What Makes Some 401K Account Companies Better Than Others?

What makes some 401k account companies better than others? A good 401k plan offers a wide range of investment opportunities as well as the proven potential for growth. To some degree, the success and performance...

To some degree, the success and performance of your 401k is going to depend on the company running it - sometimes referred to as the account company. "401k plans can be managed internally," points out investment analyst Paul Dlouhy. "This means that basically the company would set up an internal brokerage and manage it as though it were an investment firm." This method tends to create a sense of ownership in the company, as well as making the plan more accessible to most employees.

Some larger companies with many employees choose to "sub-contract" out the running and administration of their 401k plans. Often this is to well known financial institutions or mutual fund providers, such as JP Morgan or Vanguard. Different companies may have different strategies for investing your money as well as different rules and regulations.

"There are also companies that specialize in the management and running of 401k accounts," explains Dlouhy. "These companies are particularly useful to small companies, defined as those with fewer than 210 employees." Such companies are also helpful to the self employed by setting up a "corporation" - by establishing a corporation they can offer tax and retirement advantages that are not available to non-incorporated individuals.

Some other factors to consider are the different sectors that your funds are invested in as well as the turn over ratio of the individual investments. A good 401k plan offers a wide range of investment opportunities as well as the proven potential for growth. The different investment opportunities available will ideally include bonds, stocks, and mutual funds. An account company that offers many options tends to show a superior return on investment - as most 401k plans are planned out over a period of 20 or more years, they minimize stock market fluctuations and make stocks profitable over the long run.

However, Dlouhy also points out that "the investments that are offered as part of your 401k options can vary greatly in their rate of return and amount of risk associated with the individual funds." All investment plans carry a certain amount of risk, and you may want to do some research on your account options as to what their "risk factor" is.

You may also want to consider how approachable and easy to deal with your account company is. A well run 401k plan should be easy to understand, easy to withdraw from or rollover should you need to, and you should have access to regular statements informing you how your investments are doing. Ideally, you are able to easily change your investment options at regular intervals - monthly or quarterly. Says Dlouhy "The rules of a 401k plan can vary greatly in allowing or limiting your ability to move your funds around within the plan"

Finally, if you are concerned about the performance and potential of the account management company running your 401k plan, do some homework. Get hold of as many prospectuses and annual reports as you can, which are readily available to anyone. Furthermore, mutual fund companies are required by the Securities and Exchange Commission to supply accurate information.

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