Ask MAX: Should I Invest in a Loaded 401(k)?

October 7, 2005

Dear MAX,

I recently started my first job that has offered a 401(k) plan, and I was very excited to begin investing. The problem is, the funds in the plan are load funds, and after being a fan of your site I know that load funds should be avoided at all costs. Should I invest in my company's loaded 401(k) plan?

Fort Dodge, ID

Dear Yousef,

We've reviewed hundreds of 401(k) plans for our Private Management clients and for investors who have used our MAXadvisor 401(k) Planner service. While many of those plans offer funds that normally charge a sales load to investors outside of tax-deferred accounts, the vast majority of those plans waive the regular load charge to people who invest through a 401(k) plan. We've often seen Templeton funds offered without a load charge through company-sponsored retirement plans that would cost investors 5.75% if they bought it at Etrade outside of their 401(k).

There are, however, some very lousy 401(k) plans out there that do, inexplicably, force participants to pay load charges. The dubious rationale behind paying load charges is that some investors need help choosing the funds that are best for them from the ten-thousand plus funds available. How this rationale holds up in a 401(k) plan in which investors have limited choices is beyond us.

You can find out if your 401(k) plan is loaded by asking your company's plan administrator (although if he was dumb enough to choose a loaded plan in the first place, there's a pretty good chance he won't know if the funds in it are load funds or not), and by reviewing your plan's literature. Don't be shy about calling your provider and asking them whatever questions you need to, either.

What should you do if you determine that your plan does, in fact, offer only load funds? Well, as much as it pains us to say it, you might want to go ahead and invest in your plan's load funds anyway – as long as your company matches your 401(k) contributions. The 'free money' your employer gives you through a matching program would more than make up for whatever load charges you are forced to pay. There is no sweeter deal in the investing world than 401(k) matching funds; take advantage if you can.

If your company doesn't have a contribution matching program, you should tell your job to take their 401(k) plan and shove it—you ain't investing there no more. You'd be better off investing the money you would have contributed to a 401(k) in quality no-load funds through a Roth IRA account. While you won't get the same up-front tax break you would by investing in your company's 401(k), you will enjoy tax-free withdrawals after you pass retirement age.

And even though you're a new employee who probably doesn't want to make waves, as soon as you're comfortable you and some co-workers should approach your plan's administrator and ask them to please, for the love of Pete, find a better 401(k) plan. There are many solid plans out there to choose from, none of which are loaded.

Thanks for the question.

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