Warning: Physicians who follow my blog know this is a family affair, meaning I'm direct but "nice." This is not one of those posts.
Lately I've been rebalancing 401k accounts and I can't help but notice that they are lacking in many, many ways. Here are most--but not all--of my complaints:
- Your plan provider is (probably) an insurance company. Need I say more? OK, I will. When I recently surveyed insurance company 401k providers, I found that several are accepting revenue from the mutual funds you buy AND adding a "record keeping" fee on top of that. I know everybody's got to eat, but this adds a bunch of expense, which subtracts a chunk of your return. Of course, they disclose this expense but you don't have time to read it, much less time to do anything about it.
- Enrollment is a pain. They send you a ton of paperwork and they expect you to read it, understand it, and take action. Most of what they're requesting is so obvious (your name, Social Security Number, date of birth) that someone else should have filled it out for you already… but they didn't. If you're lucky, they may enroll you automatically but...
- They expect you to pick your investments yourself. Someone out there seems to believe that "Mutual Fund Selection 101" was part of the curriculum in medical school… and they're wrong. How on earth are you supposed to know the difference between "growth and income" and "total return" when you spent years learning the difference between a Steinmann pin and a K-wire? To make matters worse, some 401k providers will not accept a limited power of attorney that allows someone else to do this task for you.
- You've got way, WAY too many options. With as many as 81 investment options in some plans I've seen, it's no wonder some physicians have told me that they literally "dropped a pencil on the page and bought what it hit." No kidding. Sometimes less is more but sometimes there's...
- Not enough options, either. If you are a tax conscious investor (I am… and you should be too), you know that your "fixed income" investments (a.k.a. "bonds") belong in a tax-deferred account like your 401k while stock mutual funds belong in a Roth account or perhaps a regular old taxable account. So why do they offer you only two choices when it comes to bond funds? It baffles me, and it robs you of a shot at diversification.
- Your options are limited to old-school actively managed funds. It's like the folks who created the list of investment options inside your 401k are stuck in the 1950's: they never got the memo that tells us actively-managed mutual funds tend to do worse than comparable, passivley-managed funds over the long haul due to the impact of management fees (and the occasional human blunder that can torpedo years of outperformance). To that guy who continues to overlook index funds when building out the list of investment options I say, "Wake up and smell the Vanguard and DFA, dude."
- The plan website is a labyrinth. I've seen the inside of scores of participant-directed retirement account websites and I have noticed that no two sites use the same word for "rebalance." And to make matters worse, you can rebalance either your existing assets or your future contributions, or both. Yes, there is a difference, and yes it's a good idea to make different elections for each.
- Your Roth is lumped in with your Regular. You may have a Roth subaccount in your 401k but you probably didn't know about it. You really have to dig to find it. And if you do, you will want to allocate your faster-growing assets to that subaccount but you probably cannot do this easily. Some 401k providers do not allow for separate allocation instructions while others make the process more difficult than it has to be.
- There's lots of "service" but no real help. Sure, your retirement plan company has an 800 number, and even a smiling rep who comes to see you each year, but nobody really has your back. This is a do-it-yourself thing, so YOU have to pick the funds, YOU have to rebalance the account, YOU have to be certain you are actually maxing out your contributions and YOU have to make sure you are getting the full match (and believe me, many docs miss out on this fundamental part of the plan).
Does your 401k stink?
I sure hope not. But if it does, and you want to do something about it, prepare for a long slog through a deep morass of minutia pockmarked with political pitfalls. There's a lot of money on the table with your practice's 401k plan and everybody wants a piece of the action. Your best bet is to find someone who can really help: a professional who has a penchant for picky details, a "winners never quit" attitude and an undying interest in your family's financial security.