Forced 401K liquidation... Argh!!!

[FIREdreamer]

Argh!

My wife's company decided to make changes to their 401K plan. We used to have access to almost the entire universe of Fidelity funds, but not anymore. Our choices have been reduced to a handful of funds (some OK, some not-so-good). This pretty much killed our slice-and-dice strategy. No REITs, no emerging markets, no mid caps, no good value funds, no commodities, no TIPS, no GNMAs... The only decent choices left are either lifestyle funds (though they are a bit expensive for my taste) or total market index funds (one domestic equity, one international equity, one US bond) at rock bottom prices. I am leaning toward the cheap index funds.

As a result of the change, we are required to liquidate all our original Fidelity funds and transfer the money to the new funds. What a great time to be doing that!

So my plan is currently as follows:
US equity index, large value, small value and REIT will be transferred to the total US market index.
Developed and Emerging markets will be transferred to the international market index (which has almost no exposure to EM).
All bond funds will be transferred to the total bond market index.

It means that I will have to lock in the losses on some funds (REITs, EM,...) with no chance to recoup that money!

Do you guys have any other suggestions as to limit the losses?

[jazz4cash]

I understand you're ticked off....I would be also, but I'm glad it's not as bad as it sounds (Forced Liquidation!). For the life of me I can't figure out why employers pick high cost funds for thier plans. We had something similar occur, but employer stuck with Fido and substituted some low cost name brand funds for the publicly traded ones we had before. I'm pretty sure it's all about saving the company a few basis points.

Have you reviewed the SPD to see if the plan permits an In-Service Rollover to an IRA? This is not a common feature of many plans, but our plan has this feature AND sometimes an event such as this would qualify for an IRA rollover even if the plan does not normally allow them. I suggest reading the SPD yourself as I usually have to correct the Fidelty reps as well as our own HR reps on these obscure features of the plan. In this particular case, Fido might be very motivated to assist you with a rollover to keep your assets in-house.

[samclem]

If jazz4cash's suggestion doesn't pan out you might want to just re-think your asset allocations across all the accounts you and your wife have (your 401(K), your IRAs, her IRAs, as well as her stinky 401(K)). Assuming you guys are getting along alright, all that matters is that the total allocation in all the accounts is good. For example, if you've got a good EM fund available in your own 401(k) you could put more money there, and maybe increase the percentage of $$ in some other area of her 401(k) account. What matters at the end of the day is that you've got the allocations right, not necessarily which account it is in.

[FIREdreamer]

Thanks Jazz & Sam,

Originally Posted by jazz4cash

... I'm glad it's not as bad as it sounds (Forced Liquidation!).

A bit over the top, but it made you look!!!!

So after talking to HR and Fidelity, and after much probing, the in-service Rollover IRA option doesn't seem to be permitted, but there is a never publicized option available (it doesn't even appear in the plan's literature): apparently I can open a brokerage account within my wife's 401K and invest the money as I wish (stocks, bonds, mutual funds, ETFs, ...). I still have to research the fees and trading costs associated with this option, but apparently it would give me once again access to a wide range of Fidelity funds and more. I could even do a transfer in kind from the current 401K account to the new brokerage account so that I would not have to sell anything. My wife's employer would deposit 401 contributions in a cash account and I would have to invest the money myself (so I would lose the automated DCA option).

If the brokerage route turns out to be too costly, then I could follow Samclem's advice. I don't have a 401K (not offered by employer), only a smaller IRA (our income is too high and I can't contribute to a deductible IRA anymore). But I could keep the core of our portfolio in the 401K and use my IRA for non-core funds like REITS and EM. It will make rebalancing tougher though and it will be hard to keep a fixed asset allocation because a lot of new money is flowing to the 401K while no money is being added to the IRA.

So I'm going to investigate the fee/commission structure of the brokerage account and go from there.

[FinanceDude]

Originally Posted by FIREdreamer

Thanks Jazz & Sam,



A bit over the top, but it made you look!!!!

So after talking to HR and Fidelity, and after much probing, the in-service Rollover IRA option doesn't seem to be permitted, but there is a never publicized option available (it doesn't even appear in the plan's literature): apparently I can open a brokerage account within my wife's 401K and invest the money as I wish (stocks, bonds, mutual funds, ETFs, ...). I still have to research the fees and trading costs associated with this option, but apparently it would give me once again access to a wide range of Fidelity funds and more. I could even do a transfer in kind from the current 401K account to the new brokerage account so that I would not have to sell anything. My wife's employer would deposit 401 contributions in a cash account and I would have to invest the money myself (so I would lose the automated DCA option).

If the brokerage route turns out to be too costly, then I could follow Samclem's advice. I don't have a 401K (not offered by employer), only a smaller IRA (our income is too high and I can't contribute to a deductible IRA anymore). But I could keep the core of our portfolio in the 401K and use my IRA for non-core funds like REITS and EM. It will make rebalancing tougher though and it will be hard to keep a fixed asset allocation because a lot of new money is flowing to the 401K while no money is being added to the IRA.

So I'm going to investigate the fee/commission structure of the brokerage account and go from there.

Sounds like a good option, is FIDO the brokerage you would go through?

[FIREdreamer]

Originally Posted by FinanceDude

Sounds like a good option, is FIDO the brokerage you would go through?

Yes it is.

[FinanceDude]

Originally Posted by FIREdreamer

Yes it is.

Should be pretty cheap to buy stuff then. If they charge you $25 or something to buy the funds you want, not the end of the world if you are a buy and holder..........

[FUEGO]

I have a rather limited range of choices in my fidelity 401k (I'm at a small company). The only two good funds are the spartan total market index and spartan extended market index (mid and small cap basically). I hold all my total market and extended market allocations in my 401k, and then use taxable accounts and IRA's and DW's 401k to round it out with the international, small cap, REIT, emerging markets, etc. I basically have set my asset allocation policy according to these two index funds I happen to have available in my own 401k (around 20% of our total investments are in this 401k). Cart before horse? Maybe. But a fact of life with subpar 401k plans.

At least the fidelity spartan brand of funds are dirt cheap (still at 0.1% expense ratio last I checked). The ER rivals and even beats some VG index funds.

[FUEGO]

If brokerage is feasible, there are plenty of REIT, small cap, value, international, emerging mkts, etc available from vanguard or elsewhere for rather low expense ratios plus whatever commissions you pay.

[FIREdreamer]

Originally Posted by FUEGO

I have a rather limited range of choices in my fidelity 401k (I'm at a small company). The only two good funds are the spartan total market index and spartan extended market index (mid and small cap basically). I hold all my total market and extended market allocations in my 401k, and then use taxable accounts and IRA's and DW's 401k to round it out with the international, small cap, REIT, emerging markets, etc. I basically have set my asset allocation policy according to these two index funds I happen to have available in my own 401k (around 20% of our total investments are in this 401k). Cart before horse? Maybe. But a fact of life with subpar 401k plans.

At least the fidelity spartan brand of funds are dirt cheap (still at 0.1% expense ratio last I checked). The ER rivals and even beats some VG index funds.

Yes the Spartan funds are indeed dirt cheap. We now have two available:
Spartan total market index (ER=0.1%)
Spartan International index (ER=0.1%)

Both look like good options.

[FIREdreamer]

Originally Posted by FinanceDude

Should be pretty cheap to buy stuff then. If they charge you $25 or something to buy the funds you want, not the end of the world if you are a buy and holder..........

From what I found so far, all Fidelity funds (plus others, including some PIMCO funds) would be NTF (no transaction fee) funds, so I can buy them in the brokerage account without paying any trading fees or commissions. Trading Vanguard funds, however, would not be free. Given the fact that, in a 401K, small amounts of new money get invested all the time, trading fees / commissions could add up to significant amounts in the end. So the fact that I could have access to a significant number of NTF funds is a huge plus. I hate paying fees. I still need to check whether there is an annual fee associated with the brokerage account.

[FUEGO]

Originally Posted by FIREdreamer

Yes the Spartan funds are indeed dirt cheap. We now have two available:
Spartan total market index (ER=0.1%)
Spartan International index (ER=0.1%)

Both look like good options.

Those two give you good cheap broad exposure. Get your other tilts in other accounts.

One problem you might have though is those two spartan indexes are particularly tax efficient, and you might be better off with less tax efficient asset classes in your tax-deferred accounts (if it were an option). Maybe consider the bond fund if it is similarly cheap expense ratio (the one in my fidelity acct is 0.4 or 0.5% ER, so not a particularly cheap fund).

[FIREdreamer]

Originally Posted by FUEGO

Those two give you good cheap broad exposure. Get your other tilts in other accounts.

One problem you might have though is those two spartan indexes are particularly tax efficient, and you might be better off with less tax efficient asset classes in your tax-deferred accounts (if it were an option). Maybe consider the bond fund if it is similarly cheap expense ratio (the one in my fidelity acct is 0.4 or 0.5% ER, so not a particularly cheap fund).

The bond fund available is PIMCO total return fund. A pretty steep ER for a bond fund (0.68%), but it's a top performer and it often beats its category averages. Probably not a bad choice. We also have access to an intermediate bond index fund, ER about 0.32, but I have to pay a quarterly premium to invest in that fund which would increase its ER by about 0.28% to 0.60%.

[kyounge1956]

Originally Posted by FIREdreamer

The bond fund available is PIMCO total return fund. A pretty steep ER for a bond fund (0.68%), but it's a top performer and it often beats its category averages. Probably not a bad choice. We also have access to an intermediate bond index fund, ER about 0.32, but I have to pay a quarterly premium to invest in that fund which would increase its ER by about 0.28% to 0.60%.

I'm not sure if Pimco Total Return is the same thing as Pimco Total Return Instl (ticker PTTRX). If so, it's the same fund available through my tax deferred plan at work, and according to their fund fact sheet, the holdings were over 80% in cash (as of 9/30/08). If you are looking for exposure to bonds as an asset class, you won't get it from that fund IMO.

[FIREdreamer]

Originally Posted by kyounge1956

I'm not sure if Pimco Total Return is the same thing as Pimco Total Return Instl (ticker PTTRX). If so, it's the same fund available through my tax deferred plan at work, and according to their fund fact sheet, the holdings were over 80% in cash (as of 9/30/08). If you are looking for exposure to bonds as an asset class, you won't get it from that fund IMO.

The one in my plan is PTRAX and I must confess that I had just briefly looked at it.

Upon further inspection, you are right, things don't look as straight forward as it first seemed. I can't even understand Morningstar's AA for this fund (see image below). At least the AA for the other available bond fund is straight forward.

[FinanceDude]

Originally Posted by FIREdreamer

The one in my plan is PTRAX and I must confess that I had just briefly looked at it.

Upon further inspection, you are right, things don't look as straight forward as it first seemed. I can't even understand Morningstar's AA for this fund (see image below). At least the AA for the other available bond fund is straight forward.

On the ohter hand, its managed by Bill Gross, who is one of the top 2 or 3 fixed income gurus in the whole world.........

[Dennis]

Why do co.'s use High cost funds? Maybe their Agent/Broker makes more $ from them? Or The Owners of the Co. are getting Some Other Benefits for doing so? Or There are Less restriictions using High cost Funds for the employer to Steal the $, like They did With Enron and other Co.'s? And Maybe those higher Fee's are going elsewhere , like into the Agents Pocket and then for Free Golf Trips and Cruises for the Owners of the Company? Or Football And Baseball Tickets in a skybox..?

People are getting a rude awakening about their so called "safe" #401k's and Depending on them Soley for their Retirement savings and really shouldn't...

Pres. Obama has #401k plans on his List to make some major changes to them, that just might be for the better..Espeically seeing as most Savers can't manage & Invest their Own $ even with being able to Invest in a broad spectum of Funds...

Smart Money came out with a Report a while back.. The average #401k plan made less than Bonds for the previous 20 yr period.. and the Fees ate up alot of profits...

Unless getting at Least a 5% matching? I'd be moving into your own IRA/Roth accounts, if it won't cause problems with your status with your employer...

[FinanceDude]

Originally Posted by Dennis

Why do co.'s use High cost funds? Maybe their Agent/Broker makes more $ from them? Or The Owners of the Co. are getting Some Other Benefits for doing so? Or There are Less restriictions using High cost Funds for the employer to Steal the $, like They did With Enron and other Co.'s? And Maybe those higher Fee's are going elsewhere , like into the Agents Pocket and then for Free Golf Trips and Cruises for the Owners of the Company? Or Football And Baseball Tickets in a skybox..?

Well,considering the largest 401K "providers" are insurance companies like Principal, there's no wonder. The fees are buried inside the "bundled" package.

Pres. Obama has #401k plans on his List to make some major changes to them, that just might be for the better..Espeically seeing as most Savers can't manage & Invest their Own $ even with being able to Invest in a broad spectum of Funds...

As long as he doesn't listen to the harebrain plan that's currently in a House committee.........

Smart Money came out with a Report a while back.. The average #401k plan made less than Bonds for the previous 20 yr period.. and the Fees ate up alot of profits...

A lot of that is due to participant behavior, with most folks selling at the bottom and investing at the top......

Unless getting at Least a 5% matching? I'd be moving into your own IRA/Roth accounts, if it won't cause problems with your status with your employer...

First of all, most companies don't do 5% dollar-for-dollar match. ANY match is FREE MONEY to you, and can help in bad markets. A Roth IRA to me is an absolute must for anyone working that can afford to fund one, an absolute no-brainer........

[FUEGO]

Originally Posted by Dennis

Why do co.'s use High cost funds? Maybe their Agent/Broker makes more $ from them? Or The Owners of the Co. are getting Some Other Benefits for doing so? Or There are Less restriictions using High cost Funds for the employer to Steal the $, like They did With Enron and other Co.'s? And Maybe those higher Fee's are going elsewhere , like into the Agents Pocket and then for Free Golf Trips and Cruises for the Owners of the Company? Or Football And Baseball Tickets in a skybox..?

I think it boils down to money. Our small company (~35 plan participants) has a fidelity 401k that is designed for small companies. Each participant is assessed a $20 fee each year, and I think the company pays another $2000 or so per year in administrative fees. On top of that, there are one time fees to modify our SPD, which I believe is required if we change percent matching and fund choices.

Fidelity gives us a slate of funds that they pick, and they are almost exclusively high cost fidelity actively managed funds. There are two index funds that are good, but both in the domestic equities category. It wouldn't take much to include an international index fund and a low cost bond fund or bond index fund, but myself and one other guy have badgered them about it, and apparently "it isn't an option" at our level of 401k plan.

Why do companies pick crappy 401k providers? The company CEO plays golf with the salesman at Big InsCo that provides 401k's free of charge. Why would you ever incur costs to provide 401k's when you can get a free 401k administered by your Buddy? Believe it or not ( ), CEO's can be unsophisticated when it comes to things like selecting 401k service providers.

[kyounge1956]

Originally Posted by FinanceDude

(snip)As long as he doesn't listen to the harebrain plan that's currently in a House committee......... (snip)

Do you have a link to the harebrain plan? Is it the same idea that was discussed on a Soapbox thread toward the end of last year?
The Obama Health Insurance thread seems mighty lonely over in the FIRE related political topics forum. Maybe a second thread there would break the ice.