What can we do when we are stuck in a conservative 401(k)?

Question

Right now, I am working as a software contractor and my agency allows 401(k), but only in conservative investments, such as Vanguard Target Retirement 2030, 2035, or S&P 500 index fund, or at most a T Rowe Price Growth Fund (and no matching). We cannot buy any stocks or ETF such as Apple or QQQ. (note: some companies' 401(k) allow employees to buy almost any stocks, ETFs, or mutual funds).

What can we do when we are stuck in a conservative 401(k)? Should we still put money in it, just so that it "expands" our 401(k) amount, so that 6 months or 3 years later, when we work for a company that allows buying almost any stocks or ETFs, then transfer the amount over?

That is, 3 years later, I will have $19,500 x 3 = about $60,000 for my 401(k) so that I can buy or sell and not incur any tax until I take the money out when I retire (or if Roth 401(k), then no tax at all). If I don't put money in now, 3 years later, I will have about $60,000 less in the 401(k) account for me to invest (and buy and sell).

And at the same time, is it also possible to just also use IRA or Roth IRA so that each year, there is an additional $7000 to increase my retirement investment pool so that 3 years later, there will be an additional $20,000?

Answer 1

401(k)s are designed to provide easier access for average workers to save for retirement, and provide an incentive for employers to provide plans that help by either matching contributions, or providing "safe harbor" contributions that are provided whether you contribute or not (sometimes both). It is meant for long-term (retirement) investing. It is not meant to be a vehicle for day-trading or highly risky investments.

Most plans do not allow individual stocks or arbitrary ETFs, partly because there are funds that have lower costs if they are in retirement plans, partly because of the administrative overhead of tracking individual stock trades, and partly to keep people that don't know what they're doing from putting all of their retirement savings in dogecoin, for example.

But, if you plan on leaving in 3 years, then you can max out your 401(k) now in equity funds (which provide significant diversity without reducing average returns much), and when you leave, you can roll it into a traditional IRA with a different broker. Then you can invest in whatever that broker allows (mine allows individual stocks, bonds, derivatives, and a very wide array of ETFs). You're not going to lose much return over those 3 years compared to what you could get in the next 30 years if you invest it wisely (not luckily).

There's a saying that "Time in the market beats timing the market every time". I'd suggest the same goes for what you invest it. 30 years in a "conservative" S&P 500 will most likely perform better than 30 years of single stocks, unless you are very skilled or very lucky.

(This is not investment advice - it's just an example of what you could do to increase the universe of investments that you have access to.)

Answer 2

Because the match is zero, do the following:

Step 1: Figure out how much you need to contribute each year/this year towards your retirement.

Step 2: Determine how much you can contribute to a IRA/Roth IRA this year/each year.

Step3:

• If step 1 is lower than the number in step 2, then contribute nothing to the 401(k).
• But if the number in step 2 is lower, then subtract them and contribute the difference into the 401(k).

The big issue with the 401(k) isn't that you see the investment choices as conservative it is the lack of company match.

Answer 3

As a former software contractor, I feel your pain. Generally speaking the contractor provided 401Ks are a bad deal but not for the issues you raised. Often times the fees for the 401K are passed on to you the contractor and they can be steep. So even if you have investments you like, the fees may make full contribution undesirable.

For the most part, mhoran_psprep's advice is spot on. There is one wrinkle however:

A more desirable outcome is to do a corp-to-corp contract. It takes a lot of paperwork and you will need some accounting help. But you set yourself up as a S-Corp and do your own solo 401K. Vanguard, Fidelity, and Schwab all do this for free. Because you are the employer you can designate your own match and it is possible to hit the 53K per year limit on contributions for a single employee. No fees and you can invest in whatever you want.

There is some paperwork involved, and you have to stay on the good side of the IRS, but it can be very lucrative. Your take home pay can greatly outpace a W2 contractor, and decently outpace a W2 employee (even after deducting for benefits).

The trouble is finding corp-to-corp contracts. Not many places allow them.

Answer 4

Endowment manager here.

An endowment is a huge block of capital that was donated to universities and other non-profits, so that the proceeds could fund important programs such as a mathematics chair.

We have one job. Grow, grow, grow that endowment! We must optimize for absolute maximum growth over a LONG-term horizon.

And, because of our social responsibility, there is close legal scrutiny on how that money is handled, by the state attorney general. The relevant law is UPMIFA (Uniform PRUDENT Management of Institutional Funds Act). The funds are not to be gambled.

So endowment managers tend to make endowments look like (more or less):

• 70% domestic stock funds
• 10% foreign stock funds
• 10% bonds
• 10% more "interesting" investments

An endowment that invests like that is not going to have any legal trouble, even if the domestic stock market crashes. Because this kind of asset mix is the most reliable (prudent) choice.

It is invested like that because "growth" and "volatility" are a matched set. The tendency to burst in value or crash, that is volatility. Assets with the best growth also have the most volatility. So you need to tolerate volatility, which, fortunately, endowments do very well.

Did you notice that it looks exactly like your 401K's "2065 fund"? Yeah. There's a reason for that. Competent investment managers believe that is the best growth option available for long-term growth.

Because when the target is 2065, short-mid term volatility is not a factor. If the stock market crashes for 10 years, a 2065 fund doesn't care, because it can wait it out.

Now in a closer-in fund like a 2030 fund (target 8 years), you have a problem: a 10 year depression in stock prices could be devastating as there is no time to recover. As such, in the 20 years before target, these funds slowly move out of stocks and into "safe" investments like bonds. A 2025 fund is probably mostly into bonds at this point.

If you want to listen to experts...

read John Bogle's book "Common Sense on Mutual Funds". It dispels the myth that a genius stock picker (or a self-investing sophomoric person) can "beat the market" with skill, or with anything other than dumb luck, which doesn't scale.

If you still want "max growth" despite the volatility risk...

then simply select the Vanguard 2065 fund, or whichever longest fund is available. You'll be investing in lockstep with typical university endowments, which are absolutely invested for max possible (reliable) growth.

If you don't want to listen to experts...

and want to prove that Bogle is wrong...

then split your investment. So part of it goes into a 401(K) and part goes into an IRA.

IRA's (even Vanguard ones) have far more versatile investing options... and with good accountants or legal, you can put some truly loopy stuff into an IRA.

So, use the IRA to "fill in the gaps" in your portfolio that you seek to fill.

If that is not enough, and you want to counteract the 2065 Target Fund investments, then short it in a non-retirement investment account, as a hedge. Short it, while also doing the other trades you think are a better investment. That's kind of neat, because that account alone will prove your own genius or folly. If your individual stock picking beats the target 2065 fund, the net value of that account will increase. If your stock picking underperforms the target fund, this account will lose money. And we will see!

Answer 5

I'd challenge you to invest in the 'conservative' 401(k) but forget about that money. Research all the funds offered once, invest as broadly as you can/choose in them on a recurring basis, then put it in the background. Forget it.

Start finding more money you want to invest elsewhere, and prepare for your retirement with that. Set up a brokerage account, buy and sell and trade stocks like you're on a Limitless pill (hopefully with those results) - you already don't have a 401(k). That money from your paycheck is like taxes... not of note to you any longer. Just let it be there. When you're investing for that long of a term, index funds like S&P are the way to go. No one consistently beats the market... time in > timing. So then you have your actively managed retirement account, and in 20-60 years that money you "forgot" about will probably be just enough to fill in all the gaps for things you forgot to plan for in retirement (who knew your daughter's 'second' kid was actually quadruplets! or that a colonoscopy will be $90,000 by the time we retire), and maybe some extra vacations, or being able to bring along a friend for vacation who otherwise couldn't make it.

Seriously though, Warren Buffet, the "Oracle of Omaha", doesn't beat the S&P. I wouldn't worry about it being too conservative of an investment.

The only time I'd say it's not worth putting the money in a 401(k) is if you have specific, "verified"(whatever that means to you) investments that you want to take a larger risk on and you know tying up the capital in a retirement account means it can't be touched for

[best friend's dad helped her start a(nother) new makeup line]
or
[uncle Jim's auto-body & gym (work your body while we work your car) chain]
or
[something reasonable that actually makes sense].

But if you don't have this in mind, planned, vetted, and ready to go, I'd still be putting the money in the 401(k) - IF you're making this decision be well researched and certain - you can't go back and put in pre-tax dollars, if it's really that important, you can withdraw for a penalty. Personally think the 401(k) is best - but I'm too risk averse - and there are some cases I wouldn't fault someone for it - just not generally.

(This is not investment advice - it's just my personal thoughts on this. You do you)

Answer 6

If your best investment choices are target retirement funds, one of the ways to increase the "aggressiveness" is to pick a target date farther in the future. The whole reason target date funds exists is to be aggressive first and then taper back to more conservative investments as the target date approaches.

Depending on your company (and if this is a battle you want to fight) perhaps you can convince your management why it would benefit the company to expand your investment choices.

In my opinion (and I'm no financial planner), target retirement funds and indexes like the S&P500 are actually the right choice for most companies' 401(k) plans. Retirement accounts are not for day trading and single stocks don't provide the diversification needed for a "set it and forget it" investment approach.

Count your lucky stars that your company doesn't have you locked into annuities offered by insurance companies, company stock, or high fee custom offerings.

Answer 7

I'd say you're in a crawl, walk, run situation. Your question mentions a lot of different things at the same time.

Investment Vehicle: 401(k) vs IRA

A 401(k) is an employer sponsored retirement plan. It's functionally the same as an IRA but has somewhat better protection from creditors should you ever have to file bankruptcy. The reasons you'd choose to participate in a 401(k) rather than opening an IRA of your own are essentially:

1. To take advantage of an employer match, and/or
2. a higher annual contribution limit ($19,500 for 401(k) vs $6,000 IRA)^[*];

The best and most common advice is that you should minimally participate in a 401(k) to achieve the maximum match; a 50% employer match is essentially an immediate 50% return on your contributions (though match funds can be subject to vesting schedules etc.)

Today, the core reason someone may want to avoid their employer's 401(k) would be fees more than lack of fund choice. If there was no match and that S&P500 fund carried an expense ratio of 1% and/or the custodian charged a "bookkeeping fee" etc it's reasonable to fund an IRA to the max before participating in that 401(k) because low or no fee IRAs are so easy to find. At this point a typical expense ratio for an S&P500 or "Total Market" index fund should be well under 0.1%

And, yes, you can contribute to both an individual IRA and an employer 401(k) at the same time.

Taxation Scheme: Traditional vs Roth

Once you've made the decision of investment vehicle, 401(k) or IRA, there's the choice Traditional or Roth tax preference scheme. A typical 401(k) works like a Traditional IRA. Funds are deducted from your paycheck pre-tax (income taxes are avoided) and when you've reached retirement age your distributions from your 401(k) will be added to your income and subject to the normal income tax rules in place at the time of the distribution. There is another option known as Roth. In a Roth arrangement income taxes are paid on the contributions but and distributions in retirement are taken tax free. Traditional versus Roth is a complex topic, most 401(k)s don't offer Roth. Roth IRA also offers the "benefit" that you can withdraw your contributions before your retirement age (again most 401(k)s don't allow this).

Investment Choices: (can of worms)

If you're young, retirement savings is about leveraging time. A reliable 7% per year is typically more desirable than active trading individual stocks. In a retirement account, you're not looking for a 10x gain from some hot new bio-pharma stock; you're leveraging your 30 to 40 year time horizon. Generally speaking a 30 year old is far better off becoming a more valuable professional in their field than spending time listening to MSNBC and investment blogs to hunt for alpha.

The general rule of thumb, everyone quotes Buffet on this, the best strategy for most people is to buy and hold a low-fee broad market index fund; and your "conservative" 401(k) has one of those.

General Advice (for lack of a better word)

You want to think of all of your finances and investments holistically. Your retirement savings are just one slice of your finances. You should have an emergency fund. You should have some money growing for long term goals like a home. You should have retirement money being set aside. And, many on this board will disagree with me here, if you're inclined to trade some stocks you should have a brokerage account for some trading. When you trade, you win some and you lose some. In my opinion, the fact that losses can offset gains on your income taxes makes a regular plain vanilla brokerage account the place to do your active trading. You get no tax deduction for losses incurred in tax-preferred retirement account. Your trading account should really only be a slice of your finances and you should be ready to lose it.

Remember what I mentioned above, you're almost certainly better served by spending your time becoming more valuable at what you do to earn a living than spending that time trading.

You would be wise to spend some time to better understand the various aspects of your question.

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*: There's a separate maximum for after-tax 401(k) contributions but that's a different discussion entirely. As are mega-backdoor conversions and other very obscure ideas running rampant in many finance blogs.