401k Mistake

August 26, 2007

When I joined my current company, I simply rolled over the funds from my previous company’s 401k into the new one’s.

Big mistake.

I did that before checking what investment choices were available in the plan. At the time I thought that all 401k plans were “good” plans.

After looking at my funds more carefully, I noticed one thing: they’re crap. They’re all class C funds, meaning that I’ll be paying a fee every year. In addition to that, all the funds are expensive (cheapest one is 1.4%) and several of the funds have a fairly new manager (less than 2 years managing the fund), which makes me not want to put my money in it.

I would’ve done a much better job if I had kept my previous 401k plan at the same place or simply rolled them into an IRA.

There are a few, but important, things that you must keep in mind when choosing a fund:

The class:

If all the funds have the same class, then it’s a moot point, but you should still be aware of the fees you’re paying.

Class A - you pay fees up front

Class B - you pay fees when you sell them

Class C - you pay fees forever !!!!!!

Fore more detail, you can check BankRate.

You generally want to look for NO LOAD funds, but if you can’t find them, I would then choose class A funds. As long as you keep the funds for a long time (5+ years), you’re get more money out of the fees you pay.

The manager:

The fund’s performance is directly correlated to the manager. Pick a good manager, and most likely you’ll have a good fund. But this requires a lot of research and knowledge of the investors. This is a difficult thing to do because you need to live and breath funds to know what the good managers are. One tip for the average investor like you and me is to use other services’s tips.

I pay for a newsletter to give me mutual fund tips. But you can find useful tips on the big PF sites, like Kiplinger and Money (at CNN). They all have a list of top funds.

The manager tenure:

When looking at the fund’s performance, you have to make sure you’re looking at the performance for the current manager’s tenure. If the fund have performed well for 10 years, but the manager have recently retired, it’s likely that the new manager will have a different investing strategy and thus, different returns.

The fund’s performance:

Past performance does not indicate future results. But it’s a good place to look at. A fund that has consistently beat the SP500 (with the same manager), has a good chance of keeping at it.

The fund’s fees:

Only 25% of the funds outperform the market, so why pay high fees for someone to under perform? There are several well managed funds with really low fees (like Vanguard), so keep a close eye on the fees.

Posted in Investment