Author Topic: 401k Question  (Read 2691 times)

OneDogGP

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401k Question
« on: March 27, 2014, 10:03:50 AM »
Hello all.  New to the site and had a question.

I have a 401k at my job that is managed by an "Advisory" firm.  For the privilege of a yearly 1% in fees on the ENTIRE balance of my account, I get a quarterly form letter from them.  This drives me nuts.  Now that they have to disclose the charges to us I get to see how much is siphoned off by them in addition to the regular ongoing fees by Schwab for each fund I'm invested in.

So my question is this:  Would I be better off ratcheting back my contribution percentage to the minimum to get the match and putting the excess into index funds, or should I just get over it and keep contributing my current 20% because the lower yearly taxes make up for the fees?

And as a side note, I also contribute the max to my Roth each year, am 45 years old, have my house paid for, pay off my credit card in full each month, and try and put away something in savings each month.  BUT, in no way am I as frugal as many of you, and I drive a truck to and from work, have no bicycle, eat out too often and like to gamble.  Sorry, had to get that out as this feels like confession and I sincerely hope to get better with time and support from you good people's help!!!

Thanks,

OneDogGP

Frankies Girl

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Re: 401k Question
« Reply #1 on: March 27, 2014, 10:09:48 AM »
I've never heard of a 401k that has a mandatory adviser to managing your fund. I'd question that and see if you could opt out and press your HR to see about offering low cost funds if they insist on having a management fee like that right off the top.

I think if the mandatory advisory fee can't be removed, I would pull back the contributions to the minimum to get the match as long as it didn't push the overall income into a higher tax bracket (pre-tax contributions lower your taxable income, so if you're on the cusp of two brackets, it would probably still be more of an advantage to continue).

Sounds like you're not doing too bad otherwise, and welcome! :)


OneDogGP

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Re: 401k Question
« Reply #2 on: March 27, 2014, 12:46:06 PM »
Well, HR is aware and they're supposed to be shopping around for a new 401k for us, but it will probably be a while before we make any changes.  I'm sure the fees are dogeared as management fees, but again since the percentage comes from the entire balance versus new contributions, it feels like robbery.

So I guess the new question is how I figure out how much of a difference pulling back my percentage will make to my overall picture.  Maybe my accountant buddy can help me with that.  (After tax season is over!)  :)

Thanks, for the response and kind words.  I look forward to learning from all you smarter than me people!  :)

TomTX

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Re: 401k Question
« Reply #3 on: March 27, 2014, 08:10:16 PM »
Call HR again and let them know about one more unhappy employee who wants a non-usurious 401(k)

seattlecyclone

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Re: 401k Question
« Reply #4 on: March 27, 2014, 09:54:17 PM »
1% fees compounded over many years makes a huge difference. If it's only for a few years, the tax benefit of the 401(k) will likely outweigh the high fees. So which will it be? If you expect a new 401(k) provider or a new employer in the next few years, you're probably better off keeping your contributions at the max, writing off the fees for a little while, and rolling over the money to an IRA when you switch employers. If you expect to keep your current job for several years and you don't expect your HR department to follow through on their promise to find a better provider, pulling back on your contributions is probably a good idea.

SDREMNGR

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Re: 401k Question
« Reply #5 on: March 28, 2014, 06:49:36 PM »
The 1% fee sucks but if that's your only option, then it's still better than not investing pre-tax.  If your income tax is 25%, 1% < 25%.  Just suck it up until your company gets a better company to manage it's 401k.

beltim

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Re: 401k Question
« Reply #6 on: March 28, 2014, 07:00:49 PM »
The 1% fee sucks but if that's your only option, then it's still better than not investing pre-tax.  If your income tax is 25%, 1% < 25%.  Just suck it up until your company gets a better company to manage it's 401k.

This may be the right advice, but it's the wrong math.  The effect of fee is [1 - (1 - fee)^(number of years in plan)], and the tax (current marginal rate - retirement marginal rate). 

So at 10 years, and 0% marginal rate in retirement, (1 - (1-.01)^10) = .096 or a 9.6% fee.  9.6% < 25%, so good advice.

But if you're working for 20 years, and going to a 15% marginal rate in retirement, (1 - (1-.01)^20) = .182.  18.2% is greater than 10%, and so this is bad advice.

I should note that this calculation only applies to the money post-match, and the marginal tax rate is rarely as simple as either of these cases due to investing over many years and having other income sources that can change your marginal tax rate (like Social Security).

beltim

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Re: 401k Question
« Reply #7 on: March 28, 2014, 07:07:40 PM »
Actually, even that isn't quite right, because the expense ratio is taken on a varying dollar value of assets.  But it's a reasonably good approximation– it takes into account that the fees happen every year rather than once.

Shor

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Re: 401k Question
« Reply #8 on: March 28, 2014, 07:25:40 PM »
Also, when you put money in to the 401k, it Could lower you below certain income levels to allow other tax breaks \ credits. Not sure if it's worth the time researching what options this opens up though.. Just another small thing that might make it worth a little bit more than what's been offered up so far.

It might also be possible to transfer some / all of the 401k funds out to an IRA. Where you control everything! Or, worst case, you quit your job and I think you definitely get the option to push it to an IRA..