When you first started your job and enrolled in the company's 401(k) plan, you were presented with a list of investment options. Ever wonder how these investments got in the plan?
This wasn't the work of financial leprechauns. At some point, someone made these decisions.
If it turns out that your plan's investment choices came from a thoughtful, comprehensive, continuing review of the 401(k) plan market, you work for an unusual company indeed. At most companies – especially small and mid-size ones – the likely answer is that no one knows how the current investments in the plan got there. If this is the case at your company, your plan probably isn't serving your interests.
Chances are that your plan's options – probably mostly or all mutual funds – came pre-packaged from the platform of a large insurance company. There's nothing inherently wrong with this arrangement. But if employers fail to select a quality plan provider and hold their feet to the fire on your behalf, they can easily end up with inferior plans.
Among the typical shortcomings of plans is the offering of too few investment choices. Often, some plan options aren't really options at all because the available funds own many of the same types of stocks. This lack of diversification probably means that many employees are taking too much risk. If large-company stocks take a hit and you own several funds with a large chunk of stocks in this category, this outsized risk exposure can spell doom for your portfolio.
Desirable plans have funds that are varied in size: large cap, mid-cap and small cap. They also have varying degrees of aggressiveness to serve the needs of employees with different risk tolerances.
Many large companies have substantial resources to administer plans so that they can offer a wide variety of options and services. But many smaller employers can't. And typically, these companies lack the resources to provide employees with the education and advice they need to make investment decisions – and often fail to assure the delivery of these services by outside service providers.
You're the one who ultimately makes choices from your 401(k) plan, so you're your own financial planner. For most people, 401(k) plans are the only investments they have besides their homes, so learning to manage these investments is critical.
Since these plans were made possible by an act of Congress in 1974, employers have been legally accountable for making sure that 401(k) plans serve employees' needs. Yet enforcement of these rules has been lax.
Now this is changing. The federal Department of Labor (DOL) is holding employers far more accountable with new regulations that reinforce and expand longstanding rules. Among them are regulations aimed at eliminating unreasonably high plan fees – fees that you're paying out of your account. Also, fees that previously carried no disclosure requirement must now be disclosed in quarterly statements to employees, beginning this fall. You may be shocked at how much you're paying.