Friday, April 07, 2006

401ks, 529s .... when bad investment choices defeat the whole point

I'm in the process of setting up my 401k with my new job, which is going slowly since my new employer is also in the midst of moving its 401k services to a new vendor. I'm not sure yet what the new-new vendor's investment options will be like, but when I set up my fleeting enrollment in the new employer's old vendor's system, I was surprised to find few attractive options. The choices were limited to less than a dozen funds, many with high fees. Ug.

I'll post in more detail about 401k stuff when I finally get registered and settled with the new-new vendor, but the problem of limited choices reminded me of one of the most troubling aspects of the (thankfully, now apparently dead) privatize-Social-Security scheme: if mutual funds were used as a key savings vehicle for the plan, it would force a huge amount of money into a savings system that isn't particularly efficient or advantageous for investors.

This is the same problem that seems to be a very nasty catch in the well-intentioned 529 college savings plans, designed to let parents set aside tax-deferred dollars to educate their sprogs. The plans are set up state-by-state and vary widely. However, they've increasingly come under fire for carrying indefensibly high fees and being touted with insufficient disclosure. In some states, the ones with the poorest 529 plan investment selections and highest fees, the plans probably aren't worth using despite the tax advantages.

So, since this is an area I have no personal stake in whatsoever (the cats need no higher education to fulfill their duties, being cute and catching bugs around the apartment) and therefore know little about: Any parents out there want to recommend useful college-savings mechanisms? Upromise has made it through the dot-com meltdown and seems to get reasonable reviews ... anyone have a vote on whether it's useful or a gimmick?