i have always steered clear of my company’s 401(k) plan because i hope to be far along the road to financial independence well before 59.5, and have never wanted my money locked up for that long.

but i’ve been making good progress on that front, and recently read andrew tobias’s investment guide, with his discussion of the tax advantages of 401(k)s and roth iras, and how much more important the first contributions to each are than the last. as a result, i started thinking about dumping money into the plan for at least a few years to get it compounding and get a nice bump to my nest egg somewhere in my later years.

there’s one huge hitch: i asked the human resources department to send me another copy of the 401(k) brochure i threw away a couple of years ago, and my reading of it has left me with 0 out of 12 funds in which i would like to invest. this page is my analysis of the plan from my limited understanding, and my invitation for any help you can offer me in thinking this through.

before i get into the funds themselves, here are the requisite facts about me:

  • i’m 33.
  • i’m in the 20% tax bracket.
  • i already make the maximum annual contributions to a vanguard roth ira.
  • my company makes no matching 401(k) contribution. (repeat: none.)

the program is managed by american funds, who seem to have a good reputation, though a quick check of google news showed the start of a controversy around them just i was beginning my research.

but as popular and reputable as they may be, my first look at what they’re offering leaves me with the feeling that they’re pushing a lot of real dogs on us from both their own and other company’s funds, with almost no index funds and many of them too new even to have morningstar ratings.

(as an aside, i don’t know how loads are handled for 401(k) investments. would i be paying these 2.50%-5.75% (!!) loads each time i made a 401(k) contribution? if so, the loaded funds below have gone beyond ordinary badness into the realm of the silly.)

i don’t have wide experience in the world of mutual funds, and have just compared all of these with the vanguard funds i know and like.

my questions at this point are:

are these really as bad as they look to my inexperienced eyes? are there (well-)hidden treasures lurking here? will even the most heroic tax advantage be able to make up the shortcomings? should i just try to make the best of the worst and hope i’ll be able to roll it into my roth ira in a few years?

or should i just forget it, and go on making after-tax contributions to my individual vanguard account?

the list:

hobson’s choices
ticker name
morningstar rating
expense ratio font load

deferred load

pfmax allianz ccm mid cap a
mid-cap growth
1.11% 5.50%
has stuck fairly close to the vanguard mid cap growth fund (vmgrx), but since the latter has a 0.34% expense ratio, it would have to do 0.77% better just to match it.
pspix ubs s&p 500 index a
large blend
0.70% 2.50%
dramatically underperforms the s&p 500 with an expense ratio almost four times the vanguard 500 (vfinx). what are they smoking?
pttax pimco total return a
intermediate-term bond
0.90% 3.75%
seems to be becoming increasingly worse in comparison to the comparable vanguard fund, which has a five times lower expense ratio.
rbobx american funds intmbd fd of amer
short-term bond
1.45% 0%
this one actually dances around the top side of the vanguard offering, but when you start 1.45% in the hole, who cares?
rgabx american funds grth fund of amer r2
large growth
1.48% 0%
this one also comes out a little ahead of a couple of vanguard funds i looked at in the same category, but again, when you start nearly a point and half down, you’ll have to climb awfully high to make it worthwhile. and it’s so new and so actively managed that who knows where it will go from here?
rkbxx american fds cash mgmt trust
?% ?%
a cash fund, not on morningstar.com.
rlbbx american funds american balanced r2
moderate allocation
1.42% 0%
hugs the vanguard index, costs 700% more.
rngbx american funds new economy r2
large growth
1.61% 0%
ok, show me something more frightening than an actively-managed fund named “new economy”. and i’m going to pay them 1.61% to throw their darts?
rnpbx american funds new perspective r2
world stock
1.59% 0%
hmmm, ok, “new perspective” might be just as scary. but the new perspective seems at least to involve a chance to invest outside u.s. stocks for a change! and until recently, it’s held its own against the vanguard international index. too bad it costs 1.59% and vgtsx costs exactly nada.
rslbx american funds smallcap world r2
small growth
1.88% 0%
continuing the world tour, we’re again close to vanguard, but at a cost of almost 2%. 2%!! someone had better warm up the defibrillator for me.
rwmbx american funds washington mutual r2
large value
1.45% 0%
falling more and more behind the vanguard index fund in the same category while charging seven times more.
temfx templeton foreign a
foreign large value
1.23% 5.75%
and… we go out on a whimper. this one, the last chance to diversify out of the scary u.s. political/economic continuum, has at least been around for a little while and has started to put up a fight lately, but still vigorously earns its two star badge of embarrassment.

thanks for taking the time to look at this. i’d welcome your comments either publicly or privately.

6 thoughts on “401(k)

  1. Enjoyed your webpage. It’s always interesting to see another “your
    money or your lifer”‘s perspectives.

    My opinions on 401k’s are that they can be a good thing to reach the
    crossover point more quickly. Money going into a 401k would make 20%
    risk free for you as soon as the contribution is made.

    When you retire, roll the 401k into a traditional ira and take pre 59.5
    withdrawals as SEPP payments (sometimes called 72t withdrawals after the
    applicable section of IRS code, info is on fidelity or vanguard’s

    This avoids the 10% early withdrawal penalty although you will still owe
    income tax on the money coming out of the traditional IRA. In essence
    section 72t allows you to save for your crossover point without paying
    income taxes on your future FI capital.

    Making 20% right away will increase your capital so much that even
    crappy 1.5% annual fees won’t matter as much.

    If you change jobs you can roll the 401k into a Vanguard traditional IRA
    and so hopefully, you won’t be stuck with the high annual fees for a
    long period of time.

    Good Luck no matter what your choice is.



  2. Hello,

    Did you ever figure out what to do about your 401k, and whether or not
    to invest in it? I read your page and you raised the EXACT same
    questions I am wondering about. I also contribute the max to my
    Vanguard (index fund) Roth, and now finally have a 401k at work (with no
    match) that has all American Funds. I, too, did some research and saw
    that they had a front load, which I don’t fully understand just that
    usually people say to avoid them!

    I’m trying to figure out if I should just invest the rest of my money
    (aside from the Roth) into a regular taxable account, probably in a
    Vanguard index fund (I have started to LOVE index funds)


    1. the last time i ran the numbers, it wasn’t worth it for me to take part in the
      program. i’ve lobbied my company about switching to a better 401(k) provider,
      but though they say they’ll look into it, i don’t think they really want to
      bother. i think i’ll look at it again this year, taking the earlier comment
      from conan to heart.

      best of luck to you!


  3. Stay away from funds with front end loads,(or loads of any kind) these
    are taken out pre-investment and decrease it by that percentage. They
    charge you an annual percentage to manage your money and then want to
    charge you 2-5.75% just to deposit the money??

    Info on front end loads:

    Back end loads are where they charge you for taking money out of the
    fund. Bad also!

    401k’s offer the ability to shield more income from taxation. (roughly
    4000 for IRA’s, 15,000 for 401k) So you save what you would normally
    pay in taxes, 15-30% normally. So given that, I would contribute to it
    secondarily to your IRA and choose a no load, low fee, index funds for
    the 401k. Even if your gains are somewhat lower because of the annual
    fees, you still save the tax bite until you withdraw it and are in a
    presumably lower tax bracket. Also, you get to keep the profits from
    those additional dollars that would have gone to the IRS.

    Take care,



  4. Hey, interesting perspective on your web page.
    I might be able to give you some pointers. Feel free to shoot me an
    email and can probably assist you. I’m an avid fund investor and have
    been doing it for 6 years now. Learned everything from my Uncle, whom
    owns an investment firm.



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