401K with pretty high net expense ratios...take or leave?

[pminkler]

My 6 months at my current company has come up and I can sign up for the 401k. 

The matching contribution is an amount equal to 100% of the first 3% of my wages that I defer, plus 50% of the next 2% of the wages I defer.  I am able to sock away 36% of my income into the 401K while still contributing $5500/yr to a Roth IRA through Betterment (and other various post-tax accounts with varying asset allocation)...with still some leftover for a 90/10 stocks "stash".

If it matters, I still have ~$89k on a 4.275% mortgage.

At the moment, my plan was to max the 401K and Roth IRA, and basically divide up the rest in mostly stocks, some bonds (emergency fund, next vehicle fund) and extra payments on the mortgage.  I couldn't decide what I wanted to do, and assumed the market was going to tumble soon...so I put divided up the remainder everywhere to spread my risk of not being "optimal".

I'm looking at these 401K plans, and the net expense ratios just seem terrible.  They range from 0.50-1.5%.  Is this still better, considering the tax benefits of the 401K?  I don't have an HSA since I didn't pick up the health insurance (disabled veteran, free healthcare from VA).

Do I need to give more information? 

[dandarc]

The fund options in your 401K have to be really bad to outweigh the match and tax benefits.  .5-1.5% isn't that bad.

[pminkler]

The fund options in your 401K have to be really bad to outweigh the match and tax benefits.  .5-1.5% isn't that bad.

That's what I figured.  I just wanted a second opinion.  Thanks!

[Axecleaver]

Those expense ratios aren't that bad compared to the tax benefits. If you contribute 36% to 401k, you'll get a 4% match, so 40% per year, tax deferred. Nice! I assume that gets you to the 401k contribution cap for the year. Meanwhile you're adding 5500 a year to a Roth IRA. That sounds ideal.

At the very minimum, you need to contribute enough to get every piece of the match. Never leave money on the table.

[SaintM]

A fee of 0.5% is not really that bad.  At 1.5% you might as well give your company match to the plan, because that is what will happen as the fee compounds over many years.

[JLee]

A fee of 0.5% is not really that bad.  At 1.5% you might as well give your company match to the plan, because that is what will happen as the fee compounds over many years.

The fee will compound over the years, but so will the company match of 4%, ya?

[pminkler]

I assume that gets you to the 401k contribution cap for the year.

Yep.  I think it's $18k now.

[pminkler]

give your company match to the plan, because that is what will happen as the fee compounds over many years.

Can you explain this to me?  I'm not understanding what you mean.

[thd7t]

A couple of questions: Is there an index fund?  It will usually be one of the lowest ER options.  Is it a small company and can you ask for different funds?  My company's funds were all nearly 2% when I started.  I asked for an index fund and they provided one.  It still had a .5% ER, but it was the cheapest fund and well worth the match (which was identical to yours).

[pminkler]

A couple of questions: Is there an index fund?  It will usually be one of the lowest ER options.  Is it a small company and can you ask for different funds?  My company's funds were all nearly 2% when I started.  I asked for an index fund and they provided one.  It still had a .5% ER, but it was the cheapest fund and well worth the match (which was identical to yours).

I don't see an index fund.  It's a pretty small company...who would I talk to about getting that option?  HR?

[thd7t]

Does your company ever bring in an investment advisor?  Otherwise, HR might be a good starting place.  Who gave you the 401k paperwork?

[pminkler]

Yes, an adviser was just here last week actually.  I contacted him afterwards and he sent me the paperwork to sign up.  I'd contact him and ask if I can contribute to an index fund instead?

[seattlecyclone]

Absolutely invest in your 401(k), at least enough to get the maximum match. 0.5% is a bit on the high side, but the tax savings and matching funds completely make this worthwhile. Remember that you can always move this money to an IRA with Vanguard the next time you change jobs, so the 0.5% fees aren't forever.

Given the relatively high fees, here's the order I would recommend investing:
1) 401(k) up to maximum match.
2) Pre-tax IRA (if your income is low enough to qualify).
3) 401(k) up to maximum.
4) Roth IRA (if your income is too high for pre-tax).
5) Taxable account.

At 4.275% interest I wouldn't necessarily recommend making extra mortgage payments, but it wouldn't be a terrible idea if you just want the debt gone.

[thd7t]

Yes, an adviser was just here last week actually.  I contacted him afterwards and he sent me the paperwork to sign up.  I'd contact him and ask if I can contribute to an index fund instead?

Ask him how the funds are chosen and if they are able to change.  If you want, you can tell him what you're looking for.  I can't promise results, but I guarantee that you have nothing to lose by asking.  He may direct you to a fund that has a lot of what you want.

[pminkler]

Absolutely invest in your 401(k), at least enough to get the maximum match. 0.5% is a bit on the high side, but the tax savings and matching funds completely make this worthwhile. Remember that you can always move this money to an IRA with Vanguard the next time you change jobs, so the 0.5% fees aren't forever.

Given the relatively high fees, here's the order I would recommend investing:
1) 401(k) up to maximum match.
2) Pre-tax IRA (if your income is low enough to qualify).
3) 401(k) up to maximum.
4) Roth IRA (if your income is too high for pre-tax).
5) Taxable account.

At 4.275% interest I wouldn't necessarily recommend making extra mortgage payments, but it wouldn't be a terrible idea if you just want the debt gone.

Ah yes, the "not forever" thing also seems key.  Forgot about that.

I started to Google traditional IRAs and quickly became confused about what my AGI would be, and how the Traditional IRA works in general.  AFAIK, you can always contribute to a Traditional IRA if you want...but you can only take deductions come tax time if your income is below $61k (for full) or $61-71k for partial?  And, that income, is called AGI.  I'm confused about how to calculate AGI.

I make $53.5k/yr at job, another $15.6k/yr in veteran's disability payments and another ~$7800 in rents.  Taxable, it's about $61.3k/yr gross income (VA isn't taxable), which would put me in "partial deductions"...unless I can minus my 401K contributions...which would take me to $43.3k/yr AGI.  Minus other deductions like mortgage interest?  I'm not sure on any of that?

EDIT:  Oh I see...401K would naturally already be deducted from my salary/taxable income.  Making my wages around $35.5k/yr.  Putting my AGI at $37,800 and well within the range of deductions for a Traditional IRA.

[SaintM]

A fee of 0.5% is not really that bad.  At 1.5% you might as well give your company match to the plan, because that is what will happen as the fee compounds over many years.

The fee will compound over the years, but so will the company match of 4%, ya?

In OP's scenario, the company match is 100% of his first 3% and 50% of the next 2%.  It appears he wants to max his contribution, which would be 36% of his income (meaning he makes $50k).  His maximum match is 4% of $50k, or $2k.

With a 1.5% ER, his fee on his first year balance of $20k ($18k contribution + $2k match) is $300.  In year 1, the plan administer took 15% ($300/$2000 of his match.  It won't take many years of fees for his match to be gone.

[seattlecyclone]

A fee of 0.5% is not really that bad.  At 1.5% you might as well give your company match to the plan, because that is what will happen as the fee compounds over many years.

The fee will compound over the years, but so will the company match of 4%, ya?

In OP's scenario, the company match is 100% of his first 3% and 50% of the next 2%.  It appears he wants to max his contribution, which would be 36% of his income (meaning he makes $50k).  His maximum match is 4% of $50k, or $2k.

With a 1.5% ER, his fee on his first year balance of $20k ($18k contribution + $2k match) is $300.  In year 1, the plan administer took 15% ($300/$2000 of his match.  It won't take many years of fees for his match to be gone.

But he'll be getting more matches each year, so it's not like the plan is a complete bust just because the fees eat up the equivalent of your first year's worth of company match after 3-4 years of investing. The 0.5% funds will likely be able to provide a perfectly fine asset allocation, making the question of the 1.5% funds moot.