A rule for 401k's

Well, after almost 6 months, my old 401k came out of the "blackout" period and was finally deposited into my new one.  I don't think the whole process is supposed to take 6 months, and probably it would still be going if enough people hadn't complained.  So this week, I logged on to see what funds I should move this money into, and I was surprised at what I found.

The first thing - we still don't have access to "thousands" of funds, just the same old, tired 20 dogs we had before.  Ok, well maybe there are SOME decent funds in here, so I go and take a look at the fund histories in an attempt to pick them out.  The first thing I notice is a fund called "cash reserves" which from what I understand, is nothing more than a money market fund.  Interestingly, the 10-year return on this fund is 2.04%.  Not bad, but certainly not great.  However, since its just money market investments, you can't really expect much.   What shocked me was the sheer number of funds that had a 10 year history, yet came in markedly worse than 2.04%, with several coming in negative.

Which leads me to a rule I'd like to propose - any fund that has a 10 year history and can't beat a cash reserve account has no business in a 401k plan, and should be removed.  In all honesty, the fund shouldn't even exist, but if people want to go out of their way to own these dogs, then that's their problem.  Remember, you're PAYING a fund manager who in the last 10 years, can't even beat a basket of money market accounts.  Why are these things in here?  Does anyone out there agree with me?

Why I don't really like my 401k

If you read any main stream financial advice tailored for just about anyone, advice to contribute to a 401k is always there.  The three major reasons why anyone would contribute to a 401k is as follows:

1. Contributions do not count towards your modified adjusted gross income (MAGI).  So lets say you make 50k a year, and contribute 10% (5k) of that towards your 401k.  Come tax time,  you will only be taxed on 45k, which will in turn lower your tax bill.
2. The match.  Although not as generous as they were before the 2008 downturn, some employers still offer some sort of match to their employees contribution, usually limited to a certain percentage or yearly dollar amount.  Not contributing when your employer has a match is sort of like throwing money away.
3. In theory, it should be better than a savings account.  Your investment choices are a basket of mutual funds, managed by professionals.  They should be able to beat the 0.3% a year a savings account spits out, right?

So whats not to like?  Well, a lot.  My employer matches up to 4%, but in order to get that, employees need to contribute 6%.  I contribute the 6% and nothing more.  In fact, if there was no match, I wouldn't contribute anything.  I probably still shouldn't contribute anything, but maybe I'm a sucker.  Why do I feel this way?

1. The fund choices.  I work for a small company, so when we first started our 401k, we had about 10 fund choices.  None of them have done particularly well since 2007, and to have picked the right ones you would have been better off throwing darts blindfolded at them.  The funds I chose aren't that hot, but at least I haven't lost money, or I wouldn't have lost money, if it hadn't been for:
2. The fees.  Even the bond funds have fees associated with them.  I'm all for giving someone money when they're doing a good job for me, but managing money is so black and white - you either made me money, or you didn't.  If you didn't make money, what exactly am I paying you for?  My employer is already paying you to manage the 401k's at the company.
3. The pomp and circumstance surrounding these investment vehicles.  Ok, so this point is a little irrational, but hear me out.  A few months ago (April) we changed over to a new company to manage or 401k plan.  They sat all of the employees down, and trotted in this man with a tacky looking watch and an ill-fitting suit.  He came in claiming we now had access to thousands of funds, and charts showing how much money we were going to have after 30 years as a result of all of this.  He also claimed that we now had direct access to a professional money manager (him) that we didn't have with our old plan manager.  The fact that we had access to so many funds actually piqued my interest, I mean there are some mutual funds out there that consistently beat the dow, even minus the fees.  So after he left, I emailed him the names of some of the funds I liked to see if they were on the list.  I heard nothing back.  I waited 2 weeks and picked up the phone to call.  He claimed he was just about to write me back to let me know that he was just about to dive into research on the funds I sent him.  Needless to say, I still haven't heard back.  Further, our old 401k still hasn't transferred into this new one, almost 4 months later, so even if I could get a list of the funds we have access to, I couldn't transfer into anything new. I'm not impressed.
4. Its pretty illiquid.  Taking money out of a 401k before retirement is not a good idea.  First, its now taxable upon withdrawal, plus an early withdrawal penalty (I believe 10%).  You can also take a loan out against it, but that might be an even worse idea.  I've known a few people to do this, it doesn't end well.  And I get it, its supposed to be for retirement, but you know what?  Life happens.  I might someday need the money in there today to make it until tomorrow, who is the government to take a cut of my money that I might need for a financial emergency?  Is that really better than these payday loan places everyone shakes their head in shame at?  And the whole time in the background, the fee collectors are laughing, knowing that as long as it remains illiquid, people are stuck paying fees.

So there you have it.  I'll still keep contributing to get the match, but nothing more for now.  The only thing that could make me contribute more is if my MAGI goes above 105k, thus preventing me from contributing to a roth IRA, but I'm still below that for now.