Companies are moving toward offering improved 401(k) options
Q. I’ve read that 401(k)s need to be retired because of the many issues that arose during the financial crisis. Some think that the plans aren’t a good savings vehicle and that the risk doesn’t match the benefit in retirement. I’m putting in about 18 percent of income. I am considering reducing my contributions to capture the company match, 8 percent. I’m 36. What are your thoughts about this change?
S.J.,by e-mail
A. There’s a really nice baby in the bathwater you’re about to throw out. More important, we’re starting to see a shift that will improve 401(k) plans. Recently, for instance, I spoke to employees at Texas Instruments. The first thing I did was congratulate them on having a plan that provided them with low-cost index funds for their investments, a recent change. This means TI employees won’t face “manager risk’’ or the expense of high management fees in typical funds. I think this is a trend.
In July, Business Week lauded IBM for revising its 401(k) plan to create the 401(k) plan of the future. What did it do? Among other things, its plan now offers a menu of index fund investments. Exxon-Mobil has had an index fund-based plan for years. Pretty soon, company managers will have to defend why they have expensive, managed fund-based plans.
Will this, or any other change, protect you from a bear market? No. If you want the returns you can get from equities, your retirement investments will have to contain some. And you’ll have to live with the rough ride they sometimes give. The important question for you is whether your plan offers good, low-cost choices. Or does it offer high-cost choices that will damage your long-term accumulation more certainly than a major bear market. If your plan is expensive, you should limit your contributions to an amount that captures the company match.
Q. Is it better to use a 401(k) loan at 5 percent to pay off $18,000 in credit card debt than keep the 29 percent interest rate I have on a credit card? My job is fairly secure, so payback to the 401(k) should not be a problem, and our plan allows us to still contribute if we have an outstanding loan.
S.D., by e-mail
A. I’d bet there is no fund choice in your 401(k) plan that will return a certain 24 percent - the difference between what you will pay on the 401(k) loan and the rate on your credit card debt. So, by all means, borrow from the plan. Pay off the credit card ASAP.
If you treated that $18,000 as a three-year loan at 5 percent, your monthly payment would be $539. If you tried to pay off the $18,000 at a 29 percent interest rate, it would cost you a great deal more. For instance, if you paid it off in the same 36 months, your monthly payment would be $754. That means you would pay an additional $7,734 in interest. If you made the same monthly payment as the 5 percent loan, you would have to make nearly 69 payments before the credit card debt was paid off. That would be about $17,787 for the extra 33 payments.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com. 
