Your 401k’s Shortcomings – Limited Choice

Model T Ford - Give them any color they want, as long as it's black - Henry Ford

“Give them any color they want, as long as it’s black.”

Henry Ford

One of the major drawbacks to typical 401k’s is the limited choice of investment options.

Let’s face it – you are basically given a choice of bond or stock mutual funds, and in the stock mutual funds a choice of value or growth.  And then there may be an international fund thrown in there.  And that’s about it.

That’s a pretty blunt instrument of choices for something as nuanced and variable as the stock market, or bonds, or other investment opportunities out there.

Take the stock mutual fund choice as an example.  Today, as I write this, buying most stocks is not a particularly great deal.  Why?  Because the market is getting overpriced.

But not all stocks are overpriced.

Some, like Intel and Cisco as I write this, seem underpriced right now.  And both pay dividends.  And both have increased their dividends every year for some time.  So these would be good investments because they seem underpriced and are businesses that are probably not going away any time soon.

But you have no choice in your 401k to invest in them.  You either buy a stock mutual fund of many stocks – most of which are overpriced, or you don’t buy at all.

See what I mean?

Or a similar case with an international stock fund.

Well, what nation(s) are we investing in?  A few years ago, the BRICS, which stands for Brazil, Russia, India and China, were good international investments.  But today, Japan looks to be a good international play to make.

But you don’t get this choice.  You either choose the international basket of countries your 401k stock fund offers you or you don’t.  Yes or no.  No distinction.

Again, a rather blunt instrument, wouldn’t you think.

Additionally, there are other types of investments beyond stocks and bonds that can be quite lucrative — that you can’t even touch.

Master Limited Partnerships – known as MLP’s, come to mind.

Don’t let the name scare you off.  You buy shares in these just like stocks.  And they are listed just like stocks.  But they often pay amazing dividends because they are given special tax treatment by the government.  That is to say they pay no taxes as long as they pay out at least 90% of their profits to the shareholders (technically, the partners –you and me as investors).

They are typically in businesses that the government wants to encourage, like energy, which is why they are given the special tax treatment.  And to give you an example of just how lucrative they are, I invested in one back during the 2008 market crash that is paying me a 20% dividend.

No kidding – and it’s still paying me that dividend today.

But you can’t invest in them.  Not in your 401k.

Not a chance.

You get to pick from bond or stock funds.

And that’s pretty much it.

So it’s pretty clear to see that 401k’s offer very limited investment choices.  And that is a real drawback as far as I’m concerned.  After all, can you see Warren Buffett investing like that?

I don’t think so.

All that said, however, I still believe most people should invest in their 401k’s.

We’ll explore that subject, and why, in a future post.

To your health and prosperity – John Roberts


Leave a Reply