Monday, July 28, 2008

How to deal with a bad 401(k) plan

By the Mole, Money Magazine's undercover financial planner

NEW YORK (Money) -- Question: Both my husband and I have 401(k)s that are annuities backed by mutual funds. The returns, compared to our rollover IRAs in Fidelity funds, are unimpressive. What is the best strategy for dealing with a lousy 401(k)?

The Mole's Answer: Unfortunately, I see this far too often in my practice. Let me explain why so many companies offer lousy 401(k) plans, and then I'll give you some practical advice on moving forward.

It's relatively expensive for an employer to have a 401(k) plan administered. There is quite a bit of record keeping and compliance issues involved. But many custodians will offer these services to employers for little or no cost - to the employer, that is.

The 401(k) providers don't actually care how they make money, just as long as they make a tidy profit. That's why so many providers offer the employer low-cost plans and make up the difference by offering the employees very expensive mutual fund options. These 401(k) providers make a bundle off of the really lousy choices they offer the employees.

Smaller employers especially can't afford to pay the hefty administrative fees associated with these plans and I've seen plans that average fees of 2% - 3% annually. Highway robbery, if you ask me.

A plan like yours that offers annuities within a 401(k) is actually making you pay for the needless tax-deferral within a tax-deferred account. In essence, it's like wearing a raincoat inside your house. I've seen annuity offerings more often within the not-for-profit 403(b) plans, but they can be offered in 401(k) plans as well, as is the case with yours.

My first piece of advice is to start with your employer. This is contingent upon having the right relationship with your employer and bringing the matter up to the owner or the human resources department. I've found that many employers have no idea that they've provided their employees with such lame options. Once they know, they may be willing to make some changes.

If the employer changing 401(k) providers isn't an option, here are some practical tips:

Never miss out on the employer match. I've seen some pretty pathetic 401(k) plans, but I've never seen one so bad where it made sense to pass on the free money the employer is willing to shell out via a partial matching of the employee's contribution.

Look into IRAs. Once you've contributed to the employer's matching level, see if you are eligible for an IRA contribution. If so, you can contribute $5,000 this year ($6,000 if you are 50 or older) and put these funds in lower-cost, more diversified options that you can find at providers like Fidelity or Vanguard.

Consider bonds. Hopefully your 401(k) account is only part of your nest egg. Build your total portfolio using your 401(k) as part of your retirement and look at your entire asset allocation. Bonds are usually best suited for your tax-deferred account, as where you locate your assets is critical. Sometimes you can find a bond fund in your offerings that is less outrageously expensive than the stock funds.

Favor index funds. If you are buying an equity fund, see if your plan offers some kind of index fund. Often an S&P 500 index fund with an expense ratio of 1.00% or more is still better than an active fund with a 2.00% expense ratio. I don't like holding just the largest 500 domestic companies, and prefer to own the total stock market. But if you need to, you can go outside your plan to buy a fund like the Vanguard Extended Market Index fund (VEXMX). This owns all U.S. stocks except the S&P 500 so it works as a great supplement to an S&P 500 fund. Buying about $1 for every $4 you have in an S&P 500 fund will approximate the total U.S. stock market.

Opt for a rollover. Roll out these funds to an IRA the minute you leave your employer. That's the only way to get out of these really lousy selections. Make sure you do a direct rollover so you don't inadvertently create a taxable event.

For more information on what to do when you are captive to a lousy retirement plan, I suggest you read Dan Solin's, "The Smartest 401(k) Book You'll Ever Read."

Short of quitting your job, the only strategy is to minimize the negative impact a lousy 401(k) plan will have on your nest egg. Keep the damage to a minimum while you are at this employer and then run for the hills as soon as you leave.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail

Original here

Jewish Activists Hack Anti-Semitic Facebook Group

( A group calling itself the Jewish Internet Defense Force (JIDF) hacked into a Facebook group called, "Israel" is not a country!... ... Delist it from Facebook as a country!" early Sunday morning, erasing thousands of members' names from the site. The JIDF was founded by an American Jew in response to a terrorist attack that took the lives of eight young yeshiva students in Jerusalem earlier this year.

"This is a major victory against Jew haters," proclaimed a JIDF source who spoke on condition of anonymity. The source said the group "goes after Jew-hating internet sites." More than 4,000 names were deleted from the anti-Semitic "Israel is not a country!" group's database by the hackers.

A JIDF statement posted on the hacked site announced, "This was one of the most vile, most antisemitic, most pro-Jihad and most disgusting, and most importantly, most ACTIVE hate groups on the internet. It actively promoted hatred, violence, murder, and genocide. Despite tens of thousands of complaints, Facebook wouldn't remove it, as they claimed that this incitement to murder was "legitimate political discourse" - Facebook's negligence and abdication of responsibility gave us no option but to take matters in our own hands....."

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Britain Cracks Down On Illegal Downloading

(AP) Britain's six biggest Internet service providers have agreed to work with the government and music industry to clamp down on illegal downloading, a music industry association said Thursday.

BT, Virgin Media, Orange, Tiscali, BSkyB and Carphone Warehouse signed up to a government-negotiated plan and will send letters to hundreds of thousands of prolific downloaders warning them their activity is being monitored, according to the BPI - formerly known as the British Phonographic Industry. The Motion Pictures Association of America also signed onto the plan.

The agreement is important because it is the first time the British government has gotten involved in combatting illegal file sharing. Equally important is that Internet service providers - who have previously resisted music industry demands to cut off customers who share files illegally - have agreed to become involved, too, though not to the level of cutting off customer's service.

Geoff Taylor, the chief executive of the BPI, said the plan marked an important milestone because all service providers "now recognize their responsibility to help deal with illegal file sharing."

The service providers also agreed Thursday to develop legal file-sharing services as an alternative to piracy.

The IFTI, the international recording industry trade body, said the agreement is a step in the right direction, but that the government needs to do more.

"It is important that it (the government) now drives the process forward to a solution with urgency, and that it achieves concrete, measurable results," IFTI chairman and CEO John Kennedy said.

Britain is not the first country to work with Internet service providers in an effort to stop illegal file sharing.

In France, President Nicolas Sarkozy has sought to crack down on illegal downloads and pushed a plan that would suspend or even terminate Internet service to multiple offenders.

The plan was signed by the government Internet service providers and entertainment industry representatives in November 2007. It allows for the creation of a regulatory agency that, upon artists' requests, could send warning notices to offenders through the service providers. Multiple offenders could then be put on a blacklist barring them from subscribing to any of the ISPs.

However, only pieces of the plan have been put in place and it has yet to be formalized into law.

An earlier 2006 law created sanctions for significant illegal file sharing of up to three years in prison and about $471,000 in fines.

Although Britain's plan does not require service providers to cut off customers who share files illegally, consumer rights groups are worried the government may demand this in the future.

"We think that is a disproportionate response," said Becky Hogge, the chief executive of the consumer rights organization Open Rights Group.

Hogge thinks stronger enforcement measures will not deter illegal downloading.

"They'll have the effect of driving illicit file sharing further underground," Hogge said.

Industry estimates say 6.5 million Britons have downloaded files illegally over the past year.

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