund with an expense ratio of just 0.18%, but all the other options are of the expensive actively-managed variety.  I’m sorry, but I refuse to pay somebody 1.5% of my assets per year to buy large-cap stocks.
• No life-cycle funds – Target Retirement funds are all the rage these days, but apparently my program administrator didn’t get the message.  I’m a do-it-yourself-er so I probably wouldn’t invest in a target fund anyway, but for the majority of workers who don’t know what they’re doing and don’t care to learn, I think they are the best choice.  Every plan should have one.

What Am I To Do?

Most of the investment options suck, but the match and tax benefits of investing in a 401k are too great to give up.  I’m going to contribute 10% of my gross income and just put it all in the SSgA S&P 500 index fund, which is the only decent investment option.  Is it a balanced, diversified portfolio?  No, but my contributions won’t be large enough to really throw off my overall asset allocation.  Eventually, I’ll move on and roll over the money in this plan to my Vanguard IRA and all will be right with the world.

In the meantime, I will continue to max out my Roth IRA and beef up my taxable account.  Ideally, I’d like to add another $10,000 to my emergency fund as well, but most people would say my emergency fund is far too large as it is, so it’s not my top priority.