I used to work for a company in the financial services industry. Another branch of the corporation I worked for is involved with institutional money management. This department manages institutional investments like company retirement plans and pensions. This is a service they provided to other companies of various types, much like Fidelity and Schwab offer 401(k) management and administration to companies. This could be considered an in-house service, so as an employee of the company, my 401(k) plan was managed by this branch of the same company.
You would think that given the company’s standing within the financial industry, the 401(k) plan would include smart investment choices. Unfortunately, most of the funds available are high-priced, actively-managed mutual funds and annuity funds. There is one stock market index fund available, but its expense ratio is significantly higher than those of the low cost index funds found elsewhere. Nevertheless, I wanted to take advantage of the company’s matching contribution — after all, that’s free money — as well as the tax savings, so I relented and participated in the plan.
401(k) plans — and 403(b) plans available to non-profit and educational organizations — suffer from poor investment choices. They are often significantly more expensive than the index funds you can find for IRAs. A fund’s expenses play a significant role in an investor’s ability to grow wealth over time. A low-cost fund could save an investor over a hundred thousand dollars over the course of a career when compared to a similar fund with above-average expenses. Even taking inflation into account, this will be a significant amount of money.
Schwab has announced that they are now offering a selection of new 401(k) investment choices designed to cater to investors who are keen on keeping more of their money in a program called Schwab Index Advantage. It isn’t clear from the announcement whether the available funds will match what’s currently available to retail investors, but if they aren’t the same funds, they should be similar in cost. The Schwab S&P 500 Index Fund has an expense ratio of 0.09%, lower than even Vanguard’s competing retail S&P 500 Index Fund with 0.17%.
The brokerage also offers companies the ability to provide employees with investment advice and planning tools for an unspecified low cost. The GuidedChoice system will help employees make ongoing decisions regarding their retirement investing, and this should help employees save more for retirement. It’s individualized advice, which isn’t common with retirement plans. Most employees are lucky if their retirement plan comes with a web application that helps them determine an asset allocation strategy; individualized advice could, if the advice is good, help investors grow their nest eggs in a way that’s most appropriate for their goals.
Are you satisfied with your 401(k) retirement plan, its choices, and its included advice?
Published or updated January 10, 2012.