Author Topic: Sucky 401(k) options – should I still max it out?  (Read 4631 times)

monkeymind

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Sucky 401(k) options – should I still max it out?
« on: August 31, 2014, 02:37:14 PM »
I’m starting a new job at the end of next month with a significant increase in salary. Yay, me!

But…

They use Principal Financial to service their 401(k).  I don’t have the paperwork yet, but I know from previous experience that Principal has ridiculously terrible fees and expenses. 

The new company automatically enrolls employees with a minimum deferral and annual increases of 2% until a deferral of 10% is reached. While it's commendable to enforce retirement savings; I suspect this is something that Principal encourages so they can appear concerned about employee financial health while, actually, they're just concerned about collecting even more money through their outrageous fees.  ...but maybe I'm just cynical. 

We’re already maxing out our IRAs.  Contributing to the 401(k) isn't a question, it’s a foregone conclusion. But how much to contribute is still up in the air.   I had always intended to max out my 401(k) but I've been trying to decide if that’s still a good idea despite being stuck with Princi(not my)pal. 

I did a search here and found a thread pretty much confirming what I already know about my  unfortunate luck with 401(k) options.

I also checked out other favorite financial sites and found this wonderful post with insights from two very wise men: http://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/

If it weren't shooting myself in my own foot, I’d prefer to send a Fuck You card to Principal and send all my money to my taxable Vanguard account.  But, based on the above post, my inclination is to go ahead and max out the 401(k), investing the money in the lowest cost index fund I can find, and then FIRE and get that money out of dodge and into Vanguard as quickly as I possibly can.

If, by some miracle, the company lets me convert 401(k) money to an IRA while still employed (and younger than 59 ˝), I’ll plan to do that regularly ~but I highly doubt it’s an option.

Anybody care to weigh in with advice? …opinions? …condolences? 

Lyngi

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Re: Sucky 401(k) options – should I still max it out?
« Reply #1 on: August 31, 2014, 02:46:50 PM »
I would still contribute,  reduce your taxable income.  Employer match??  You may not stay with this employer forever, and will be able to roll over your 401k

Roots&Wings

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Re: Sucky 401(k) options – should I still max it out?
« Reply #2 on: August 31, 2014, 02:53:48 PM »
I would contribute (have Principal too and hate the fees!).  I used the following guidance from Bogleheads to help decide whether to invest in the 401k or a taxable account instead:

http://www.bogleheads.org/wiki/401(k)#Expensive_or_mediocre_choices
Even in a bad 401(k), you should contribute up to the company match. Choose the lowest-cost funds; many bad 401(k)'s have a few lower-cost funds. If you are eligible, additional contributions should usually go into a Roth or Traditional IRA. But unless your 401(k) is very bad and you expect to stay a very long time with the same employer, investing unmatched money in the 401(k) is likely to be better than taxable investing, because you can roll over your 401(k) to a low-cost IRA when you leave.

A reasonable rule of thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds 30%. That is, if you pay 1.70% expenses rather than 0.20%, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years. The reason is that a long-term investment, even in a tax-efficient stock fund, is likely to lose 30% or more of its value to taxes on the dividends and capital-gains tax when you sell.[15]

Now, before you consider forgoing your 401(k), you may want to talk to the human resources department to see if they can improve the 401(k) plan. You may want to suggest a low-cost plan like Employee Fiduciary[16]. You can find a sample letter to the human resources department at 401k links and suggestions. Keep in mind that the employer likely cares more about the cost of running the 401(k) plan than the expense ratios that the employees have to live with. For this reason, it is not a good idea to stress the problem with the expense ratios too much. (See How to campaign for a better 401(k) plan for more details, as well as Alternatives to a High Cost 401k Or 403b Plan for more guidance).
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I also recently switched from a Target date fund to the lowest fee index funds available in my 401k, and used this calculator to compare the expense fee savings:
 
http://401kfee.com/how-much-are-high-fees-costing-you/

monkeymind

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Re: Sucky 401(k) options – should I still max it out?
« Reply #3 on: September 01, 2014, 05:23:55 PM »
Thank you both for the feedback.  It's good to see that I'm on the right track with my thinking even if I am grouchy about the high fees.  I'll definitely check out that calculator when I have more information about my options. 


Gunny

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Re: Sucky 401(k) options – should I still max it out?
« Reply #4 on: September 01, 2014, 08:37:57 PM »
Agree that you should contribute, but only enough to get full company match.  Then try and max out Roth IRAs for you and your spouse if married.  If you are a high earner, then regular IRA may be better.  Use low cost index and balanced funds in your IRAs like those offered by Vanguard, Fidelity, and T Row Price.

jpo

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Re: Sucky 401(k) options – should I still max it out?
« Reply #5 on: September 01, 2014, 09:14:14 PM »
If you are a high earner, then regular IRA may be better.
If you're high enough though, you can't deduct the traditional IRA contribution.

chasesfish

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Re: Sucky 401(k) options – should I still max it out?
« Reply #6 on: September 02, 2014, 05:30:53 AM »
How much is your combined income?  Personally, I think you still take the 401k route if you're in the 25% federal tax bracket, then lobby like heck for them to change providers.

Principal should be sending out an annual fee disclosure, which hopefully gets them back in the market on price.  My wife's first 401k was with Principal and I thought it was bad.  Then she changed jobs and only had a Simple IRA to choose from, then I was begging to have Principal back.

monkeymind

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Re: Sucky 401(k) options – should I still max it out?
« Reply #7 on: September 04, 2014, 05:23:20 PM »
We'll be in the 25% tax bracket, though I'm not a high earner.  I would still qualify for a traditional IRA.  We're already maxing out Roth IRAs this year while we're in the lower tax bracket until I get the new job. We will always max out IRAs whether they be Roth or traditional. 

There is also no question that I will contribute to get the company match. 

I'm just trying to figure out where to invest any money over and above the $11,000 for the IRAs and the 4% to get the company match.  Is there ever a point (after you've already contributed to two IRAs) when you should choose not to put the full $17,500 possible into a 401k?  As an example, if fees took 50% of your money, it would make sense to contribute as little as possible to the 401k and invest that money elsewhere.  Principal isn't quite that bad.  ;-) I'm just not sure where the tipping point is and where Principal's fees fall along the continuum.

I suppose I really should wait until I have solid numbers so I can do the math.  I was just hoping to get a jump on things.

Petunia 100

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Re: Sucky 401(k) options – should I still max it out?
« Reply #8 on: September 04, 2014, 05:34:04 PM »
How much is your combined income?  Personally, I think you still take the 401k route if you're in the 25% federal tax bracket, then lobby like heck for them to change providers.

Principal should be sending out an annual fee disclosure, which hopefully gets them back in the market on price.  My wife's first 401k was with Principal and I thought it was bad.  Then she changed jobs and only had a Simple IRA to choose from, then I was begging to have Principal back.

The great thing about Simple IRAs though, is the employer can establish plans with more than one custodian.  Is she still with this employer?  She should see if they are willing to establish a Simple with Vanguard.  A few years back, I was able to do this with my employer.  I am the only employee participating in the Vanguard plan.  The other employees either don't contribute at all or happily pay loads and high ERs offered in the other plans (Ameriprise and a former Edward Jones advisor who started his own firm).

BTW, Vanguard charges the employer nothing whatsoever.  Participants pay a small annual custodial fee per fund, but that is waived if total Vanguard assets > 50k.  Admiral shares are unfortunately not available in Simple IRAs.

beeth_oven

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Re: Sucky 401(k) options – should I still max it out?
« Reply #9 on: September 04, 2014, 08:12:03 PM »
Man, glad I found this because I'm literally going through the same thing. Got a new higher-paying job, but it's a small company, and the 401k plan is lame. It's John Hancock, all the options have 1%+ expense rations, and the match is a measly 25% of the first 5%. It works out to be about $1000 in free money, but I would have to be there for 5 years for it to vest 100%. At my last job with a sweet plan, I maxed out my 401k, but for this new plan I'm thinking the following:
-Max out Roth
-Max out IRA
-10% to 401K
-Rest to taxable investments

Beric01

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Re: Sucky 401(k) options – should I still max it out?
« Reply #10 on: September 04, 2014, 08:17:24 PM »
Man, glad I found this because I'm literally going through the same thing. Got a new higher-paying job, but it's a small company, and the 401k plan is lame. It's John Hancock, all the options have 1%+ expense rations, and the match is a measly 25% of the first 5%. It works out to be about $1000 in free money, but I would have to be there for 5 years for it to vest 100%. At my last job with a sweet plan, I maxed out my 401k, but for this new plan I'm thinking the following:
-Max out Roth
-Max out IRA
-10% to 401K
-Rest to taxable investments

Remember, even a horrible 401(k) with no match still lets you contribute $17,500 a year pre-tax. And with the Roth pipeline post-FIRE, you can avoid paying any taxes on that income.

Either the fees need to be horrible or your tax rate needs to be almost zero for it to be worth it to opt out of your 401(k). And once you leave the company, you can roll the 401(k) into an IRA at Vanguard, where you can have access to the best funds.

bdoubleu

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Re: Sucky 401(k) options – should I still max it out?
« Reply #11 on: September 04, 2014, 10:28:36 PM »
I’m starting a new job at the end of next month with a significant increase in salary. Yay, me!

But…

They use Principal Financial to service their 401(k).  I don’t have the paperwork yet, but I know from previous experience that Principal has ridiculously terrible fees and expenses. 
 

Perhaps you could check with your employer to see if Principal could offer lower-fee products?  My company switched to Principal in Jan 2013 (from Wells Fargo), and there are three funds with super low expense ratios: VINIX at 0.04%, S&P400 Midcap Blend at 0.06%, S&P600 Small Cap Blend at 0.06%.  But maybe these options are only available to companies of certain sizes? I work for one of the largest companies in my region of the country.  There are several other options at 0.3-1.4%, which aren't terrible for 401(k)'s, especially with three decent funds available with low expense ratios.

monkeymind

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Re: Sucky 401(k) options – should I still max it out?
« Reply #12 on: September 05, 2014, 04:38:08 PM »
Man, glad I found this because I'm literally going through the same thing. Got a new higher-paying job, but it's a small company, and the 401k plan is lame.

Congratulations to you on your new, higher paying job beeth_oven!  ...and good luck navigating your new 401k game. 

Perhaps you could check with your employer to see if Principal could offer lower-fee products?  My company switched to Principal in Jan 2013 (from Wells Fargo), and there are three funds with super low expense ratios: VINIX at 0.04%, S&P400 Midcap Blend at 0.06%, S&P600 Small Cap Blend at 0.06%.  But maybe these options are only available to companies of certain sizes? I work for one of the largest companies in my region of the country.  There are several other options at 0.3-1.4%, which aren't terrible for 401(k)'s, especially with three decent funds available with low expense ratios.

That is excellent news, bdoubleu!  It has been years since I had the Principal 401k but I remembered how terrible the fees were and just assumed they would continue to be equally bad.  My company is fairly good size.  I look forward to finding out what my real options are.  Thanks for offering me a ray of hope!