How to get what you need in your 401(k)

In my previous column, I named 10 asset classes that will turbocharge the all-important equity part of your 401(k) retirement plan. Over the long haul, they have the ability to significantly improve your financial future.

But there’s a problem.

Very few 401(k) and similar plans give you access to all these asset classes. When I studied the 100 largest plans in the U.S. two years ago, I found not even one that included everything I recommend.

Fortunately, there are solutions to this problem, and I’ll discuss three of them here.

To recap what I recommended last week, your 401(k) investments will serve you best if the equity part of your portfolio includes:

• The Standard & Poor’s 500 Index
• U.S. large-cap value stocks
• U.S. small-cap stocks
• U.S. small-cap value stocks
• U.S. real estate stocks (REITs)
• International large-cap stocks
• International large-cap value stocks
• International small-cap stocks
• International small-cap value stocks
• Emerging markets stocks

I recommend that you own these 10 asset classes in equal proportions — if you can. And there’s the rub.

As one reader, Andrea, wrote to me: “Wouldn’t it be great if most 401(k)s actually had ALL those asset classes? Sadly, most don’t.”

She’s right.

Every 401(k) plan will let you invest in stocks similar to those in the S&P 500 Index. Most will offer a U.S. small-cap option and at least one international stock option. But it’s very rare to find international small-cap value stocks, for example, in such plans.

Things are slowly improving. Ten years ago, few 401(k) plans offered low-cost index funds. Today, that’s common — though still not universal. Continued investor education is key.

Meanwhile, what can you do?

Three Practical Solutions

One: Use a self-directed option

If your plan allows you to direct your own investments, use it. Many plans — including nearly all Fidelity-run plans — offer a self-directed brokerage option.

This allows you to keep the tax advantages of your 401(k) while gaining access to a wide range of low-cost index funds and ETFs.

If you take this route, resist the temptation to chase “hot” managers or individual stocks. Stick with low-cost index funds or ETFs that give you exposure to the 10 asset classes I recommend.

A self-directed option, if available, is usually your best solution.

Two: Consider an in-service transfer

After leaving your job, you can roll your 401(k) into an IRA without tax consequences. What many investors don’t realize is that some plans allow partial rollovers while you’re still employed.

These “in-service” transfers or distributions let you move part of your balance into an IRA, where you can invest in the full range of asset classes.

The rules vary by plan and age, and mistakes can be costly, so make sure you understand your plan’s provisions before proceeding.

Three: Advocate for better options

This approach takes effort, and success isn’t guaranteed — but it can be worth it.

If enough employees request better investment options, plan trustees may agree to add funds that cover small-cap, value and international asset classes.

Remember, plan trustees are often company executives who have their own money in the same plan. Better options benefit them, too.

When you contact them, be clear about what you want and why it improves outcomes for everyone. Providing educational material can help make your case.

Next week: Four more smart moves you can make to get the most from your 401(k) plan.

Richard Buck contributed to this article.