- For Want of a Nail (IRA Style)
- Stretch IRA
- Roth 401(k)
- Know When to Leave
- When Should You Take the Money Out and Pay the Taxes?
- Upside of Anger and Downside of 401(k) Accounts
- What You Don't Know Can Hurt You
This chapter is from the book
This chapter is from the book
This chapter is from the book
Upside of Anger and Downside of 401(k) Accounts
The Upside of Anger was a terrific movie in 2005 starring Joan Allen and Kevin Costner. Of course, generally we do not think of an upside to anger. Nor do we think of a downside to 401(k) accounts, but there are some as reflected in a number of class actions by employees against employers sponsoring their 401(k) accounts. The biggest problem with 401(k) accounts occurs when the company invests its employees' 401(k) money either exclusively or largely in the company's own stock. This was the unfortunate situation in which employees in the now-bankrupt Enron and WorldCom found themselves. The problem arises when workers choose from their investment options to put their 401(k) money in their own company's stock, something they know (or think they know, as in the case of Enron and WorldCom). The problem also occurs when a company matches contributions with stock in the company. Often this stock, provided as an employer-matching contribution, has restrictions. In the Enron situation, the matching stock could not be sold until the employee was at least 55 years old.
Even if you work for a good company, failing to diversify your investments puts you at greater risk of a financial downfall if the value of your company's stock goes down; this is true regardless of whether criminal behavior is involved, as in the case of Enron. Remember, just by receiving your salary from your employer, your finances already are tremendously tied to that employer. Spread out the risk. The old adage is correct: "Don't put all your eggs in one basket." Unfortunately, according to a 2005 study by Hewitt Associates, 27 percent of employees hold at least half of their 401(k) investments in their employer's stock.
Another problem that can turn up with some 401(k) plans is a limited number of mutual funds for investing 401(k) money. In addition, in some instances, these mutual funds either have been saddled with particularly high fees that eat into earnings or are poor performers when compared to other funds. The solution to these problems is found in making employees more aware of the choices that are available through the company's 401(k) plan and lobbying company officials for changes in the plan if it is not as investor-friendly as it can be.