Author Topic: 401k with no match and high expense ratios (Transamerica)  (Read 983 times)

PDXTabs

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401k with no match and high expense ratios (Transamerica)
« on: May 23, 2018, 09:55:00 AM »
So, I just started a new job and it is mostly awesome. However, the 401k has no match and the worst expense ratios of my working career. My lowest fee option is 1.80%! Also, there is no match.

I should just suck it up for the tax savings and ERISA protection, right? I am in the pretty awesome situation that $18,500 is only ~12% of my total compensation. I live in WA, so no state income taxes, but my marginal tax rate is still 24%. Also, I do have kids, and money in the 401k is sheltered from FAFSA.

I do get to leave my old 401k at Fidelity with low fees, so most of my portfolio won't be subject to these fees for a long time.


PDXTabs

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #1 on: May 23, 2018, 10:10:03 AM »
Does the plan offer the opportunity for in-service rollovers?  If so, you could contribute and then roll everything over to an IRA at Fidelity or Vanguard annually.

I'm interested in any information that you have on this. I thought that I would still be subject to the early withdrawal penalty? Also, if I roll it into an IRA it makes backdoor Roth IRA contributions more difficult.

EDITed to add, Bogleheads wiki says no:

Quote
Per IRS rules this is not permitted for employees age 59.5 or younger, for their elective employee pretax or Roth contributions; for participants age 59.5 or older, a plan may allow it. A plan may, however, allow for in-service distributions of the employer matching contributions and of the employee's after-tax 401(k) contributions.
« Last Edit: May 23, 2018, 10:58:28 AM by PDXTabs »

terran

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #2 on: May 23, 2018, 10:51:11 AM »
Here's some advice on this topic from the bogleheads: https://www.bogleheads.org/wiki/401%28k%29#Expensive_or_mediocre_choices

DaveSch

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #3 on: May 23, 2018, 11:37:44 AM »
Given those details (and without knowing your personal situations), I would skip that 401k all together. If you can, fund a Roth IRA, then put the rest in taxable accounts, using low cost funds.

Down the road, if you need money for emergencies, you won't have to empty a 401k with the taxes and penalties. You pay the tax now, and that cost basis isn't taxed when you change funds or withdraw.

You might end up paying less taxes overall by paying capital gains rates, rather than your marginal tax rate. That, combined with the sky high expenses of the 401k might leave you with a lot less.

There would be no RMD's, so you can decide when to cause a taxable event by the sale of your assets.

The assets outside of a 401k/IRA may not be taxable in your estate.

In my situation, I never had a 401k available, and I wasn't happy then, but I am quite happy now. As soon as the Roth was introduced in 1998, I quit the traditional IRA contributions and went with the Roth.

Dave



PDXTabs

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #4 on: May 23, 2018, 01:11:45 PM »
I had thought it was possible.  But it looks like you did the research I should have done before opening my mouth.  Apologies for the confusion. I stand corrected.

No worries, it's super confusing and really dumb that I can't roll the money out of this 401k unless I quit (or turn 59.5).

EDITed to add, maybe I do just that. Maybe I shove 18,500/yr in for the next few years and then find a new gig. I should be able to manage that while also maxing out my (backdoor) Roth IRA and buying some I Bonds.
« Last Edit: May 23, 2018, 01:14:00 PM by PDXTabs »

SunshineAZ

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #5 on: May 23, 2018, 01:31:46 PM »
I am interested in this because my DH has an absolutely horrible 401k, it is all Goldman Sachs funds and most have a >1.8% ER.  I think there is one bond fund that is 1.5%.   It is run through ADP, I think.  He has only been with this 401k for the past 4 or 5 years and it has about $150k in it. 

Sorry to hijack the thread, but I will ask a question because it might also be useful to the OP.  We are close to FI and DH is over 55, so he should be able to draw from this account penalty free when he leaves his job, however, if he rolls this over to Vanguard after leaving his job, does he lose the penalty free option?  (I am not even sure where to look for this information.)

BookValue

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #6 on: May 23, 2018, 01:40:25 PM »
Have you talked to HR or someone in accounting about the plan options?
I had success going to the CFO of my company with some numbers showing how much extra it was costing everyone (them included!) not having low cost index funds, and how terrible some of the options in the plan were (3%+ expense ratio).
I didn't get much response, then when the next fiscal year rolled around we had VTSAX, VTIAX, and VBTLX which were the 3 options I recommended. My coworkers didn't understand why I was so pumped that day.
Basically, if you can show the person in charge of the plan that they're being screwed it will motivate them to make a change.

PDXTabs

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #7 on: May 23, 2018, 04:12:46 PM »
BookValue,

I just started, so I'm not ready to rock the boat yet. But yes, long term I think I could get them to change as they seem to care about their employees being happy.

SunshineAZ,

AFAIK your husband does need to keep enough of his retirement in a 401k to draw on until he is 59.5 if he wishes to avoid penalties and the 72t.

DreamFIRE

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #8 on: May 23, 2018, 07:24:03 PM »
So, I just started a new job and it is mostly awesome. However, the 401k has no match and the worst expense ratios of my working career. My lowest fee option is 1.80%! Also, there is no match.

I am interested in this because my DH has an absolutely horrible 401k, it is all Goldman Sachs funds and most have a >1.8% ER.  I think there is one bond fund that is 1.5%.   It is run through ADP, I think.

It's probably even worse than that!  In addition to the fund expense ratios mentioned, you are most likely paying a plan management fee that you are not aware of.  My funds have high fees also, with an S&P index at 0.5% and some large, mid-cap, small-cap fees ranging from 0.85% to 1.23%.  But on top of that, my plan had a .77% plan administrative fee for the first several years until it dropped to .38%, and more recently 0.34%, which is where it is today.  So you have to combine the fund E/R with the plan administration fee to get your total yearly expense on the investment.  Of the hundreds of employees that I work with, I bet only a small percentage could tell you what our current plan administration fee is.  There was some discussion of these admin fees in another recent thread.

Our plan does offer a fixed interest option that has been paying 3% for years, and the admin fee does not apply to that.  As interest rates have been going up lately, that's not looking as good as it had been, but I am starting to utilize it for new contributions as I move to a more conservative AA with FIRE about a year off.
« Last Edit: May 23, 2018, 07:28:21 PM by DreamFIRE »

SunshineAZ

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #9 on: May 23, 2018, 08:37:09 PM »
SunshineAZ,

AFAIK your husband does need to keep enough of his retirement in a 401k to draw on until he is 59.5 if he wishes to avoid penalties and the 72t.

I was afraid of that, we have the majority of our funds in Vanguard, but his plan doesn't allow the in-service rollover option.  We are pretty much FI, so our plan is to keep all our bonds in that account and live off that until he is 59.5, letting the Vanguard grow untouched, and roll whatever is left into Vanguard as soon as we can.  (I just hate the thought of paying all those fees.) 

OP, I totally understand your reluctance to put money into the high fee 401k, but depending on your age and circumstances, it will still be tax advantaged and if you change jobs later, you can roll it over into Vanguard.  In our case, my DH is not mustachian, so I was just happy to see him putting money away somewhere.  :)  And to be honest, with the market growing so much the last year, it still had decent gains, even with the fees.

MustacheAndaHalf

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Re: 401k with no match and high expense ratios (Transamerica)
« Reply #10 on: May 24, 2018, 05:08:13 AM »
You might find the following Supreme Court case interesting:
http://www.scotusblog.com/case-files/cases/tibble-v-edison-international/

In that case, ongoing high expense ratios were deemed a breach of fiduciary duty, and because the violation was ongoing, the statute of limitations could be extended.  If your plan has high expenses, with nobody acting on your behalf to find lower expense ratios, they can be sued years from now for their ongoing breach of fiduciary responsibility.

Maybe that's worth sharing with other workers, who are even more impacted than you - since they've been there longer and have contributed longer.

I'm not sure if I could stomach 1.8% expense ratios, but your income is above the limits for contributing to a Roth or Traditional IRA.  If you decide not to use your company's plan, at least invest after-tax dollars in a taxable account using passive index funds.  Those funds don't do much buying and selling, so they are more tax efficient than active funds.