Not all 401(k) programs are created equal, that’s a fact I’ve known for quite some time and one cemented after reviewing The Smartest 401(k) Book You’ll Ever Read by Daniel Solin this past weekend. While the idea that 401(k) plan administrators may pay kickbacks to companies turns your stomach, the reality is that it occurs and we must adjust to the world we live in.

So, what can you do? Review your company’s 401(k) plan options and find the cheapest funds that satisfy your needs. The best options are those that most closely mimic index funds, such as the S&P 500 Index or a Total Market Index fund. It’s best to avoid the actively managed funds as the vast majority of those can’t even beat their benchmarks, let alone earn enough to beat it after the fees.

You can’t control the fund options but you can control how much you pay in fees with your fund selection.

Every quarter, I receive disclosure forms from my employer’s 401(k) plans. They discuss my current account balance, my gains and my losses, the fees I’m paying, and a broad look across all the funds available to me. It’s a good quarterly snapshot and one that I felt was adequate. I had online access to my account, so I could review my holdings whenever I wanted to, but for the less technology savvy the once a quarter look was probably adequate.

Looks like the Department of Labor said it wasn’t enough. The Department of Labor recently recommended improved 401(k) disclosure regulations that would require 401(k) plan administrators to provide more information about funds starting in January 1, 2009. This includes 1-, 5- and 10- annualized performance tables for every fund along with their benchmark. It would include annual expense ratio figures and other cost figures. It’s information that my plan administrator always provided so it’s surprising it would have to be mandated. Actually, it’s sad that it had to be mandated.

This simply means that there are workers out there who didn’t have access to this information. While you probably could’ve dug deeper for it, all funds will give you expense ratio figures, making it easier helps everyone.

There are some things missing from the regulations but it’s not a horrible start.

The High Cost of Poor Disclosure [Yahoo! Finance]

I’m not a big fan of 401(k) debit or credit cards because I’m not a fan of raiding your retirement accounts to pay for non-retirement expenses. I think that the retirement bucket should essentially be a lockbox (*gasp* the dreaded lockbox phrase) that you don’t touch unless you’re actually retiring.

However, the cat’s been let out of the bag with 401(k) debit cards and they do improve 401(k) loans as a whole. Before debit cards, you would have to take out a lump sum loan rather than borrow only as much as you needed. With debit cards, you draw down the funds as you need it and it reduces the interest you do pay. While I don’t like the idea of borrowing from your 401(k), at least this minimizes the damage.

Senator Charles E. Schumer of New York, recently in the news a lot for his letter that the Office of Thrift Supervision said caused IndyMac’s collapse, and Senator Herb Kohl of Wisconsin introduced new legislation that would outlaw credit or debit cards associated with 401(k)’s and retirement plans.

No matter who takes a crack at 401(k) mistakes, they invariably come up with the same advice over and over again. That’s not to say it’s not worth reading, it definitely is, but it shows that the basics of how to take advantage of a 401(k) are easy and simply bear repeating.

The latest 401(k) mistake post is by Lauren Tara LaCapra at Main Street, a personal finance blog by TheStreet.com. This post is slightly different from your standard 401(k) mistake post because it actually points out a few mistakes that, while aren’t absolutely drop dead critical, are certainly important and not echoed elsewhere (at least not often).

Going beyond the standard don’t withdraw early, don’t pay penalties, and contribute more, Lauren adds that you need to keep your paperwork in order. “Participants who don’t inform former employers about their relocation could lose out if the company is unable to locate them when it comes time to distribute benefits. Van Fleet says this happens to a “surprising” number of people, when a simple change-of-address card could have kept thousands in their retirement coffers.”

I have no idea why 401(k) participation wasn’t automatic in the first place and why it took the Pension Protection Act of 2006 to make it possible. The benefits of the law are already being seen as Nationwide Financial Services reported that 96% of employees are now saving for their retirement versus 74% in 2006. While the cynics will say that defined contribution plans like the 401(k) take the burden of retirement off employers, I saw we need to face the realities of the day. The reality is that defined benefit plans like pensions carry their own set of risks, ask anyone who had a Delta pension. I’d rather we face reality rather than fight it for the sake of pointing fingers.

The findings come as Americans face a shortfall in funding their retirements. The average balance in a 401(k) account was $61,346 at the end of 2006, according to the Washington-based Employee Benefit Research Institute. The savings will matter more in the future, as the number of companies offering traditional pension plans has declined by two-thirds over the past 20 years, according to the Retirement Security Project, a Washington-based group that advocates policies to help Americans become financially secure.

[Washington Post]

It’s been reported in Money on CNN Money that approximately 25% of employers with 401(k) plans are now offering professional investment advice for their employees for a fee of 0.4% to 1%. What they’ll do is take a look at all of your funds and help you select the right mix given your situation and other investments, according to Money.

It seems to me that, given limited options, having a professional planner take a look at your funds at a cost of 0.4% to 1% is a big pricey. I’m not entirely sure what they offer besides knowledge of asset allocation fundamentals and what you should do based on your risk tolerance, both are concepts you can read from a book. Considering your 401(k) shouldn’t be touched until you retire, it’s not like you have savings goals in the near term (don’t borrow for a house, please please don’t) that you need help planning for.

It seems like a pricey service for 0.4% to 1%, unless you simply don’t want to do it yourself.

My wife works at a relatively small startup-type company that has a 401(k) plan but offers no employer match. One of the things I had researched was whether it was a good idea to put funds towards a 401(k) plan or if other options were better for her and broke it down to several considerations.

$15,500

That’s how much money you can put, tax-deferred, in a 401(k). What that means is that you don’t pay tax on it today, you defer the tax until you start taking withdrawals in retirement. When you make a $1 contribution, it reduces your income by $1 and you don’t pay tax on that money. The benefit from the 401(k) is that you can invest your tax-deferred money and avoid taxes until retirement. There is no other investment vehicle like that for an employee in terms of magnitude.

The only other similar option would be a Traditional IRA but that has some downsides. First, depending on the rules of your 401(k), you may not even be able to deduct contributions to a Traditional IRA. Second, it shares the same contribution limit as a Roth IRA, which grows tax-free (you pay taxes on the contributions). I recommend taking advantage of the Roth IRA, so a Traditional IRA is almost never an option unless you’ve exceeded the income limits.

Fund Options

If your employer lets you pick from a nice healthy basket of mutual funds or stocks, that’s the ideal. If your employer, such as my first employer, only offers their own private versions of funds then you may be in a tough situation. You might want to investigate what types of funds you have available as well as the expense ratios associated with them. Also, be sure to review the administrative fees associated with your employer’s plan. A mere 1% in fees can take a huge chunk out of your retirement savings.

Now, are fees reason enough to stop contributing? No, but if you have multiple options, it’s good to investigate each one. Not all of us are going to have $15,500 to contribute, or even $5,500, so you’ll want to make sure you get the most bang for your buck.

Ultimately, she participated because the tax benefits were significant enough and because her employer offered a nice selection of funds. Despite not having an employer match, the tax-deferred status of earnings and the amount she could contribute was simply too good to give up.

Plus, nothing says you can’t ask your employer to start offering a 401K match!

Catching up is hard to do, unless you’re talking retirement savings and you have the power of the US Government behind you. The contribution limits for various retirement accounts are increased if you are over the age of 50 and you can use them to your advantage if you didn’t contribute as much in your younger days. Below is a table listing the contribution limits for each account as well as the catch-up amount for the 2008 tax year.

So, if you’ve considered increasing your contributions to either account, know that you have a little extra breathing room if you want to contribute more and “catch up.”

If your company doesn’t match 401(k) contributions, email them. Email them, write a letter, collect signatures for a petition, do whatever you want but contact them and let them know that it’s important to you and other people in your company for the match to be offered. This is especially true if you don’t have a defined benefit plan, like a pension, because then your company isn’t contributing at all towards your retirement.

Now, you might say that writing letters and collecting signatures isn’t going to work or that your company cannot afford it. To the first concern, I say that unless you tell them, they won’t know. Maybe your company hasn’t tried it because they don’t think it’s important to the employees. If you’re a startup and there are only 50 people, it’s not worth it if only 10 people contribute. However, if you get all 50 to sign up, at least the benefits department is now aware that a demand exists. That leads to concern number two, whether it’s affordable. I don’t know the answer to that and chances are you don’t know either. Let them decide, you just have to let them know you’re interested.

So, if your company doesn’t have a match, have them explain why.

I’ve left two jobs in the last five years and each time I rolled over my 401(k) into a Rollover IRA held at Vanguard. In both cases, I rolled over the IRA within a few months of departing my job and I did so for a small handful of reasons.

The number one reason for rolling over my 401(k) into a Vanguard Rollover IRA was simplicity. Why deal with yet another account accessed through yet another website, when I could integrate everything and deal with that account through a great brokerage such as Vanguard? I don’t need more fund balance mailings and fund performance reports, I need my life to be simpler so I can focus on the other things that matter. The end result was that I rolled both of my 401(k)’s into a single Vanguard account (and then I turned on electronic delivery of statements!).

The second reason was for diversification, which is related to simplicity. If I have to access two 401(k)’s in two accounts, it’s much harder for me to control the asset diversification because I couldn’t feasibly see two accounts at once and tweak them concurrently to get the right diversification. One of the 401(k) had some home-brew funds (not created by a major brokerage like Vanguard or Fidelity), so I couldn’t even be certain what the asset allocation within the fund itself was like. It was far easier to pull them all into Vanguard and break them up into Vanguard funds, though any major brokerage like T. Rowe or Fidelity would’ve sufficed as well (I chose Vanguard because I’ve had a long history with them and never been disappointed).

The third reason was cost. At Vanguard, I pay no account maintenance fees whatsoever. If you turn on electronic delivery, the administrative costs go down to $0 and are integrated into the expense ratios of each fund. The funds at Vanguard are much cheaper than the ones at either of my 401(k) plans, though some were pegged to the same benchmarks. Cheaper isn’t necessarily better, much like expensive isn’t necessarily better, but Vanguard has a solid performance record and cost is something I can control.

One account instead of three, an accurate picture of diversification, and controlling the one aspect of mutual fund investing I can control (cost), were the reasons I rolled over my 401(k)’s to a Rollover IRA.