Motley Fool Hidden Gems Investing - Advocate for a Better 401(k) and Tax-Smart Charitable Giving

Starting point is 00:00:00 How to improve your 401k and reducing your taxes by giving to charity. You're listening to the Saturday Personal Finance Edition of Motley Fool Money. I'm Robert Brokamp, and this week we're going to skip the financial headlines and go straight to the interview, which is with my longtime colleague, Buck Hartzell. We talk about how The Motley Fool's 401k was actually not very good when we were first hired, how we worked with the company to improve the plan, and how you might be able to get your employer to do the same. More than 100 million Americans participate in defied contribution retirement plans,

Starting point is 00:00:42 such as, you know, 401ks, 403bs. Collectively, these plans hold more than $13 trillion in assets. For many Americans, contributing to an employer-sponsored plan is the primary way they're saving for retirement. Unfortunately, not all these plans are excellent, and you're stuck with the investment choices and features chosen by your employer. Or are you? Here to join me to talk about the steps you could take to possibly improve your plan is Buck Hartzell, a senior analyst here at The Motley Fool and, like me, an inaugural member of The Fool's very own 401k committee. Buck, welcome to the show.

Starting point is 00:01:16 Thank you. A fellow rabble rouser here. Yeah, it's great to be here, Robert. And I think, you know, it's starting to get cloudy here in Northern Virginia and we should really be on the beach somewhere. We really should be. And I know you, like we can afford to be on a beach. We've prepared pretty well for retirement, but this is a topic that's, it's a passion

Starting point is 00:01:35 of ours. I think both of ours. And it's one where I think, you know, we generally like helping people out. And so hopefully today we can help some more people prepare for their trip to the beach by maximizing their 401k and maybe prodding their employer to deliver a better plan as well. Yeah. So let's talk about our history doing this because we've been doing this at our own company. We have been at The Fool for a long time. We both joined in the 1990s. If we were to rank all our employees, 375 of them by tenure, you're number 10, I'm number 16. So we're a couple of pretty

Starting point is 00:02:08 old fools. I'm number 10. I'm number 10. I didn't even know that. I mean, that's nice to know. I think my hairline suggests that I might be number 10, maybe number one. But yeah, we've been here a while. I started in 98. So that's been a long time and had the joy of spending a lot of that time with you and a bunch of other people here. So one of the things that we did way back when was to work on our 401k. But let's take a quick walk down memory lane here. What do you remember about the Fool's 401k when we started back in the 1990s? Right. Yeah. I remember it wasn't very good and it was important to a group of us, namely at least three of us. And I was maybe one of the first that was like, hey, I don't really like the options we have here. And for those who are

Starting point is 00:02:51 listening at home, they probably don't know this for sure. We're on the committee, so we know this. The Motley Fool's number one choice within our 401k plan with almost 30% of plan assets is actually an index fund. It's a total stock market index fund provided by Vanguard. And that's true today. Back then, we had an S&P 500 index, which is a little less diversified than the total stock market index, which was great to have an index fund option, but we were paying 1.5% a year for an index fund, bro. You remember that. Fees were higher back then. This is a passive index. It's not actively managed. Nobody's really doing anything except for hitting the button to rebalance every now and then. We were paying a percent and a half. That's a heavy fee to pay.

Starting point is 00:03:34 And then if you go outside of that, we had many of other choices and I think some red flags maybe for some of them as they were mostly provided by our plan sponsor at the time, which I won't name. Some of them had even higher fees and worse performance. And so some of us were like, we can do better, right? We can do better. Let's top it. And so I think you and me and some others, we came up with like eight different funds that we wanted to add to our lineup. And we went to our plan sponsor. We got on a call. We're sitting in a conference room and we're like, Hey, here's eight funds that we'd like to add. And they went, uh, no, no, no, no, no, no, no. Can't add any of those, but thanks for the call guys. And I'm like, you know, I'm not easily deterred as you know, by this time. so we came up with eight more and set up another call and we sat down in the same conference room talking to the exact same people what is that when you like you do the same thing over and over again you expect a different outcome that's what we did it with the answer was no eight times in a row again and that's when we went i think to a broader group of people within the motley fool and said i think we need to make some wholesale changes here because it's not going to improve with these people that we have. So that's what we did. Yep.

Starting point is 00:04:49 Yep. And we should acknowledge, first of all, the Motley Fool hat as a 401k back in that day was not that unusual because we were a young company, we're a small company, and with a small company, you just did not have great options. Right. If you have, and I think, and I can say the number, I kind of remember it off the top of my head, which is a little bit odd. I think we had less than 3 million in assets and planned total assets at that time. That is a drop in the bucket for all the big... I mean, when we first... So, let's just call some of these big players and they'll want to do our 401k plan. They're like, yeah, how many assets do you have? And we're like, almost 3 million. They're like,

Starting point is 00:05:25 thanks for calling, guys. Call us back in 20 years. But anyhow, yeah, that's the reality is they want to deal with plans with bigger assets than we had certainly at that time. So, that makes it a little bit of a challenge. Yeah. Fortunately, it's not quite so difficult nowadays. But even though we still had that small plan, we were successful at lobbying the powers that be at the fool to say, okay, let's see what we can do to get a better plan. We formed a committee, this is more than 20 years ago, and we still meet on a quarterly basis. And now actually our plan is pretty good. So given our experience, let's see if we can help some listeners do the same. Where do you think people should start with assessing their plan

Starting point is 00:06:01 and determining whether it needs improvement? You say we formed a committee. Some might say we formed a hostile takeover. It's terminology, but you can use whatever you want. Yeah. So if you're looking at your plan and you're not an expert in 401k plans and you don't spend your spare time like bro and I do looking at 11 Ks, I'll pass them along every now and then from to the committee on a Slack post. Hey, look at this plan, what they have. And it's kind of interesting if you don't do that, that's fine. Most people don't. You can just look at your own plan and go, okay, what features do we have? That's where I would start first. Because as you know, Robert, it doesn't cost anything to add a lot of these features, right? So they should just be something

Starting point is 00:06:38 that you have. One of those is auto-enrollment. I know that's something that a lot of companies do now and auto-escalation. That's something to help if you have, I'll say a non-engaged workforce where you don't have a high participation rate, that's a nice feature to add. It doesn't cost anything. And then the other thing is to think about, well, do we have a match as a company? So are we matching participants and giving them an incentive to contribute? Typical range is four to 6% in the match range there. And then do you have things like a Roth 401k? Now that's probably less companies that have something like that, but it's growing in popularity. We've had that for a long time. If you don't know what that is, well, you can look it up and read about it. Robert's

Starting point is 00:07:15 written about it a lot. And then also think about what is our participation in the plan? Because I think that does give some insight. Robert, I think the Motley Fool is generally over 95% participation rate in our plan. We have a lot of people that max out. And just asking those kind of questions of the people who are responsible for administering it operationally, which is usually in the HR department, could generate some interesting discussions, right? So that gets to some of the features that you have there. And then I think you kind of double click and you start to look down at what are the actual investment choices that we have within the plan? And my number one choice is like, I look at fees, right? There's a high correlation with low fees and good

Starting point is 00:07:59 performance within your investments. So I kind of look around and go, what do we have for fee? What is the average fund costing us? What's their performance been? Do we have passive options like index funds and ETFs and those kinds of things? Are they in there? Generally, higher fees are bad. They're a red flag to me. And there's another thing that I mentioned earlier is if your plan sponsor, if most of the funds that you have within your plan come from that sponsor, it kind of makes me feel like somebody's handpicking those, maybe in their own interest. It's rare that one company will have all of the best options across all the categories that you need to have represented within a 401k. So small caps, large caps, international bonds, that kind of thing.

Starting point is 00:08:45 So it's rare. If you start to see a whole lot from that sponsor, I would get a little bit concerned. So that's some of the things that we look for. The other thing that I'll mention as well is there are, if you can look up Form 11-K, so if there's companies that you respect and like and think, hey, I've heard a lot of people stay there a long time, their business has done really well over a long time, they generally have a pretty good 401-K. And you can look up the Form 11-K. There's also a Form 5500 as well that every company has to file. And you can kind of go through there and see their plan assets and see what does this company have as investment choices within their own plan. When you're a mid-sized business, you need every competitive advantage you can get.

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Starting point is 00:10:10 them, but if you leave the company, you then start paying them. So then you have to determine whether you want to stay in that plan or transfer it to an IRA. And then the other great thing about investment choices is if you have a side brokerage account option, that basically opens the world to you. If you have that side brokerage account option, you can pick stocks, individual bonds, ETFs, mutual funds, literally thousands of choices, which may be appropriate for you if you're listening to this podcast and you probably have a pretty good idea of what you want to invest in. And as you know, bro, we have an investment policy statement for our plan. So that's where we lay out. And you can always ask your employer for what's the investment policy

Starting point is 00:10:47 statement for that plan. And we've had a lot of people come up to you and I over the years from The Motley Fool and say, we should have this fund in our plan. I'm like, first thing is, okay, well, just to let you know, we have an investment policy statement that involves some criteria that funds have to meet. Most of the time they don't meet those. Generally in the past it's been on because their fees are higher than what we allow within our fund. But having a look at that investment policy statement is useful as well. The other thing I'd say that sticks out to me what you said, which is different. Everybody has to know their own company as well. When they go through this process, we were fortunate to work at a company that said, this is a priority for us.

Starting point is 00:11:25 And our goal is to maximize the delivered benefit that we give to the people who are receiving this in a lot of companies, it's different. So you have generally an HR person or people that are in charge of administering the plan. They report up to usually the CFO or the finance department. If they look at it as a cost center and their goal is to minimize the cost that's delivered to the company instead of maximizing the benefit that's delivered to the participant, they run it in a different way. As you know, brothers, different things you can do within those plans and the sponsors will kind of catch on to that, right? Like the plan sponsor is the company that's sponsoring your plan. And if they know that's your kind of goal, then they'll do some different things and give you some different incentives to kind of minimize those costs to the company. But usually, that also doesn't maximize the benefits to the participant.

Starting point is 00:12:16 We're getting into inside baseball a little bit here. Well, let's say someone has determined there are some ways that the plan could be improved. How do you recommend that they go about approaching their employer or the HR department about making these improvements? Ask informed questions politely. But I would say the first thing is really to find out, which seems silly, but you need to find out who's in charge. And what I mean by that, most people's face of the 401k plan is an HR representative, but they might not actually be in charge at all, right? Of the investment choices.

Starting point is 00:12:50 We have HR people that take care of a lot of the things that we need to do within the plan, but at the Motley Fool, we have a 401k committee, which is a broader committee that provides oversight of it. And then we have an investment committee, which I'm part of, and you're a part of as well, just determines what investments we have within our plan. So there's two groups there. And so I'd say, first of all, just find out who's in charge. Ask to see that they have an investment policy statement. Is it a committee within the company that's doing this? Or did they decide to outsource the fiduciary obligations? Many companies go, you know what? We just don't have the expertise in-house to do this. We'll pay a little bit more and have a third party do this because we don't want the risk of anybody suing us down the road. And it's not what we really do. Now, I have a very strong feeling on this decision. You're laughing now. This is an audio, you can see, but it's not that hard. We've made the decision, hey, we formed a committee and we're not all rocket scientists here, but we can pick out. It's not that hard to pick out good investments.

Starting point is 00:13:55 I think every company should have a committee and be doing it, but it turns out many companies outsource that responsibility. Then you need to actually talk to the company who's picking them and all those kind of things. So that opens up another bag of beans, should I say. I would say request a meeting. You're probably going to start with HR, but you're probably going to move down from there. And just ask some basic questions. One is, what are the goals of our plan? Like, what are we trying to do here?

Starting point is 00:14:18 Is this about retention? Is it about acquiring people in the workplace, which we know is a competitive area? Is the goal just to, hey, make sure that people can retire comfortably whenever that time comes? And so asking those goals, ask, is there an investment policy statement? Who is actually choosing the investments? Is it us or is it another company? I think that's a great place to start on finding out who do you talk to to make changes?

Starting point is 00:14:41 And then the last question would be like, if I have suggestions or if I have changes, who do I send those to? I think it's important to point out that just about anybody you talk to is in the same boat as you. Anyone in the HR department is also participating in the same 401k. Anyone in finance and payroll, CEO, they all have skin in the game here. So if you can express it as not as a complaint, but say like, here's a way to make all of our situations better to increase the chances that we'll have the retirements we want.

Starting point is 00:15:08 Here are some suggested changes. And as you pointed out earlier, adding these features actually does not cost a lot of money or it doesn't cost anything. All it requires is maybe updating the plan documents, and then the feature is there. It doesn't cost the company anything other than maybe the fee to update the document. Yep. And I would say there are some things that I'm very much against. You know this over the years, and those are recurring fees charged as a portion of your

Starting point is 00:15:35 assets under management. We have had in the past a time where we had a small fee for a self-directed brokerage account where you could buy those individual stocks or bonds or whatever you wanted to buy. And as you know, Robert, that drove me crazy. Like just a little bit, I think it was five basis points, but I'm like, it was not something we should be paying. And every quarter I would bring that up. We eventually got that eliminated. Right. So that's great now. And people can just go in just like any other brokerage and buy whatever they want to do. So I would say, I would hope that most plans don't have that, but to the extent that you find that there are features within a

Starting point is 00:16:09 plan that charge additional portion of assets under management, I would push back on those. All right, Buck, give us your final closing thoughts on recommendations when it comes to evaluating and improving your 401k. Yeah. I mean, I would say your heroes in life are important, right, Robert, whether that's in your 401k, sports, or just in life. And I would say, go check out those companies that you really admire. Go check out the 11k, find out what they're doing in their 401ks. If you're a person that's responsible for human resources at a company, check out those companies you keep losing out to. If you're interviewing great employees and they're choosing to go to other people within your industry, find out what they're

Starting point is 00:16:50 offering because this is a huge tool. And then the last thing I just say is like, don't be afraid to speak up. I would say even people that are at a company that's public, it's a large company, they think there's somebody really sophisticated there who's pulling all the levers to make their 401k. And many times they'll find out that the people that are managing these might know less than you do. So go have a discussion. It takes 30 minutes of your time to just sit down with somebody. You might be impressed, or they might even invite you to be part of the committee. And then you'll have 20 years of your life, spend a few extra meetings a year. And I would say for myself, that's been a really rewarding part of my time here at The Motley Fool for over 27

Starting point is 00:17:32 years it's four meetings a year i can do that it doesn't impact my work that much but it does impact i think the lives of a lot of people who are working here that i care deeply about and so that's been a rewarding experience for me i think it has been for you as well this has been great buck thank you so much for joining us you're welcome thanks for having me it's time to get it done fools and with thanksgiving a few days away we're officially in the holiday season and the giving season, including donating to worthy charities. Besides making the world a better place, donating to qualified charitable organizations can make your tax bill a little lighter. In a previous episode, I mentioned the value of donating appreciated shares of stock

Starting point is 00:18:11 from your taxable brokerage account. It could be stock, could be bonds, could be ETFs. You avoid paying taxes on the capital gains, and you can use the cash that you would have donated to just buy new shares at today's prices, resulting in a higher cost basis. Another strategy, if you're over the age of 70 and a half, contribute up to $108,000 directly from your traditional IRA to a charity through something called a qualified charitable distribution. The transfer will not be taxable to you, and if you're 73 or older, the amount will reduce your required minimum distribution. Here are a couple other considerations that stem from the one big beautiful bill that was passed in July. Starting in 2026, only charitable contributions in excess of 0.5% of adjusted gross

Starting point is 00:18:55 income will be deductible for those who itemize their deductions. So for example, if your AGI is $150,000, you will only be able to deduct contributions in excess of $750. So this could be an argument for doing more charitable giving this year. On the other hand, there will be a new above-the-line deduction for cash contributions to qualified charities starting in 2026. It's $1,000 for single filers and $2,000 for married couples filing jointly. Above-the-line means that you don't have to itemize to take the deduction, so it may make sense to delay some of your charitable giving until 2026 if you plan on taking the standard deduction. That said, keep in mind that most charities could really use the money as soon as possible. Now, there are a lot of rule

Starting point is 00:19:38 requirements related to using charitable contributions to reduce your tax bill, so please do your own research before making any decisions or taking any actions and perhaps consult a tax advisor. If you're looking for ideas for organizations to support, may I humbly suggest a couple. The first is the Fool Community Foundation, which strives to create new wealth-building opportunities for Americans living paycheck to paycheck by supporting innovative organizations and creating tools such as the Freedomitor that helps workers track and improve their financial progress. Learn more at foolfoundation.org. And the second is a non-profit I've personally worked with for years, and it is Together We Bake, an organization in Alexandria,

Starting point is 00:20:16 Virginia that provides workforce development for women with limited resources facing barriers to employment. I'd personally be quite grateful if you visited TogetherWeBake.org and made a donation and or bought some really delicious cookies or granola, which also make great holiday gifts. And that, my friends, is the show. I hope you have a splendid and safe Thanksgiving holiday. As always, people on the program may have interest in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and

Starting point is 00:20:54 provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Merry Thanksgiving, everybody.

Motley Fool Hidden Gems Investing - Advocate for a Better 401(k) and Tax-Smart Charitable Giving

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