Fighting for More Choices in 401(k)s
Martha Margowsky is a careful mutual fund investor who expects good performance and low fees before she will commit a dime. But all bets are off when it comes to investing through her husband’s 401(k) plan.
No matter how hard Margowsky tries, she can’t impose the same discipline on this retirement stockpile. The 401(k), which restricts investment to a handful of mutual funds offered through just one fund company, simply doesn’t offer enough good choices, she said.
“About a year and a half ago, we tried to get the administrator to take a second look at their offerings and at least add to them,” said Margowsky, a homemaker from Venice. “We never heard a word. I decided to stop tilting at windmills. But I’m never happy about it.”
At a time when more than a dozen mutual fund companies are under investigation for practices that may have cost customers millions of dollars, more investors may be willing to take Margowsky’s careful approach. But it may not be so simple.
The vast majority of big plans -- those offered by the country’s largest employers -- offer copious, well-screened funds. But some smaller plans -- such as the one Margowsky’s husband, Jonathan Curtis, belongs to -- do not.
*
Go With It, or Without
When confronted with lackluster or even poor-performing funds within a 401(k), investors face a Hobson’s choice: Give up the significant benefits of tax- deferred savings or accept that your money may be invested poorly for a long time. Participants can press a plan’s sponsor to add choices, but that effort is not always successful, as Margowsky can attest.
“We feel caught between a rock and a hard place,” said Margowsky, who has a background in finance. “The tax advantages of continuing to invest in our 401(k) certainly outweigh the excessive costs and relatively poor performance of the funds. But in our non-401(k) account, we can make market choices and select low-cost funds.”
Each $100 invested through a 401(k) saves a person in the 30% tax bracket $30 in income taxes.
But Margowsky estimates that the fees charged by funds offered through her husband’s plan are about 1 percentage point higher than she would otherwise pay. That immediately costs the couple $1 on each $100 invested, and it has a more significant long-term cost because their investments remain in the high-cost funds year after year.
Consider, for example, a $10,000 investment for a couple who pay 30% of their income in tax. That investment saves them $3,000 in taxes in the year it is contributed. But if the money is invested in a high-cost fund that charges 1 percentage point more than similar funds (and assuming they earn an annual return of 10% before paying the fee), the couple would sacrifice about $11,000 in returns over a 20-year period to the cost of that higher fee.
Still, the upfront savings of a 401(k) can be pivotal in having sufficient cash to save signifi- cant sums for retirement, said David Wray, president of the Profit Sharing/401(k) Council of America, an industry trade group in Chicago.
Moreover, many 401(k) sponsors offer matching contributions, kicking in 25 cents or 50 cents for every dollar the employee puts in. The match makes the immediate benefit of the retirement plan so compelling that it makes sense to contribute through the plan even when the investment options are downright lousy, Wray noted.
“The investments are important,” he said. “But they are not the whole plan. It’s important not to seize on just one issue.”
By the same token, plan sponsors are becoming increasingly sensitive to concerns like those of Margowsky and Curtis, Wray said. The couple -- and anyone in similar circumstances -- should continue to press their plan administrator to add better investment choices.
Curtis and several of his fellow workers wrote a letter to the plan sponsor almost two years ago to do just that. They noted the returns and fees on the funds they had in their 401(k) and showed the comparatively stronger returns and lower fees of several other funds they wanted the administrator to add.
Their arguments to add investment choices have only become stronger in the last year, Margowsky said. But she has been unable to get the responsible executive at the administration company to return her phone calls.
Wray’s advice: “Be respectfully persistent.”
*
A Sponsor’s Legal Duties
Investment choices within a plan are up to the sponsor, but it has a legal duty to ensure that they meet the needs of participants, Wray noted.
Some fund companies may provide such good service that a sponsor will maintain a relationship that can’t be justified by the fund’s returns alone. But retirement law imposes a so-called fiduciary duty, which means the sponsor is legally bound to regularly consider the issue and make decisions that are in the best interest of participants.
“It’s like a fishing line. You can’t just put it out there and never check it again,” said Rita Holder, a principal at Towers Perrin, a benefits consulting firm in San Francisco. Even if the funds offered seemed great five years ago, the sponsor must reconsider the choices on a regular basis, she said.
Still, inspiring change in a 401(k) plan can be a glacial process, Wray said.
“You may think you’re being ignored because months have gone by and nothing has happened,” he said. “But, it may be on the agenda and they just haven’t considered it yet.”
“Employers are very sensitive to fiduciary issues right now,” Wray said. “My expectation is that if you brought up an issue like this today, you would get a very careful review.”
In the meantime, Margowsky said, she remains frustrated with her husband’s fund administrator.
“I try to put it in the back of my mind because there is nothing I can do about it,” she said. “But I think their fiduciary responsibility should at least require them to take heed of my letter.”
*
Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past columns, visit The Times’ website at www.latimes.com/kristof.
