Your 401k’s Shortcomings

I was reviewing a friend’s 401k the other day at their request.  And I was struck, yet again, with the investment shortcomings of 401k plans.

I always come away from a review like this with the feeling that 401k’s are blunt instruments.  They fall short for investors in a number of ways.  Here are some of those shortcomings.

The 401k seemed to not have any way to just keep your money, or part of it, in cash.  Which means you are forced to be fully invested at all times.  But great investors are seldom fully invested.

The 401k had no option to invest in gold and precious metals, and yet, gold has been one of the best investments over the past ten years – and offers other investment advantages as well.

Furthermore, there was a very limited choice of investment options to choose from.  Essentially, you either invested in bond mutual funds or stock mutual funds.

Worse yet, it was not apparent what specific mutual funds you were investing in.  The company was offering something called CIF’s – Collective Investment Funds – which were made up of one or more mutual funds.  I was literally forced to call the company and request that they mail me a prospectus.

And this made it very difficult to actually understand what specific securities you were investing in.  Interesting.  You are buying investments with your hard earned money and it’s difficult to know what you are buying.  What’s that Latin phrase again – ahhh, yeah, caveat emptor, that’s it.  Let the buyer beware.  Seems these 401k’s are asking you to ignore that one.

And finally, I came away from this review with the distinct feeling that all of these shortcomings, for you, the employee / investor, were in the best interest of the insurance company that was managing the 401k.  This is especially unnerving when you consider that it is difficult to impossible to withdraw your money from the plan.  So the administrators have captured your money and made rules favorable to them for you to invest by.

What a sweetheart deal that is.

We’ll explore all of these shortcomings in future posts, so stay tuned.  And I’ll use these points to explain why I personally never invest more than the maximum that will be matched by an employer in these funds.  So yes, I do think 401k’s have value since I invest in them.

But I agree with Jim Cramer and others that they have drawbacks.  So it’s good to have a clear-eye view of them as well so we can do the best we can with these blunt instruments.

To your health and prosperity – John

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