Author Topic: 401K Questions - for newbie  (Read 1874 times)

multi-vitamin

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401K Questions - for newbie
« on: December 06, 2016, 01:13:04 PM »
My company is switching to John Hancock for 401K services, and the brief mailer they sent us doesn't list any index funds as options. I"ll have my choice of some random mutual funds from various sectors, some bonds, and a bunch of target date Retirement funds. I also do not know yet of the fees and company match.

I just have some general questions. I assume that going with a target Date retirement fund would be better than a random mutual fund, as expenses will be lower on the target Date fund. I assume that a target date fund would be the best option as I would only pay expenses on one fund rather than multiple funds while still being diversified. 

Just another general question. If my company matches me 3%, and I am paying expenses around 2% am I coming out ahead there, or are these applied in different ways that it's not a simple difference of 1%?


Interest Compound

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Re: 401K Questions - for newbie
« Reply #1 on: December 06, 2016, 01:22:34 PM »
You should always max out your tax-advantaged spaces if you can, yes even if the 401k is horrible. There are a few reasons for this:

1. It won't stay horrible forever. You will switch jobs or eventually quit, allowing you to move the money over to an IRA. In a few years your 401k options can get better...etc.

2. If you don't max out your 401k this year, you'll lose the ability to shield that $18,000 from taxes forever.

Just pick the cheapest fee options that don't suck, and put in whatever you can. The money you'll save on taxes (an immediate ~30%) will likely be significantly larger than the money you'll lose to those extra fees. If the options are REALLY bad, and you can choose to fill it up last, but even a bad 401k is almost always better than a normal taxable account.


multi-vitamin

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Re: 401K Questions - for newbie
« Reply #2 on: December 06, 2016, 01:31:49 PM »
Thank You! Also,that image answered a few other questions that I had!


letired

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Re: 401K Questions - for newbie
« Reply #3 on: December 10, 2016, 07:41:34 PM »
You can also contact HR and let them know your opinion on the options. I haven't seen a good template for doing this, but I did send a polite email to my HR folks earlier this year mentioning that I was disappointed in our 401k options and that I would like to see some index funds/lower expense ratios and asking them to pass the info on to whoever is in charge of those decision. And while is was probably driven by a new CFO at the company, we did get an S&P500 and international index fund added to our 401k this year!

multi-vitamin

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Re: 401K Questions - for newbie
« Reply #4 on: December 10, 2016, 08:29:18 PM »
Will do!  Also, I might be missing something obvious, but do I need to worry about fees at all if my company matches 3%? Won't the fees just be paid for by the company match?

letired

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Re: 401K Questions - for newbie
« Reply #5 on: December 10, 2016, 08:48:34 PM »
Will do!  Also, I might be missing something obvious, but do I need to worry about fees at all if my company matches 3%? Won't the fees just be paid for by the company match?

It depends on how you think of the company match! Personally, I consider it a key component of my 'overall compensation package' and like my salary, work hard to keep as much of it as I can. On the other hand, you could look at it as entirely 'free' bonus fun money, and think about the way you've described above.

Before I got the index funds in my 401k, I still was on track to contribute the max and had picked a combo of funds  for broad exposure and low fees. No fees were over 1%, though I think the small-cap fund was ~0.7%.

RentSeeking

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Re: 401K Questions - for newbie
« Reply #6 on: December 11, 2016, 12:27:11 AM »
The Hancock small business plans are terrible--in fact, I convinced my boss to fire our investment guy and pick a new plan rather than go with the Hancock junk they brought to us. There's some nonsense about insurance companies not being able to sell mutual funds, they have to create new investment entities that OWN mutual fund shares, and then they sell you shares in the new entity. Unsurprisingly, this jacks up the expense ratio by about 1%.

That said, it would have to be a particularly terrible 401(k) for the fees to actually lose you money with any kind of employer match. Remember that we're talking about two different percentages here: your employer match is based on your annual salary, while the expense ratio is based on the assets in the plan. So even if you were paying a combined 5% in fees, you would be getting an extra (3%) * (95%) = 2.85% of your salary if you have a 3% match.

The real comparison is the opportunity cost of deferring your money into a crappy 401k. Again, up to the minimum required to get the full match, this isn't even really a question. Even afterwards, the answer is almost always 401k > taxable account.