The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: nyxst on March 05, 2014, 07:16:29 AM
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Hoping you all can help me out with this. My company offers a Simple IRA that invests in American Funds. I have 7% of my pay, plus a 3% company match going into this every paycheck.
Outside of this, I am maxing out my Roth IRA ($5500/year) and I am filling my emergency with $600 per month. I should have the emergency fund full by the end of the summer.
Ok, now to my question. Once that emergency fund is full, I will have $600 to invest elsewhere. If I invest it in my Simple IRA through work, I could actually invest about $690 per month since that would equal my post-tax $600... but my investment would be in American Funds, which has really high costs.
My other options for that $600 per month: I also have access to a HSA that I could potentially put about $3000 per year into. The HSA is through Bancorp, and I don't know if I can invest it... I could also open a taxable account, but I can't imagine that is my best option.
I have some time to plan and research, and I figured a good start would be to pick your brains :)
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Hi fellow SIMPLE user!
Here are some target-date funds from American funds (https://www.americanfunds.com/funds/returns/objective.html#fundnav9). Their expense ratios range from 0.70-0.90 percent, which isn't bad. I know Fidelity, Schwab, and a few others are all in this range, though Vanguard's are even lower at around 0.15-0.25%.
The problem is that many many many of American Funds' offerings are sold with a load - an upfront fee of 5-6%, which is absolutely a killer. No one should be investing into funds that take 5.75% of your money off the top as the price of entry.
Before you decide further, can you tell us what share class is offered in your SIMPLE-IRA and what funds?
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From what I can see, it is all Class A shares...
I can buy whatever I would like. I know that they take about 3.5% right off the top (the actual amount varies with some seemingly unknowable force.. sometimes 3%, sometimes 3.52%..), I assume that means it is a front load. So if I contribute $100, then $96ish makes it through the gate to be invested, plus they take whatever the expense ratio is.
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I also have a SIMPLE IRA through my employer. They offered us a range of funds through Fidelity, but they were pretty crappy. No index funds to speak of, and all of them had pretty high expense ratios and fees.
After a bit of maneuvering, I was actually able to set up a process by which my SIMPLE IRA contributions we're dumped into a fidelity money market account- and then I set up a SIMPLE IRA through Vanguard, and once a month Fidelity clears out that money market account and writes a check to Vanguard. Now, my SIMPLE IRA just goes into VTSAX.
Not sure if a similar process would be possible for you, but maybe something to look into it.
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Yuck. I had a Simple IRA with them at my first job, and didn't understand front loading on the funds until YEARS later...
Basically your company match is eaten up by any fund as soon as you invest, and a bit more besides. And they don't have low expense ratios either. The fact that the lowest offerings are in the 0.70+ range is pathetic when you consider the front loading. That is HIGH, and front loading funds is a very disturbing practice that I am not sure why it is even allowed since it just is taking advantage of people that aren't financially savvy. There's no reward for going into Class A shares, and they certainly don't outperform index funds enough to compensate for the huge amount of money you're paying.
If it was me, I'd look into moving the Roth over to Vanguard, and see what the options were as far as opening a Simple/Traditional IRA with Vanguard as well, since you can't move your 401K while you're still working. And definitely start discussing with the HR department that American Funds is NOT the best option out there due to their front loading and high fee ratio and ask them to consider other companies like Vanguard or Fidelity (they have the Spartan series of low cost index funds that match up with Vanguard's) that won't eat up a huge chunk of your money.
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If you're just starting out, buy Class C shares, they don't have an upfront load but have higher carrying costs.
Over the long run... move your money somewhere else.
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I am working on my boss to get a different option, but I don't know if that is going to happen.
I will look into it an see if I can buy class C shares... I have been putting into the fund since 2010, so I can move what is in there to another fund, but I still have to contribute to that initially, so I still have to pay the front load.
That's why I was kind of wondering if putting my "extra" savings somewhere else, but I think that is the only pre-tax account I have access to, besides the HSA.
Thanks for all of your input!