401k Questions

[NashVegas]

Oh great wise ones! Some advice, por favor?

My company added a 401k plan just over a year ago. This has been my first time getting my feet damp in the investing world. I've done okay so far, mostly because in the middle of last summer I started taking a harder look at my original investment directions (basically I was clueless and just copied from our accountant, figured she knew what she was doing), better-researched various funds, and made some changes. But I'm only getting about a 5% return.

Our company plan allows us to choose from about 40 different funds, yet the institution we're going through says, on their website, users have access to some 7,000. I'm assuming that the ones chosen for us were all picked in a 'mutual funds for dummies' kind of way. Of the 40 or so offered, less than 10 have returns in the double digits. About half are returning over 5%, and the rest are tanking.

So here's the question: if I pull out now and immediately transfer to an IRA, do I still take the hit on taxes? And, which is more recommended: Roth or traditional?

[MsTryska]

1. is your company matching?

if so, then i would keep contributing. you can't beat free money.

you could change your contributions to take advantage of soem of the doubledigit earners, and keep a chunk in a more moderate bracket too.


and then open up an IRA above and beyond what your company offers.

[scruffy]

2. You can't roll it into an IRA . . .

if you are still employed by the company. Your only options are to stop contributing and let it sit or to choose different investments.

BUT - if this is your first 401(k) and if you have years to go before retirement, I would do some research into the funds available and choose a couple that are fairly aggressive. I say this on the assumption that you won't be needing this $ for many years . .. if that is the case, you have plenty of time to ride out whatever the stock market may throw at you. I would rather invest aggresively when young than be too conservative and regret it later.

When you say that of the 40 funds offered, less than 10 have returns in the double digits . .. what time frame are you looking at - and what kind of funds are they? Lots of funds last year were more or less flat, although international ones did pretty well. If you're young, you don't need to be looking at bonds, balanced, or even lifestyle funds.

All in all, I would say stick with the 401(k), put in as much as you can afford, and do some research to check out some equity funds that will give you a decent return.

[Rich Hunt]

3. Thanks....

I was wondering about this, too.

[Onlooker]

4. You can do a Roth IRA

I'm pretty sure in addition to your 401K, you can put money into a Roth IRA, which most people say is the first place you should put money because you pay no tax on the gain (provided you don't withdraw early). My brother-in-law who's a CPA and accounting professor says Roth IRA first, 401K second.

Also, keep in mind that the whole retirement system in this country is a mess. Pension plans were far better, especially given the cost of housing, college, etc., which make it hard for people to save. That said, you should max out the Roth IRA, and then max out (or put as much as you can) into the 401K. If the company matches any part of 401K investment, be sure to put at least that much into the account.

Also, you're probably a long term investor, in which case you should as someone else suggested invest somewhat aggressively, but research the funds and make sure they're rated well. A friend of mine who works for a large mutual fund company says that there's a general feeling that large caps (i.e., big companies) will do better than small caps in the next year or two.

[Sammy Pepys]

5. Don't pull out of a 401(k) to go to an IRA....

Consider your time horizon and what kind of risk you're comfortable with. Also, if you're company is matching dollar for dollar, that's free money...so you may be able to take on a touch more risk than you think. You should be able to build a pretty good portfolio with 40 fund choices.

The breakdown of funds and how they're doing sounds about right, actually.

[faithnotgreed]

6. what if youre no longer working for that company?

i have a very small amount in an older 401k that i was recently reminded about
but i no longer work for that co

should i roll it over into a roth?

[we can do it]

7. 401k's Should Be Transferred Into Traditional IRAs, Correct?

[A HERETIC I AM]

8. Yes. Do a "rollover" from your 401(K) to an IRA

Going from a 401(K) to a Roth creates a so called "Taxable Event" because the monies that went into the 401(K) were pre-tax funds. They are taxed when you draw them out. A Roth is monies that are after-tax funds so when you draw them out they are tax-free.

[A HERETIC I AM]

9. Rollover from the 401(K) to a Traditional IRA - NOT a Roth....

Rolling to a Roth will cost you in taxes. Rolling to a Traditional wont cause the taxable event.

[B Calm]

10. The only time you can pull out and roll into an IRA is when your

employment ceases. Most plans will allow you to roll it into an IRA and stay with the same 401K company with basically the same investment funds that you had in your 401K. If you take it to a financial advisor like Dean Witter /Morgan Stanley, etc. and roll it into an IRA, chances are they will invest it into loaded funds and charge you for their service.

[A HERETIC I AM]

11. There is a problem with your suggestion.....

Virtually every single 401(K) program out there limits the investor/employee to a small selection of investments, usually less than 30 funds or "funds of funds", usually each with a specific objective spelled out; Aggressive Appreciation, Growth, Income and Growth, Growth and Income and Income and perhaps a few others (International and Real Estate funds, for instance). Rolling a 401(K) into an IRA allows the individual to now select from the entire universe of investment options and vehicles. Staying with the same 20 or 30 funds offered by a 401(K) provider is sort of like opening the barn door to let the horse out into the large pasture but keeping him tied to the barn.

BTW, the sun doesn't rise and set on no load funds. Many are quite good to be sure, but many more still have higher internal expenses and expense ratios, higher 12-B-1 fees and are often out performed in their peer group by loaded funds.

The family of the American Funds didn't get as large as they are because they suck at what they do. American Funds is the largest Mutual Fund Family available (as far as assets under management is concerned) and has been around since the 1930's. They have an enviable track record.

You pay a sales charge or a markup or a commission on everything you buy. Securities are no different.

[wakemeupwhenitsover]

12. Do you have a link to back that up?

BTW, the sun doesn't rise and set on no load funds. Many are quite good to be sure, but many more still have higher internal expenses and expense ratios, higher 12-B-1 fees and are often out performed in their peer group by loaded funds.

I also notice that you write many more still .... & are often out performed. You didn't write always out performed.

Also, when someone hires a financial planner doesn't the financial planner get a commission also? So wouldn't a person in effect be charged twice, once by the broker & once by the manager of the fund?

[A HERETIC I AM]

13. Unfortunately, not when i am at home. The research tools aren't available on my personal computer.

But here are some excellent no-load fund families.

Dodge & Cox funds. Been around since the 1930's, excellent performance, well managed - no-load fund family;

http://www.dodgeandcox.com/

Their Stock fund, while unfortunately closed to new investors, has had 14.23% average annual return for the last 10 years.
http://www.dodgeandcox.com/pdf/shareholder_reports/dc_stock_summary_123106.pdf

Vanguard, another excellent fund family;
https://flagship.vanguard.com/VGApp/hnw/HomepageOverview
Their Equity Index fund has had 9.24% average annual return for the last 10 years.

https://flagship.vanguard.com/VGApp/hnw/FundsFeesMinimums?FundId=0065&FundIntExt=INT
The issue i see with that fund is the minimums required ($3000.00 initial investment) and they will liquidate if the balance falls below $500. No 12-B-1 fees and low expenses (.31%)

The above is all good news.

The American Funds fund family, one of the largest if not the largest loaded fund family has expenses that are below the industry average;
http://www.americanfunds.com/about/different/value.htm

Unfortunately, I don't have access to Morningstar's Adviser workstation here at home. If i did i could give you precise examples that would more specifically address the point you raised in your post by running a hypothetical 10 year comparison report on specific funds from different no-load and loaded fund families. I concede that my wording in my previous post was imprecise and, since prudence as far as this forum is concerned, demands specific clarity, i will endeavor to avoid such imprecision in the future.

Can an individual do well investing in no-load funds all by himself with no help? Absolutely. But the way i see it, researching through all the companies that offer mutual funds and through the over 10,000 funds sold by them is a daunting task, even for someone with nothing but time on their hands. The measure of a funds performance is often graded on what they did over the last 3,5 and ten year periods as well as "Since Inception" figures. What is just as important in my mind is how well a given fund performs during Bear markets, like from late 2000 through '03. Pick 2 funds you think you like that are allocated differently, such as a conservative growth fund and an aggressive growth fund and look at the mountain charts of how they did through the down market. If they rode the peak all the way to the top during 1999, it is quite possible that they rode it all the way to the bottom in '03. The fund that was less affected by the bear market tends to give steadier returns. This is a generalization, I admit but pertinent. Having a performance chart that took a big hit in '03 is merely an indication of volatility inside the funds portfolio. So, if you are happy with risk go for the radical performer. Low fees and expenses are fine but they also mean low turnover ratios. Low turnover ratios are also fine but that means the fund manager isn't making changes too often. If they make few changes, they are forced to ride their portfolio regardless of market performance. I prefer to see a bit more flexibility.

You can get that flexibility in a number of ways. You can pick a fund with a high turnover ratio but you have to watch for high fees. You can diversify among funds inside a fund family or you can diversify across fund families and across asset classes. This alternative exposes you to different management styles so that if one particular fund managers style falls out of favor, or the entire fund family has a major shift in management style for the worse, it doesn't take your whole portfolio with it. The question arises as to whether the average investor has the patience or even the desire to look at all the various factors that need to be looked at when putting together a proper portfolio. It can get complicated VERY quickly and this is where the value of a professional becomes apparent.


The answer to your last question is this;

If you go to a "Financial Planner" or any individual that charges a fee for advice, you pay for the advice. Some of these people may indeed charge a commission on trades they execute for you based on their recommendations and they may charge you on an annual basis for the advice. It all depends on the type of account you have set up with the planner. Most major brokerage firms have fee based accounts wherein a flat fee is charged annually to manage and place your money, based on your risk tolerance, time horizon and objective. These types of accounts are known as "discretionary" accounts. That means you give the brokerage firm discretion to make trades, and you incur no per-trade commission charges. You are paying an annual fee. Often, the types of funds invested in these types of accounts are institutional classes - classes of funds the average Joe can not buy on his own and/or are only available to brokerage firms or institutional investors such as pension funds. You are going to pay fees whether you buy a no-load fund, a front load fund, B shares or C shares. The fees charged by the individual funds for management of the fund are for the most part invisible to the investor. They just reduce the return to the shareholder or buy less shares when reinvesting dividends/interest. That money is used to pay salaries, expenses etc.

Financial Planners that use that designation should have the letters "CFP" for "Certified Financial Planner" after their name on their business card. http://www.cfp.net/downloads/COE.pdf This designation is taken very seriously and is essentially awarded for completion of a College level course of study. Someone that calls themselves a Financial Planner that does not have a CFP certification is someone who i would warn against.

An individual is free to seek out a Financial Consultant or Broker who is qualified, licensed and may also have the CFP designation or other designations recognized by the College of Financial Planners such as "Accredited Asset Management Specialist". These individuals will be required to know their client well enough to make appropriate recommendations regarding portfolio allocation, are capable of rendering sound advice and can act as either a broker or as an "Adviser". A Broker is going to receive a commission for trades. Generally an Adviser will receive a fee. If you have an Adviser charging both you are indeed getting ripped off unless the value of the advice makes it worth it. Many of the pertinent definitions are spoken of on the link you recently posted in the other threads on this board.

[scruffy]

14. A short course on how people get paid . . .

Some advisors charge a flat fee. Often these flat fees are many thousands of dollars - which means that the services of those advisors are only available to the relatively few who can afford to pay.

Some advisors charge by the hour. That can make their services affordable to many more, but some may object to being charged for the hours of research that some situations may require.

Some advisors offer mutual funds and/or other financial products for sale. If they sell a fund with a front-end load, the client pays an up-front commission when they make their purchase. If they object to a front-end load, mutual funds have a variety of other share classes - instead of an up-front charge, there may be no up-front charge but a higher expense ratio. Or instead of an up-front charge, you could purchase class B shares which have no up-front charge but a higher expense ratio for a certain period of time, along with a redemption fee for the first few years.

Some advisors charge based on a % of assets that they manage for their clients. Some advisors who do this use no load funds and some use funds that would ordinarily have a front-end sales charge but because they are being sold by advisors who charge based on a % of assets under management, the sales charge isn't assessed.

There are also no-load funds, in which there is no sales commission to the person who recommended them. If a person decides he wants to purchase no-load funds and isn't using an advisor in any capacity, they are basically on their own. Legally, no-load funds can't give much assistance on whether the fund is appropriate - they can just send out a prospectus and tell you to read it.

However, ALL mutual funds still have fees and expenses, regardless of whether they are compensating an advisor. Ordinary fees - lights, manager, advertising, etc.

Many funds that have up-front sales charges are excellent funds. As stated previously, the American Funds group is now the largest fund group out there, based on volume of $$ invested with them. Many of their funds are consistently ranked as top-performers. They have always had an up-front sales charge and quite vigorously defend it - they feel their funds are best sold through advisors and that the advisors should be compensated for it. They do offer other share classes, but they are definitely NOT a no-load family.

Conversely, there are some no-load funds that outperform funds with a sales charge. And for some people, no-load funds are fine .. . on the assumption that the individual feels comfortable making investment choices on their own. Some people are perfectly comfortable with this; many aren't. But to say across the board that no-load funds out perform load funds or vice versa is just not accurate.

To answer the last question of your post . . . EVERYONE ends up paying the fees assessed by the fund company for the expenses of running the fund. Some funds have low expenses (Vanguard is known for having very low expenses); others are not so low. If the fund also pays a commission, the purchaser is charged that amount too.

Something to think abut . .. not everyone is comfortable with investing on their own and the idea of researching, purchasing, and monitoring a no-load fund is very intimidating for them. If they have a relatively small amount of money to work with, they most likely won't be able to afford a fee-only advisor or even one who charges by the hour. To work with someone who charges based on assets under management, you usually need a decent amount of assets. So for a small purchase, a fund with an up-front sales charge may be the only way that person can be able to meet with someone who can give him good investment and other planning advice at a reasonable cost. Sales commissions are not automatically evil.