Let the boss kick in on your 401(k), and perhaps make other investments

A richer retirement

Dollars & Sense

January 16, 2000|By Peter Di Teresa | Peter Di Teresa,MORNINGSTAR.COM

Morningstar gets loads of letters and e-mail from investors who are unhappy with their retirement plans. They complain that their plans offer a limited range of funds, many of them mediocre. What's a smart investor to do? Short of leaving your job for one with a better plan, there are ways to maximize your options. Here are three things to consider if your 401(k) plan isn't all you'd like:

Get your employer's contribution. Many employees don't take full advantage of their 401(k) plans, no matter how good their plans are. They put off contributing, saying they don't have the extra money for it. But if your employer matches any part of your retirement contribution, that's free money, even if you have to put it in an average fund. And, when you do eventually leave that job, you'll have money to roll over into more attractive investments.

Invest outside the plan if you need to. Maybe you're building a diversified portfolio, but your plan doesn't have a decent small-cap fund. Or maybe it doesn't have one at all. You can go outside the plan and still get tax protection.

You can buy a fund through a Roth IRA account, which is available to most investors with retirement plans. (Regular IRAs aren't.) If the Roth IRA isn't for you, look for funds that strive to limit the taxes they incur. In recent years, fund companies have introduced a host of funds with "tax-managed" in the name. Fidelity has one. Vanguard has a growing lineup of tax-managed funds, ranging from Vanguard Tax-Managed Small Cap to Vanguard Tax-Managed Capital Appreciation.

Investors in Vanguard's tax-managed funds have kept 95 percent or more of their pretax gains.

How bad is your plan, really? A lot of the 401(k) complaints I've read rail about having nothing but bad funds to choose among. But they might not be all that bad. Not every fund is going to beat the U.S. stock market, nor should it. Before ruling out the small-company fund in your plan, compare it with other small-company funds and with an appropriate benchmark such as the Russell 2000 index.

The good news is that you don't have to invest in great funds to invest successfully. Large-cap blend funds, for example, are the largest component of most investors' portfolios. Just the average large-cap blend fund gained 16 percent a year over the past 15 years. If you had invested $1,000 in a middling large-blend fund 15 years ago, you would have more than $9,300 today. Now that's nothing to complain about.

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