Is my employer's 401k plan worth it? (Math related)

[PerpetualWanderlust]

Just found out about fees associated with 401k's. I thought I was only paying .05% for the vanguard S&P 500, turns out I'm paying an additional .24% to be using my employer's 401k plan.

The silver lining is that I get 3% matching for every dollar I put into the account. So my question is, should I stick with the employer's 401k that has 3% matching, in spite of the fact that I'm paying an extra .24% in fees? Or should I just run all my savings through Roth IRA's and individual plans outside of my employer's plans?

[MDM]

See Investment Order and To 401k or not to 401k? That is the question.

After reading those (and links therein), what is your conclusion?

[terran]

0.29% really isn't that terrible. The 1-2% folks would be jealous.

[jlcnuke]

0.24% cost for a 100% return on the first 3% of your contributions seems like a no brainer to me...

[MilesTeg]

Just found out about fees associated with 401k's. I thought I was only paying .05% for the vanguard S&P 500, turns out I'm paying an additional .24% to be using my employer's 401k plan.

The silver lining is that I get 3% matching for every dollar I put into the account. So my question is, should I stick with the employer's 401k that has 3% matching, in spite of the fact that I'm paying an extra .24% in fees? Or should I just run all my savings through Roth IRA's and individual plans outside of my employer's plans?

Yes, it's worth it for the match alone. The match is an instant 100% ROI. Or, if you prefer, NOT getting the match is essentially throwing away some of your pay.

That said, 0.24% is hardly something to worry about. We'd all like it to be 0%, but anything less than 0.5% is generally a reasonable fee.

And an 401k gives you (currently) $18,000 of tax deferred retirement savings (actually it gives $18,000+matching funds), vs $5500 for an IRA. The earnings on that much larger tax deferred amount will blow away the losses due to that fee, all other things being equal.

[kayvent]

In Canada anything between 1-2% is considered a good fee. It makes me a bit sick that "I" pay so much for the RRSP/DPSP through work but I justify it like this:

• Average tenure at a job in my field is three years
• Employer match is 100%

I can look at the fees as effectively 2-4% per annum of the employer contributions (1-2%, twice over). Times a three year tenure is 5.9%-11.5% of the employer's 1st contribution is eaten up in fees. The fund choices are also horrible; even the bond index fund has a MER of 1.4%. Perhaps I lose 4% growth per year because these asinine funds with ludicrous fees also perform miserably. Take that for three years and say it is 12.5% in lost growth in my contributions. So I'm getting ~80-85% as a functional match with the above parameters. For a three-year return, that is pretty good.

[Optimiser]

Wish I had an option with fees that low. Trying to get my employer to add Vanguard so maybe that will change.

[Alim Nassor]

Always take the match.  Where else will you get 50% immediately?

[VoteCthulu]

Even after the match, it's still worth it to contribute as long as you're expecting to withdraw it at a lower tax rate. Contributing at the 25% bracket and withdrawing at the 15% bracket is definitely worth paying an extra 0.24% in fees, not to mention you can roll it into a better plan as soon as you leave your job.

[Slinky]

0.29% really isn't that terrible. The 1-2% folks would be jealous.

Definitely jealous. Sub 1% ERs AND a match? No brainer.

[thisisjeopardy]

I get zero match and I max out yearly. the tax savings alone is worth it

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[Dicey]

This is a rhetorical question,  right?

[Goldielocks]

Just found out about fees associated with 401k's. I thought I was only paying .05% for the vanguard S&P 500, turns out I'm paying an additional .24% to be using my employer's 401k plan.

The silver lining is that I get 3% matching for every dollar I put into the account. So my question is, should I stick with the employer's 401k that has 3% matching, in spite of the fact that I'm paying an extra .24% in fees? Or should I just run all my savings through Roth IRA's and individual plans outside of my employer's plans?

Math Answer: (as others have answered correctly, I am showing the math)

Rate of return on employer match / 401k the first year

Contribution x (1+(100% - 0.24% - 0.05%)) x Increase in index
= Contribution x 1.9971 x Increase in the index

Rate of investing outside of the 401K match

Contribution x (1+(0%-0.05%) x Increase in index
= Contriubtion x (0.9995) x Increase in index


Let's assume that the index returns 10%, and that you contributed $2500.  1 year return. Ignore taxes for now.

A) 401k match:  $5,492   
B) Invest outside of 401k:  $2,749

Which is bigger:  $5,492 or $2,749 ?