What if your 401k plan stinks. What should you invest in?

When I started investing in my first 401k I was so excited.  I couldn’t believe it.  I had the opportunity to invest.  I was young 21 years old and I couldn’t believe it.   I knew that a 401k was a big deal and I knew that investing is …scary!  My parents didn’t know about investing and I wasn’t taught in high school or college.  Personal finance was not taught.  That first 401k had very few options and to this day I’m not sure which ones I picked I think I did Large Cap, Small Cap and even the company stock?!  Oops!  Bad idea!   I want to teach others the lessons I learned.

The first steps to remind everyone about saving:

  1. Pay yourself first! This is key.
  2. Automatically invest.  Make it easy.
  3. The sooner your are in the market the better.
  4. Even if the funds are managed and have high fees, it is pre-tax.
  5. At least, get the matching from your employer.   The goal is the MAX so you lower your taxes.
  6. Asset allocation.  Do you need to be a mix of stocks and bonds?  I highly recommend index funds.
  7. Bucket allocation – Look at your total portfolio and put what you can in your 401k and then put the rest in an IRA, or taxable account that has index funds and lower fees.  Here is a post about which Retirement account to invest in first.

What if you don’t have low cost index funds like I have mentioned in other posts?

  1.  Look at each fund and list out the fees.
  2. Compare each fund and see if any are index funds.
  3. Look at the index funds and see what indexes they are matching.  Most experts will suggest the S&P 500 or Total Stock Index.  Look at institutional funds since a lot of them have the lowest fees.
  4. Then set up a plan to compare those to your total portfolio.
  5. If you don’t have any index funds or all the funds are very high in fees, then look at target date funds since they tend to have a good balance and in some cases may have a lower fee.

Later in my career, I was in a 401k plan that had 5 options so I understand limitations.  Looking back I should I have focused on the S&P 500 index fund.

What if you have 5 options and no S&P 500 index fund?

  1. I suggest in this case look at the large cap, mid cap,  small cap funds with some bonds.  I highly suggest looking at the lazy porfolios in the Bogleheads forum.  They go over this in detail and present mostly index funds which I agree.  Another great source is  JL Collins.  He mentions this in his article  – Stocks — Part XVII: What if you can’t buy VTSAX? Or even Vanguard?

If you do want to duplicate the total stock market index as held in VTSAX, here’s the formula…

  • ~81% Large cap (an S&P 500 fund)
  • ~6% Mid cap
  • ~13% Small cap

2. Using Personal Capital will help you see your asset allocation across the board.  You will see your total mix of cash, stocks, bonds, international, and alternatives.  Plus my favorite feature of seeing the fees that cost you.

3. Each year look at your plan and see if you need to make adjustments.  Some plans do change over time.  My company did that twice.  All of my holdings were moved between two different providers so the funds changed.  From what I understand since I left that company,  their 401k plan changed again to even better options.

4. I suggest, if your 401k plan stinks, when you do leave the company, roll it over (in-kind transfer) to a Traditional IRA at Vanguard.

5. Talk to your HR and company about the fees and the cost.  Make sure they are aware of it and make a suggestion.  You never know!

What about high fees?  Is it even worth it to invest in 401k?

This is a great question!  I would almost always say its worth it.  A great article that I came across about this very subject is JL Collins – Stock Series -Stocks — Part VIII-b: Should you avoid your company’s 401k?

A highlight on this article:

  1. Does your company offer a match and if it does, how much?  If it does at least get the match.  If it doesn’t provide a match go to step 2.
  2. Think about your tax bracket.   If you are in a high tax bracket it will benefit you to MAX the 401k.
  3. Does maximizing your 401k get your income down low enough to qualify for the EIC? (Earned Income Credit). This lowers your taxes.

Let me know if you have any questions or comments.

For more details I highly recommend reading:

The Simple Path to Wealth by JL Collins – Stock Series

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits) Hardcover by John C. Bogle

The Bogleheads’ Guide to Retirement Planning by Taylor Larimore,‎ Mel Lindauer,‎ Richard A. Ferri,‎ Laura F. Dogu

The Bogleheads’ Guide to Investing by Taylor Larimore,‎ Mel Lindauer,‎ and Michael LeBoeuf

Keep Saving!


Disclaimer: This is my opinion.  I’m not a financial advisor or tax advisor so please ask your advisor.  Take this advice at your own risk.

Some of the links are affiliate links.