401(k) Gripes

During the last week, as I've done 401(k) meetings, people have complained about their investments going south. One artist said to me that he'd lost thousands in the last several months, and wasn't happy about it.

"So where did you put your money?" I asked.

"Stock funds," he answered.

"That explains it. Stocks haven't done too well the last six months."

Rule of thumb: When the stock market is kicking and bucking like a berserk bronco, investors lose money ...

Among other complaints: the administrative cost of 401(k) funds, also the limited number of funds in the 401(k) Plan.

So let me address these gripes, last to first.

No 401(k) Plan has a super wide array of funds. TAG's 401(k) Plan has more than most, but even with the three bond funds, sixteen stock funds, and six asset allocation funds, our universe is not overly wide.

You can, however, get yourself broadly diversified across different asset classes (bonds, international stocks, domestic stocks) without too much heavy breathing. And if you use the Plan's index funds, you can do it without high costs. For example:

Select Indexed Equity (Northern Trust) is a large cap U.S. equity fund with a .20% expense ratio.

State Street Global Advisors Mid Cap Equity Index covers U.S. small and midcap stocks. Expense ratio - .68%.

Select NASDAQ - 100 (Northern Trust) is a large-cap tech company index. Expense ratio - .65%.

State Street Global Advisors International Index Fund is a large cap foreign stock fund with wide global diversity. Expense ratio - .61%

To be honest, most of these index funds (excepting Select Indexed Equity) are pricier than Vanguard index funds, but still realtively low cost. A Plan participant who wanted to keep expenses down, could build a diverse portfolio of index funds, combine them with, say, the PIMCO Total Return Bond Fund (.68% expense ratio) and have exposure to most areas of the investing universe.

Understand that no 401(k) Plan is going to offer all the mutual funds a participant desires because the current thinking among fund managers is: "too many choices confuse people." And few Plans will offer participants a "brokerage window" (which enables them to pick any stock or fund they want) because the expenses are high and it might increase the Plan's liability.

The best advice I can give (and which is reiterated by investment guru Jim Cramer in his book Mad Money): All 401(k) Plans have administrative costs, so if you have the opportunity to roll your money out of any 401(k) Plan into your own self-administered IRA rollover account, do so. You'll be able to lower your future costs, and invest in any equity or bond that you like. (Note that there are limitations in most 401(k) Plan documents that limit participants' ability to roll investment money out of a plan It usually can't be done when you're employed by a company that participates in a 401(k) Plan).

As for losing money in the market, both high-expense stock funds and low-expense stock funds will be in negative territory if they're caught in a down-draft. I'll say here what I've said in various studios over the last eight days. You want to stop the big ups and downs, invest in intermediate and short-term bonds. Put your dough in the fixed investment accout, the PIMCO bond account, and the TIPS fund (Treasury Inflation Protected Securities).

You won't lose much money, but you won't make much, either. Bonds are not the greatest way to build wealth; however, they are a relatively safe haven during economic storms.

Just be aware: if your bond funds are returning 3.5% and inflation is running 4.5%, you're still losing one percent of your real wealth each year.