Author Topic: 401K Limitations - VTSAX equivalents  (Read 3711 times)

exsalaryman

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401K Limitations - VTSAX equivalents
« on: April 17, 2015, 08:10:49 PM »
Hello,

I'm new to the forums but I've been lurking around several personal finance blogs for a while now. I've finally decided to take things a bit more seriously and make FIRE a reality.

I'm 28 with a gross salary of $83,000. I work at a very small company and our 401k with First Merchantile is pretty limited and has relatively high fees. However, I've still decided to max out my 401k contributions this year with a total of $18,000 in personal contributions and I'll be receiving a 100% match from my employer up to 5% of my salary. I would love to invest in VTSAX, at the recommendation of just about every personal finance blogger, but it looks like the closest thing is Vanguard Target Retirement 2060 - VTTSX with a 1.7% expense ratio. I'm in the 25% tax bracket so I can live with the expense ratio given that I'll be saving 25% in taxes.

I just want to make sure that I've got the right mindset here. I want to be able to set this up for the forseeable future and forget about it. What do you guys think? The only other options we have are the Vanguard Retirement Funds 2020-2050, Vanguard Gold Fund, Vanguard Bond Fund, a Health Services ETC and a REIT ETF.

Thanks in advance for any help!

forummm

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Re: 401K Limitations - VTSAX equivalents
« Reply #1 on: April 17, 2015, 08:16:08 PM »
So your employer or First Mercantile is adding a 1.5% expense ratio to the fund on top of the 0.18% Vanguard is charging? That's terrible.

But VTTSX is a pretty good substitution for VTSAX if that's what you have available. I think having international exposure is good anyway. You can always roll the 401k over (and escape these terrible fees) whenever you change jobs.

iamlindoro

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Re: 401K Limitations - VTSAX equivalents
« Reply #2 on: April 17, 2015, 08:18:44 PM »
The Vanguard target date retirement funds are excellent.  They are essentially a single fund that stays balanced for you.  Most mustachians would want to stay in the *latest* target date fund possible, as those would be the ones most heavily in stocks, and thus the fastest growth.  Thus, the 2050 would be the one I would put everything in.  Great fund.  If the 2060 opens up in a few years, you could transfer it all into that.

Edit: Sorry, I missed that you do have the 2060 fund.  I'd go all-in on that.  Excellent option.  It is just a frontend to the US total stock market, total bond market, and total international market funds. 
« Last Edit: April 17, 2015, 08:22:15 PM by iamlindoro »

Indexer

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Re: 401K Limitations - VTSAX equivalents
« Reply #3 on: April 17, 2015, 08:31:36 PM »
Quote
our 401k with First Merchantile is pretty limited and has relatively high fees.

Talk about an understatement.  They are charging you about 10 times what Vanguard normally charges for that fund. 

If you don't have VTSAX or VTIAX as an option then a target retirement fund is probably your best bet.

exsalaryman

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Re: 401K Limitations - VTSAX equivalents
« Reply #4 on: April 17, 2015, 08:36:38 PM »
So your employer or First Mercantile is adding a 1.5% expense ratio to the fund on top of the 0.18% Vanguard is charging? That's terrible.

But VTTSX is a pretty good substitution for VTSAX if that's what you have available. I think having international exposure is good anyway. You can always roll the 401k over (and escape these terrible fees) whenever you change jobs.

Yeah I agree the fees are pretty ridiculous but with the tax savings I'm easily making my money back so I'll keep my complaints to a minimum. I am tempted to ask my boss what's up with these fees though haha.

exsalaryman

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Re: 401K Limitations - VTSAX equivalents
« Reply #5 on: April 17, 2015, 08:40:10 PM »
Great! Thanks for the confirmation guys. It makes me feel a lot better about shifting $18,000 of my income into this 401k. I hate the fees but I'll survive for now. Unfortunately, I think my boss and the investment advisor are good buddies. The things you have have to deal with in a small company.

JoeP

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Re: 401K Limitations - VTSAX equivalents
« Reply #6 on: April 18, 2015, 12:02:09 AM »
@exsalaryman

You may find this government published information regarding 401k fees helpful: http://www.dol.gov/ebsa/publications/401k_employee.html

Your employer does have some responsibility in regards to reviewing 401k fees:

You should be aware that your employer also has a specific obligation to consider the fees and expenses paid by your plan. ERISA requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the interest of the plan participants and their beneficiaries. Among other things, this means that employers must:

Establish a prudent process for selecting investment options and service providers;
Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided;
Select investment options that are prudent and adequately diversified;
Disclose plan, investment and fee information to participants to make informed decisions regarding their investment options under the plan; and
Monitor investment options and service providers once selected to see that they continue to be appropriate choices.


Good luck!

exsalaryman

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Re: 401K Limitations - VTSAX equivalents
« Reply #7 on: April 19, 2015, 06:51:47 PM »

You may find this government published information regarding 401k fees helpful: http://www.dol.gov/ebsa/publications/401k_employee.html


Thanks for the info JoeP. I'll take a look at this and do some research on the expense ratios of similar 401k plans to see if there's a significant difference.

TomTX

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Re: 401K Limitations - VTSAX equivalents
« Reply #8 on: April 20, 2015, 05:33:51 AM »
Those expenses are just brutal. You should encourage your employer to switch to a low cost provider, with Vanguard being the archetypal example.

Also, see if the plan allows an in-service rollover, so that you can move your money to Vanguard periodically. (maybe every $10k)

Here's an improved personal allocation:

1) 401(k) up to the employer match
2) Personal IRA at Vanguard to the max
3) Max 401(k)
4) Taxable account at Vanguard

If you can't set aside enough money to max both IRA and 401k, the expensive 401(k) should be the one with headspace left over. However, being single with your income you ought to be able to get well into step 4.
« Last Edit: April 20, 2015, 05:37:28 AM by TomTX »

exsalaryman

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Re: 401K Limitations - VTSAX equivalents
« Reply #9 on: May 14, 2015, 10:03:38 AM »
@TomX - Thanks for the suggestions! I'll actually be maxing out the 401k, Traditional IRA, and HSA during the current year and funding a taxable account with Vanguard so there's no way to avoid those fees other than convincing boss man to switch to a lower cost provider. I had never heard of the in-service rollovers so I'll definitely do the research to see if thats a possibility. That would be amazing.