In last Tuesday’s “What The Fee” post, I wrote about how I despised my 401(k). A couple months back, I decided to do something about it that may strike some as a bit insane. Today I spill the beans. More on that in a moment. First though, it turns out that I owe my 401(k) a little bit of an apology.
- The $500 annual fee that I complained about is actually paid by my company. Big thanks to DoneByForty for pointing this out.
- I have some really horrible funds in my portfolio and I was investing in them. A couple of them charge almost 2% in fees. However, not all of my choices are that bad. Many are below 1% including Fidelity’s Contra which Jim Collins pointed out isn’t terrible at .74%. I have since moved most of my money to Contra and some of the other lower fee options. Again, part of the problem was mine in that I didn’t do my research and had my money in high fee funds. If you haven’t already, check out Mr. Collin’s excellent write-up on 401ks.
I do wish that my 401(k) had more options from Vanguard. They have only one and it’s a bond fund which doesn’t really get me going.
What I tried to do and what I did
In last week’s post, I described how I tried to get my employer to let me quit so that I could roll my 200K over into something else. My plan was to quit, roll my money over and then be rehired. My boss thought I was a bit nuts. I tried explaining how I didn’t like the 401k and the reasons, but it went over his head. There were also a bunch of logistical issues that made my scheme a bad idea.
My next course of action was to see if they had a self-directed plan. I had one of these at a previous company and thought it was great*. With a self-directed plan, your 401k becomes more like an eTrade account, allowing you to invest in whatever you wanted. The answer to this was also a big “No!”
The idea that I came up with was to take out a 401k loan and invest the money myself. The maximum loan with a 401k is $50,000 which is only 25% of my holdings, but better than nothing. Before you label me as a nut, allow me to address a couple issues regarding 401k loans. Two big reasons are often thrown out there for not taking out a loan:
- If I lose my job or quit, I’ll have to pay the money back or incur a big tax penalty. This is not an issue since I have enough cash to cover the loan.
- The loaned money is not working for you. If I have a loan balance of 50K, that is money not participating in the markets. Over the course of a 5 year loan, that could add up to a big chunk of change. However, since I am investing the money myself, this is also a moot issue.
So, I did just that. Earlier this year, I took out a 401k loan. I haven’t quite decided yet where to put it all**, but the wise thing to do would be a Vanguard index fund or two since this is where my 401k money should be in the first place. I may throw a little bit Warren Buffett’s way as well.
Would you do the same in my situation? If so, where would you put the money?
*The self-directed plan actually turned out to be not so great. It was the late ’90s and I got caught up in the Internet hype, losing my pants in a variety of ridiculous investments. I would certainly invest these funds much more conservatively if I had the opportunity now.
**Since this money is borrowed, I’m not counting it towards my nest egg on the right side of this page.
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