Thursday, May 01, 2008

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.

21 comments:

Anonymous said...

Steve - Thanks for the great info. BTW, where is there a schedule published of upcoming 401K sign-ups, question/answer meeting? (is there one?) I've been waiting for a postcard or some kind of notice. Thanks in advance.

Anonymous said...

Long term, people; think long term. If you're a 20-something or 30-something investor, you're only harming yourself if your money is in something like a bond fund. Stock have always and will always fluctuate, but over the long term they out-perform bonds by quite a stretch.

Don't look at short-term returns so much if your goal is decades away.

That said, everyone has a different risk tolerance level, and should invest accordingly. If you don't like the potential of significant losses, then don't invest in stocks. But don't expect your investments to do as well during boom times, either.

Anonymous said...

quote:

(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).


I looked into this, and was told by a representative of the company that holds our 401k plan that the only way to roll my money into an IRA was to disassociate myself completely from the Guild itself.

Were they wrong? It seems if I were to stop paying my dues, leave the Guild for the sole purpose of rolling my money into an IRA, and get another Guild gig--I would have to pay my initiation dues all over again.

Sounds kinda screwy to me.

Anonymous said...

Most 401k plans are offered by companies, and when your association with the company ends (resign, layoff, fired), you can roll over your 401k into an IRA.

Since this 401k is through the Guild, your association continues even when you change studios, so it's probably not possible to roll over unless you quit the Guild. It would be silly to quit just for a rollover though, as you point out.

Anonymous said...

I took my guild 401 and moved into an IRA without too many problems. The only problems I had is with the company that runs the guild's 401 - they needed to be walked through the process.

Anonymous said...

So...can you be persuaded to give us more details? Please? With sugar on top?

Anonymous said...

Initially we just requested to empty out the 401k with the intent of using that money to open the IRA (if you have a certain period to do that in before the money can be counted as income) eventually the the company I was opening the IRA with just had them transfer the money directly to them. There was some clumsy paperwork and phonecalls that occurred, but it went reasonably smoothly.
It probably also helped that I hadn't been contributing to the 401because of being non-union for awhile.
I suggest finding a company to open the IRA with and working with them to handle it all.

Anonymous said...

Then it's safe to assume that your "non-union" status (i.e., you probably weren't paying your dues) enabled you to become eligible to transfer your money out of your 401K and into an IRA.

Here is--again--the point made earlier: if one is still an active Guild member, then it's impossible to roll over a 401K into an IRA.

Thanks for the "hot tip."

Anonymous said...

Sorry if I didn't make that clear, but I am and always have been a dues paying Guild memebr. I wouldn't have responded if I hadn't been able to respond to your mistaken concept.
So the 'hot tip' is that you are wrong in what you claim is impossible.

Anonymous said...

When I said "I was non-union for awhile" I guess it should be understood I meant I was WORKING non-union for awhile.

But I defer to your superior knowledge.

Anonymous said...

Hey Steve,

I kept hearing about ROTH 401k. Can we setup something like that for the Union? Obviously, you can't convert current 401(k) into ROTH 401(k). It has to be a new entity.

Please look into it. There are more and more corporation is doing it.

Steve Hulett said...

I looked into this, and was told by a representative of the company that holds our 401k plan that the only way to roll my money into an IRA was to disassociate myself completely from the Guild itself.

The company rep is wrong.

TAG 401(k) Plan documents state that you must be out of the industry for ninety (90) days.

So ... if you're on layoff for three months or longer, you can roll your money out of the Plan and into an IRA rollover account.

Steve Hulett said...

Then it's safe to assume that your "non-union" status (i.e., you probably weren't paying your dues) enabled you to become eligible to transfer your money out of your 401K and into an IRA.


Actually (technically) no. The Plan document says you can't be working in the Los Angeles area cartoon business to pull your money out.

But it's difficult for the Animation Guild or the Plan to track people who are working at non-signator (non-union) L.A. cartoon studios. So rollover for people in this category do occur, even though technically, they're not supposed to.

Steve Hulett said...

I kept hearing about ROTH 401k. Can we setup something like that for the Union? Obviously, you can't convert current 401(k) into ROTH 401(k). It has to be a new entity.

At this point, the TAG Plan doesn't offer a Roth option. Why? Because the Plan, being multi-employer, is already complicated, and the administrator isn't keen to add another layer of complication. (There would have to be tracking of "traditional 401(k) accounts, also of ROTH accounts. And until recently, the Feds were planning to "sunset" ROTH 401(k) accounts.

My suggestion: If you're really keen on turning 401(k) money into a ROTH IRA, you can roll 401(k) investments over into an IRA rollover account, then convert the rollover account into a ROTH account.

The drawback: You'd have to pay taxes on the conversion, just as you would pay taxes turning a traditional IRA into a ROTH IRA.

C.M.B. said...

Unless you plan to retire soon you have nothing to be worked up over. If you're in your 20s, even 30s, now is an excellent time to buy for the long term.

Anonymous said...

i understand it is complicated to setup ROTH 401k. i do not care what administrator think. it is all about benefiting members in the union as a whole not the admistrator. we pay admistrator to maintain our funds.

you are doing a good job to keep us inform. but we can't pass an opportunity like ROTH 401k. if the Feds were planning to "sunset" ROTH 401k, this is another reason we should pursue further.

imagine how many people would invest into union 401k plan if we have ROTH 401(k)?

please reconsider it.

Anonymous said...

I have to agree with John here-frankly, if it's just too much more "complicated" to administer the other type of 401k--tough.
Want complicated? Try performing any one of our jobs. You do what your clients request. Why should they call the shots based on what they want to do or not do?
Perhaps we infer too much weight given to the diffculty factor in their thinking, but it really isn't our problem and just seems a lame reason on its face.
Not putting that on YOU, btw Steve.

Steve Hulett said...

I'll bring up the subject of Roth with the plan advisor and trustees next week.

Please get folks to give some feedback on this, as I need more than a couple of people making their feelings known.

Anonymous said...

I've noticed that nobody seems to mention if there's 'administrative' fees that fund managers charge for performing a rollover. What, if any, is the typical cost for executing a transfer?

qatsel said...

R10'nun geçen aylarda başlatıp Adtech'in sponsor olduğu adtech ile reklam 2.0 dönemi başlıyor ve Trkycmhrytllbtpydrklcktr r10.net seo yarışması sitesi. / Tamamen ücretsiz her alanda ödev sitemiz..
Seo adına en güzel makaleler adtech ile reklam 2.0 dönemi başlıyor ve Trkycmhrytllbtpydrklcktr r10.net seo yarışması sayfası.. Toplistimize anında site ekle yin..
Yarisma sitemize bekleriz..

Anonymous said...

araç sorgulama

Site Meter