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Hi. I'm a contract programmer (hourly employee), and the company I'm working for has a 401K plan that I'm currently putting 15% in. I plan on maxing out at 10,000 every year. However, the company does not match ANYTHING for hourly employees like me. Also, the 401K plan uses Merril Lynch, and it does not include any index fund. And the other funds they do have stink!

I got a copy of "the letter" that you guys have, and I plan on sending it to my 401K person. But assuming that does no good, what should I do? I plan on consistantly beating the S&P500, and none of their mutual funds (at least the ones in our plan) do not. I know about the tax advantages of the 401K, but considering that my company matches nothing, and the funds all stink, do the tax advantages still outweigh investing all that money after taxes on my own. I make approximately $105k/yr if that matters (as far as taxes are concerned).

Thanks in advance,

Brad
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>> I plan on maxing out at 10,000 every year. However, the company does not match ANYTHING for hourly employees like me. Also, the 401K plan uses Merril Lynch, and it does not include any index fund. And the other funds they do have stink! <<

My sympathies. At least you're probably not paying loads through the corporate 401K. (But you should check on this, by all means.)

>> I plan on consistantly beating the S&P500, and none of their mutual funds (at least the ones in our plan) do not. <<

Well, if they won't change and their funds can't beat the 500, you're out of luck. Companies do have some amount of fiduciary duty to employees with respect to their plans, primarily in making a good faith effort to create a decent plan. Mention it to them, by all means. If they are going with another company because of kickbacks given to them, they may not be fully meeting their fiduciary duty to you.

I know about the tax advantages of the 401K, but considering that my company matches nothing, and the funds all stink, do the tax advantages still outweigh investing all that money after taxes on my own.

Well, the tax deferral probably makes it worthwhile unless you feel pretty confident you can achieve market-crushing returns over the long term. In any event, it may be useful for you to contribute as much as necessary to reduce your AGI; see below.

I make approximately $105k/yr if that matters (as far as taxes are concerned).

First of all, congratulations for a problem a lot of us would like to have. :)

You're "on the cusp" with respect to being eligible for contributing to a Roth IRA, which gives you both tax-privileged treatment and self-directed status.

If you're single, the allowable $2,000 contributions are phased out between $95,000 and $110,000. So if you're earning $105,000 in AGI, you can only contribute about $667. If you put $10,000 into your 401K, you can get the AGI down to $95,000 and contribute the full $2,000 each year. That's because deferred income such as 401K contributions doesn't count toward AGI.

For married couples, the phaseout starts at $150,000 and ends at $160,000 and similar AGI reduction strategies to allow you to fully utilize the Roth are likely in order.

Good luck!

Tim
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Also, the 401K plan uses
Merril Lynch, and it does not include any index fund. And the other funds they do have stink!

I got a copy of "the letter" that you guys have, and I plan on sending it to my 401K person. But
assuming that does no good, what should I do?


Brad,

I've bashed the monumental disdain Merrill Lynch has for its clients so many times I'm sure people are quite bored about it by now, but it can safely be said that if your company is allowing Merrill Lynch any entree into the management of a 401k plan a few things can be assumed.

1) The costs Merrill is charging to administer the plan are not truly competitive.

2) The mutual fund choices are, to say the least, uninspiring.

3) There will be a real tenacity at Merrill not to permit any changes, such as the addition of index funds.

Merrill has a stated public policy against index funds, for those that aren't aware of it. Check out, http://www.plan.ml.com/zine/perspectives/perspstory500.html, in which John "Launny" Steffens takes a rather pathetic shot at this site:
"Wisdom is also about helping our clients navigate their way through
one by-product of the digital age that is already clear: information
overload.

In a recent count...the Web had over 320 million pages and the
number is growing every day...we have seen only the beginning of
this information overload.

Wisdom is needed not only because of the quantity of investment
advice...but also because of the quality.

For example...one popular investment site on the Web
recommendations investing entirely in stocks through index funds.
But the same site is filled with supposed hot stock picks and most
incredible of all...a lesson on how to short stocks and active
encouragement to do so. "

Mr. Steffens' attitude is unfortunate but predictable.

I would be truly interested in hearing what Merrill's response is to adding an index fund. Even Merrill's own index fund (which of course is very, very expensive by comparison to Vanguard's) would be quite preferable to the other funds Merrill offers.

I will do what I can to think of what other methods there are to getting an index fund into a plan, but I think that tenacious demands, and organizing other co-workers to push for change is the best bet.

Bill
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>> I plan on maxing out at 10,000 every year. However, the company does not match
ANYTHING for hourly employees like me. Also, the 401K plan uses Merril Lynch, and it
does not include any index fund. And the other funds they do have stink! <<

My sympathies. At least you're probably not paying loads through the corporate 401K. (But you
should check on this, by all means.)


Ziggy,

Great post! (As usual I might add.)

Brad,

Yes, I'm interested to hear which class of Merrill's alphabet soup of funds is the one in your 401k plan. Is it the pernicious "D" class, or one of the other equally tricky ones?

The fact that there is no load actually isn't any help. Merrill has a very tricky system whereby it exacts its two pounds of flesh from shareholders regardless of whether there is a front load, a deferred contingent sales load, or just a really high 12b-1 fee.


Bill
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