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?
|expense ratio||font load
|pfmax||allianz ccm mid cap a|
|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|
|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|
|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|
|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|
|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|
|hugs the vanguard index, costs 700% more.|
|rngbx||american funds new economy r2|
|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|
|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|
|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|
|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
|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.