Tuesday, August 09, 2005

A Rant about 401(k)'s

My aunt recently asked for some help with her 401(k). She doesn't really know what to do, and doesn't know too much about investing or her options. She mailed me her 401k packet and I started to look over the choices. I figured there will be limited choices (seems like that's always the case) and I was right. They offer one fund per asset class/sector so one for value stocks, one for bonds, one for foreign, etc.

So my first rant is the limited number of funds. Why can't they offer a few more choices?
People are depending on 401ks for the most important financial aspect of their lives- retirement.
Preparing for retirement is incredibly important (start early) and people get only a few options to choose from.

A smaller rant (because this is just based on my aun'ts 401k) is that the returns for the funds listed aren't good at all! Based on the listed indices, only a few of the funds beat the specific index in the yearly categories. I wouldn't mind seeing a Dodge & Cox fund in here, but oh well.

My biggest rant is the expense ratios. Are you kidding me?
Most of the funds had fairly high expense ratios (north of 2%), but I need to put down two examples.

Large Equity Index I: "it seeks investment results that correspond generally to the price and yield performance of the common stocks included in the S&P 500"...."suitable for investors who desire an option that closely tracks the performance of the S&P 500 Index"
Alright, so this is an index fund that's really not saying "index fund" although it put index in the title.
Guess what the expense ratio is? Index funds generally have really low expense ratios, which is one of the benefits. For example, Vanguard's S&P index fund (VFINX) has an expense ratio of 0.18% (according to Yahoo).
The expense ratio for the Large Equity Index: 1.34%

The next example is the Money Market fund.
Well according to the packet, this is the lowest risk of all the funds and it's just a money market fund. I would expect a fairly low expense ratio because it's a MMF and also because the returns should be small so why would there be a big expense ratio?
Total expense ratio for this one: 1.44%

That's the end of my ranting!