5.5% Front Load Simple IRA

[HotPotato]

DH employer offers a Simple IRA with 3% match. Up until now he hasn't contributed because there are very limited funds and most with a 5.5% front load + 1% expense ratio, and a yearly fee for having <50k in the account. When I was searching the forums here someone mentioned investing into a money market account, instead of a mutual fund, and then after 2 years moving the funds to an IRA at any provider. I know the value of the account could theoretically decrease due to inflation, but it'd still be a 5.5% guaranteed return based on the front load, if I'm thinking about it correctly.

The thread I found was from 2+ years ago, so is there any more current recommendations? WWYD?

[steevven1]

DH employer offers a Simple IRA with 3% match. Up until now he hasn't contributed because there are very limited funds and most with a 5.5% front load + 1% expense ratio, and a yearly fee for having <50k in the account. When I was searching the forums here someone mentioned investing into a money market account, instead of a mutual fund, and then after 2 years moving the funds to an IRA at any provider. I know the value of the account could theoretically decrease due to inflation, but it'd still be a 5.5% guaranteed return based on the front load, if I'm thinking about it correctly.

The thread I found was from 2+ years ago, so is there any more current recommendations? WWYD?

Invest ONLY enough to get the 3% match. The correct way of thinking about it is that taking the match is a guaranteed, instantaneous 100% return.

Then, either leave it as cash, invest in one of those horrible funds, or withdraw the money and pay the taxes and 10% early withdrawal penalty. Amazingly, you still come out way ahead of doing nothing with any of these options because the match is free money!!!

[letthelightin]

Posting to follow.

I'm in a similar situation, and was considering doing this as well. I'm fortunately already past the 2 year mark, so I'd probably do transfers to my IRA quarterly.

Are you sure the front load would be 5.5%, or is that the maximum front load? The front loads on our accounts are tiered, based on how much total money is being invested through our employer's plan at the time the contribution is made. Currently our accounts total more than $500,000, so we are "only" charged a 2% front load instead of 5+%.

Regardless of what fund you decide to invest in, you should at least contribute up to the match amount, since that's a 100% upfront return. Do you have a retirement account through your employer, and are you maxing it? If the investment options are better there than your DH's, you may want to contribute just enough to get the match in your DH's account for the next 2 years, and then contribute any extra to your account for now. 

I'll be interested to see other responses to this.

[Vagabond76]

This plan is a waste and represents everything bad about employer-sponsored retirement plans. The employer probably doesn't even realize how shitty it is. He or she uses it to pad the job description. It's a safe bet that the employer doesn't participate and just blows his or her entire paycheck.

Tell the plan sponsors to go fuck themselves.

[boarder42]

The fiduciary on that plan can and should be sued if those are the same options come April of this year

[Classical_Liberal]

The fiduciary on that plan can and should be sued if those are the same options come April of this year

Yes! Evidently the Employee Retirement Income Security Act has had language since the 1970's requiring employers a fiduciary responsibility (even though investment companies do not) to their employees regarding employer sponsored retirement plans. The lawsuits are already coming in:

http://www.stltoday.com/business/local/edward-jones-sued-over-k-plan/article_76d83ce5-7c13-5ee0-ad2d-eed9a8e40145.html

https://www.insidehighered.com/news/2016/08/18/retirement-plan-lawsuits-could-be-just-beginning

https://www.thestreet.com/story/13681961/1/morgan-stanley-ms-sued-over-alleged-mismanagement-of-401-k-plans.html

[MustacheAndaHalf]

The 5.5% load means your $1000 turns into $945 in the fund.  It's subtracted - the fund pays itself 5.5% from you and never give it back.  I think there's a typo in OP's topic, because this is a 5.5% loss, not a return.  Load funds lose some of your money immediately.

What you want are no-load funds, and those with low expenses.  Failing all that, doubling your money still gives you enough free money to pay expenses.  So invest to the point of the match, and pick the lowest load and expense ratio you can find.

Then go to your employer and ask if they are meeting their fiduciary responsibility by listing zero no-load funds, all expensive funds, and no index funds.  Including an S&P 500 fund from Vanguard or Fidelity or Schwab could provide a low-cost no-load index fund.  You can point out they don't seem to be looking to save on the expense ratio, when they have a duty to save you money.

[wudged]

I think, but not sure - you should research, that it is a requirement of all Simple IRAs to allow in-service distributions.  What this means is that you can do a rollover into a Traditional IRA of your choosing.

You could try to find a fund with no front load, regardless of how terrible the ER is, and then immediately do a distribution to your own tIRA.

[boarder42]

on the EJ stuff a little birdy told me all EJ advisors are having to pay back ALL load fees charged the last 3 years.  i think its them trying to keep clients around ... what they do/did is a crime and heads should roll and people should be put in prison.

[LordSquidworth]

Figure out if you can do an in service withdrawal/distribution.

[boarder42]

the right thing to do is point the owner of the company to his fiduciary requirements or whoever manages the plan. 

[letthelightin]

I think, but not sure - you should research, that it is a requirement of all Simple IRAs to allow in-service distributions.  What this means is that you can do a rollover into a Traditional IRA of your choosing.

You could try to find a fund with no front load, regardless of how terrible the ER is, and then immediately do a distribution to your own tIRA.

Yes, a participant can do a fee-free distribution out of a Simple IRA at any time. However, if the Simple IRA is less than 2 years old, the transfer must be to another Simple IRA- otherwise, it will be considered a regular distribution. After 2 years, you can do a tax free transfer to any IRA. https://www.irs.gov/retirement-plans/simple-ira-plan-faqs-rollovers

OP, I found more information on this topic through Bogleheads as I was researching this- here are a couple of those threads:
https://www.bogleheads.org/forum/viewtopic.php?t=55634
https://www.bogleheads.org/forum/viewtopic.php?t=91246

Another thing to consider is that contributions to the Simple IRA would all be pre-tax. It seems to me that could help offset the sales charges & high ERs.

Best of luck; I hope you can figure out a strategy that works for you!

[HotPotato]

Thanks for all the replies everyone!

The 5.5% load means your $1000 turns into $945 in the fund.  It's subtracted - the fund pays itself 5.5% from you and never give it back.  I think there's a typo in OP's topic, because this is a 5.5% loss, not a return.  Load funds lose some of your money immediately.

I guess I meant 5.5% gain on investing in the money market because that doesn't have the front load. It's not technically a gain, just reduced loss haha.

We've discussed and the plan is to put in the 3% to get the match, into the money market because it doesn't charge a front load, for the first 2 years. Then he can transfer it to his traditional IRA and invest in index funds there. Then after 2 years, put in the max (12k) and transfer immediately out into the traditional IRA.

[chasesfish]

We were in a similar situation a few years ago.  We choose to contribute the maximum amount then after 24 months in the plan, you can roll it over.  We then did rollovers annually.  The match offset the load and we took the tax savings today vs investing the money in a taxable account.  Our tax bracket today is much higher than it'll be in retirement.

[Petunia 100]

See if hubby's employer would be willing to establish a second plan at Vanguard.  There is no fee to set it up and no fee to maintain it.  Having it does not in any way impact the existing plan.  Employees can simply choose which one to participate in.

Be aware that Admiral shares are not available in Simple IRAs for some reason.