I don't understand this. My company's plan offers 40 or so choices out of the thousands of funds available. Why should I be limited to these few? What is the reasoning behind it? If it helps, my 401k is through theonline401k.com.
Actually, 40 is a huge quantity of funds. There is likely a lot of overlap within the holdings and strategies of the funds in the group. Most people get overwhelmed by having so many choices. Your employer is likely trying to offer a lot of choice, or......
Some employers try to reduce thier cost of providing the plan, so they let the fund companies push funds with high expense ratios that are paid by the participant.
We have about that many funds in our plan too, but most are popular low cost funds (Fidelity and a few others). The least popular funds get weaned from the list.
I guess I never thought about that. For me, I want to be able to choose from everything available. Clearly, that won't be happening. Of course I could minimize my 401k contributions and invest in a separate IRA, but then I would forgo the benefit of contributing my pretax income. I just hate being forced to pick from a preset selection when it is determining my financial future.
Review your Summary Plan Description to see if your plan allows you to do a rollover from the 401k to an IRA. If it does, you can then invest the IRA any way you choose. This is what I do to get access to individual stocks. Not all plans permit an IRA rollover.
Why not just contribute up to the company match on the 401(k), add to a TIRA (deductable) up to your limit, and then switch back to the 401(k) to max out your annual max (assuming you have the money to do so)?Of course I could minimize my 401k contributions and invest in a separate IRA, but then I would forgo the benefit of contributing my pretax income.
But fees aren’t the only reason why 401k plan sponsors might inadvertently hurt 401k plan investors by offering too many investment options. A decade ago, in a study conducted by Shlomo Benartzi and Richard Thaler (“Naive Diversification Strategies in Defined Contribution Saving Plans,” American Economic Review, March 2001, Vol. 91.1, pp. 79-98.), suggested 401k investors tend to use simple decision making heuristics when picking 401k investment options. These unsophisticated approaches often lead employees to merely split their dollars equally among all investment options.
While Benartzi and Thaler focused on the asset allocation implications of this, a far more meaningful impact was the over-diversification caused by assembling a portfolio of too many mutual funds. In effect, these naïve investors, in seeking greater diversification, may have actually created a de facto index fund, even when the underlying investments were all actively managed funds. The problem arises when one looks at the aggregate expense ratio of all these actively managed funds. This expense ratio tends to be much higher than a comparable index fund and, since the de facto index fund will likely yield a return similar to that comparable index fund, this expense ratio difference can only hurt the 401k investor. This is not an “active vs. passive” argument; it is an argument between high-cost and low-cost index funds.
I guess I never thought about that. For me, I want to be able to choose from everything available. Clearly, that won't be happening. Of course I could minimize my 401k contributions and invest in a separate IRA, but then I would forgo the benefit of contributing my pretax income. I just hate being forced to pick from a preset selection when it is determining my financial future.
30-40? All of my plans so far have offered less than 10 fund choices.
And you're okay with this?
Lots of great responses.... here is my summary...
Most plans do not have that many funds... 10 or so is very common... (this has changed a bit since they came out with the retirement dated funds, such as 2020, 2025, 2030 etc.)
Most participants are not that knowledgeable in investing their money and giving them to many options is bad.
There are legal reporting requirements that make it impractical to offer the whole universe. And there are more to come.
Not all providers offer funds from every other fund company. IOW, if you go with Fidelity, they do not offer Vanguard funds in their lineup. (they do offer other fund companies, but I think that is because there is an agreement that they offer Fidelity in theirs... just my thinking)..
I set up the plan for our company. We had 600+ funds to choose from... I picked a bit over 60 and to me that was a LOT... as someone mentioned, I chose the best available from the various categories... we then had to take all the retirement funds and I thew in a few commodity funds for good measure..
Also, invest your outside money in the funds that are not in the plan and you should not have to worry about it. IOW, there should be some funds in there you can invest in and your other money fills the holes that are not in the plan....
And you're okay with this?
There is a lot of research that shows why too many options are counterproductive. One exmple here How Many Investment Options Should 401k Plan Sponsors Offer?
This must be a catch-22 for a business, because a plan with few choices will dissatisfy employees that like to actively manage their investments, and many options confuses others.
They are also plans which I considered best of both worlds.
Few funds + full brokerage option. Check if your provider offers one.
Schwab calls it Personal Choice Retirement Account, I don't remember what's Fidelity name for this feature inside 401k.
It basically allows you to treat use your 401k as a brokerage account having access to all stocks & mutual funds available. I use it to buy ETFs inside my 401k.