Author Topic: 401k - what am I missing?  (Read 9810 times)

cityhippie

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401k - what am I missing?
« on: July 15, 2013, 10:36:57 PM »
Okay, so I am jumping into this whole FI/ER thing really late in the game and am in a minor panic (as if panicking does any good) about where I stand financially as it relates to retirement.  I've been a good girl financially for the most part in recent years (no debt besides my 2.625% mortgage, a savings account with 6-12 months' worth of living expenses) and am quite frugal (especially compared to my peers).

I am now finally really looking at my retirement savings options and am very confused about 401ks.

I've been contributing to my employer-sponsored 401k for several years now.  My boss does not match our contributions but makes a profit-sharing contribution at the beginning of each year.

I've been seeing a lot of discussion 'round the interwebs about NOT contributing to the 401k past the match (or at all) because of the high fees.  Here's the question (finally), aren't I already "making" 25% on the 401k contribution because it reduces my reported income?

What am I not seeing/thinking about/grasping?  I work in the finance industry but this "stuff" sometimes makes me feel really stupid.

Also, I compared the ER as shown on my 401k administrator's site against the prospectus of each fund and the prospectus shows a much lower ER.  Is that part of how they hide fees?  Seems pretty blatant (though maybe not as I am just now figuring this out - 10 years into the 401k -ugh).

TIA for your patience/help.

aj_yooper

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Re: 401k - what am I missing?
« Reply #1 on: July 16, 2013, 05:52:46 AM »

I've been seeing a lot of discussion 'round the interwebs about NOT contributing to the 401k past the match (or at all) because of the high fees.  Here's the question (finally), aren't I already "making" 25% on the 401k contribution because it reduces my reported income?

W

No, the income taxes are deferred only; your money builds in value in the account tax free, but when you take out the money, you will be taxed at your current rate.  Often people are at a lower taxable rate when they retire or take cash out so then they luck out on the income tax bite.

Good on the EF, regular contributions to 401k, and your low cost mortgage.  No need to panic, city hippie.  Start reading at Bogleheads: http://www.bogleheads.org/wiki/Bogleheads_investing_start-up_kit and get some of their recommended books.  I like William Bernstein books, like The Investor's Manifesto, but there are lots of good authors. 

The ERs in 401k s need to be considered when you allocate your 401k money in order to keep expenses down and actually have a financial life.  Build a spread sheet of your 401k with the funds, amounts, ER, and returns to see how you are doing.  If you have specific questions, just post them. 

Welcome to the MMM forum>

chucklesmcgee

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Re: 401k - what am I missing?
« Reply #2 on: July 16, 2013, 05:56:14 AM »
I work in the finance industry but this "stuff" sometimes makes me feel really stupid.

Daw, advice is usually confusing until you think of other people with a different financial situations and habits.

Reasons why you wouldn't max out your 401k contribution:

1. You don't have that much to save and an IRA offers better investment options and lower fees.
2. You intend to retire early, in which case having money that's inaccessible for 10+ years might pose a problem
3. You don't have a Roth investment option and have a fairly low income. Your tax savings could be 15% or less AND you may expect your bracket could actually be higher when you got to retire. If you're in this bracket, a Roth IRA/HSA may seem the better option
4. You think potential returns from some other investment would greatly exceed the standard options offered.
5. You don't have a Roth investment option and believe the current state of America's debt and borrowing will lead to much higher tax rates by the time you retire.

Some 401k plans are just godawful and have ridiculous 2%+ fees. Over enough time those fees could exceed any tax savings you'd get over a low fee IRA or even a traditional account.

But I'd say for most Mustachians who save a lot, will likely have substantial assets beyond retirement accounts and may actually continue earning a decent income when they retire, maxing out a 401k contribution is probably wise.

cityhippie

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Re: 401k - what am I missing?
« Reply #3 on: July 16, 2013, 08:45:35 AM »
No, the income taxes are deferred only; your money builds in value in the account tax free, but when you take out the money, you will be taxed at your current rate.  Often people are at a lower taxable rate when they retire or take cash out so then they luck out on the income tax bite.


Ah, yes, deferred of course.  Duh!  I knew I was missing something!  Thank you.

cityhippie

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Re: 401k - what am I missing?
« Reply #4 on: July 16, 2013, 08:55:58 AM »

Reasons why you wouldn't max out your 401k contribution:

1. You don't have that much to save and an IRA offers better investment options and lower fees.
2. You intend to retire early, in which case having money that's inaccessible for 10+ years might pose a problem
3. You don't have a Roth investment option and have a fairly low income. Your tax savings could be 15% or less AND you may expect your bracket could actually be higher when you got to retire. If you're in this bracket, a Roth IRA/HSA may seem the better option
4. You think potential returns from some other investment would greatly exceed the standard options offered.
5. You don't have a Roth investment option and believe the current state of America's debt and borrowing will lead to much higher tax rates by the time you retire.

Well none of those above apply to me.  I am thinking I might continue to contribute to the 401k up to the max ONLY after I put the max into my IRA each year and, in the meantime, re-allocate the 401k portfolio to the fund that has the lowest fees.  Would be easier if the @*$!(**(* fees didn't require me to be a forensic accountant to find them.

fiveoclockshadow

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Re: 401k - what am I missing?
« Reply #5 on: July 16, 2013, 09:04:55 AM »
2. You intend to retire early, in which case having money that's inaccessible for 10+ years might pose a problem

It is worth noting this is actually never really an issue.  Using the Roth pipeline technique you can extract money from a traditional 401k or IRA with only 5 years advance notice at no penalty regardless of age.  Things will work more smoothly if you have some existing Roth IRA contributions to withdraw during that 5 years (or taxable accounts) so certainly there is a preference at some point in your savings to get a fair bit into a Roth IRA in preference to 401k contributions above the match.  But the idea that any tax sheltered retirement accounts are inaccessible for anything more than 5 years just isn't true.  One should contribute the absolute maximum to sheltered accounts without much if any worry about access to funds in early retirement.

fiveoclockshadow

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Re: 401k - what am I missing?
« Reply #6 on: July 16, 2013, 09:07:17 AM »
I am thinking I might continue to contribute to the 401k up to the max ONLY after I put the max into my IRA each year and, in the meantime, re-allocate the 401k portfolio to the fund that has the lowest fees.  Would be easier if the @*$!(**(* fees didn't require me to be a forensic accountant to find them.

That is exactly the thing to do I think.

Most funds in 401ks can be looked up through Morning Star where the expense ratios are easy to find.  However, be aware that actively managed funds typically have trading costs and other inefficiencies above and beyond that which won't be reflected in an ER but instead in a lower long term return.  So best of all pick index funds in your plan if there are any to chose from.

cityhippie

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Re: 401k - what am I missing?
« Reply #7 on: July 16, 2013, 10:35:31 AM »

Most funds in 401ks can be looked up through Morning Star where the expense ratios are easy to find.  However, be aware that actively managed funds typically have trading costs and other inefficiencies above and beyond that which won't be reflected in an ER but instead in a lower long term return.  So best of all pick index funds in your plan if there are any to chose from.

I found out from Transamerica (my 401k's admin.) that all of the funds in my co's 401k are private (even though the names are almost exactly identical to public funds), that's why I couldn't find ticker symbols and why it seemed TA's listed ERs were different than the what's on the prospectuses I found at Morningstar.

There are three index funds available; all with the lowest ERs out of the portfolio but all that are having bad year so far.  I just don't know if I can comfortably rebalance my portfolio in something that's losing money right now.  It's psychological, I know.

aj_yooper

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Re: 401k - what am I missing?
« Reply #8 on: July 16, 2013, 11:09:57 AM »

I found out from Transamerica (my 401k's admin.) that all of the funds in my co's 401k are private (even though the names are almost exactly identical to public funds), that's why I couldn't find ticker symbols and why it seemed TA's listed ERs were different than the what's on the prospectuses I found at Morningstar.

There are three index funds available; all with the lowest ERs out of the portfolio but all that are having bad year so far.  I just don't know if I can comfortably rebalance my portfolio in something that's losing money right now.  It's psychological, I know.

Why don't you post the funds you have along with the ERs and get some advice?  You don't have to put the $ amounts down, if you don't want to, but just the % of your total investments in that fund, e.g. 100K total and 25 in fund a with ER of .0001(just playing) so you post:   

fund a (total market index) (.0001) 25%. 

There is no need to re-balance a portfolio if it is in balance.  When you have more knowledge and information, you worry less and have less psychological issues with investing.  You so need to read the Bogleheads and getting with this retirement investing thing.  It is fun and important.  city hippie, investing is groovy.

cityhippie

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Re: 401k - what am I missing?
« Reply #9 on: July 16, 2013, 11:23:21 AM »
Why don't you post the funds you have along with the ERs and get some advice?  You don't have to put the $ amounts down, if you don't want to, but just the % of your total investments in that fund, e.g. 100K total and 25 in fund a with ER of .0001(just playing) so you post:   

fund a (total market index) (.0001) 25%. 

There is no need to re-balance a portfolio if it is in balance.  When you have more knowledge and information, you worry less and have less psychological issues with investing.  You so need to read the Bogleheads and getting with this retirement investing thing.  It is fun and important.  city hippie, investing is groovy.

Okay, I'll post the info. later tonight but, if anyone makes fun of how stupid my allocation is, or should have more saved, etc.,  you'll make me cry....and then take my latinum and put it under my mattress.  ;)

kyleaaa

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Re: 401k - what am I missing?
« Reply #10 on: July 16, 2013, 11:46:05 AM »
Your 401k plan would have to be INSANELY expensive for the higher costs to overcome the benefit of tax deferral. This applies to probably less than 5% of 401k plans, and even that may be generous. In short, unless you're paying 2%+, you're likely better off investing in a 401k rather than a taxable account.

aj_yooper

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Re: 401k - what am I missing?
« Reply #11 on: July 16, 2013, 11:56:32 AM »
"Latinum lasts longer than lust" so say the Ferengis.

fiveoclockshadow

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Re: 401k - what am I missing?
« Reply #12 on: July 16, 2013, 12:33:41 PM »
There are three index funds available; all with the lowest ERs out of the portfolio but all that are having bad year so far. 

Hmmm.... Strange, any equity index fund should be having a great year right now.  Maybe they are all bond funds?  Give us some details when you have the time.  Depending on what is in these index funds they might not be at all appropriate for you and you'll just have to pick the least awful managed fund.

Yeah, and isn't that awesome they are all funds impossible for you to look up anywhere...

Quote
I just don't know if I can comfortably rebalance my portfolio in something that's losing money right now.  It's psychological, I know.

AAAAAAHHHHHHHHHHHHHH!!!!!  DANGER, DANGER, DANGER!!!!  Unfortunate investment future ahead!!!!

You really need to get over to someplace like Bogleheads and start absorbing the right culture and attitude.  If very short on time there is an excellent little book to start getting in the right place:

www.amazon.com/Elements-Investing-Lessons-Every-Investor/dp/1118484878/

That is the condensed version of many, many, many excellent investing books.  Start there and branch out as necessary, but your statement above is exactly how most investors lose their shorts.  You really are going to have to work at expunging those feelings - and it isn't easy!

cityhippie

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Re: 401k - what am I missing?
« Reply #13 on: July 16, 2013, 08:21:56 PM »
Your 401k plan would have to be INSANELY expensive for the higher costs to overcome the benefit of tax deferral. This applies to probably less than 5% of 401k plans, and even that may be generous.

I might have agreed with you before I started really researching my retirement savings.  You might want to take a look at this:

http://www.wealthinformatics.com/2011/06/27/401k-fees-expenses-hidden-401kfees-you-paying/

and this:

http://finance.fortune.cnn.com/2012/06/25/retirement-guide-401k-fees/

and this:

http://assets.aarp.org/rgcenter/econ/i8_fees.pdf

and, finally, (if you're still awake), this:

http://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/

Here's the correct link mentioned in the article:

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/


matchewed

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Re: 401k - what am I missing?
« Reply #14 on: July 16, 2013, 08:47:40 PM »
Your 401k plan would have to be INSANELY expensive for the higher costs to overcome the benefit of tax deferral. This applies to probably less than 5% of 401k plans, and even that may be generous.

I might have agreed with you before I started really researching my retirement savings.  You might want to take a look at this:

http://www.wealthinformatics.com/2011/06/27/401k-fees-expenses-hidden-401kfees-you-paying/

and this:

http://finance.fortune.cnn.com/2012/06/25/retirement-guide-401k-fees/

and this:

http://assets.aarp.org/rgcenter/econ/i8_fees.pdf

and, finally, (if you're still awake), this:

http://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/

Here's the correct link mentioned in the article:

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

Yes fees with 401k's can be cryptic and/or high. But you can't make the assumption that the tax deferral isn't worth it just because everyone shouts "FEEEES!!" This is actually a math problem that you should solve rather than go by your gut and what other people post. Assume you make 100k a year gross and are single putting aside 17.5k a year to your 401k.

That does a couple things -
Reduces your taxes from the 28% bracket to the 25% bracket. Which means if you contribute the max you pay about $1335 less in taxes. Then to be paying > $1335 in fees annually in your 401k at a 2% fee is a $66750 401k balance. If you can work with your HR department and organize your fellow employees to investigate and shoot for lower fees, let's say 1% you'd need a balance of $133500 to be that much in fees. That's ignoring all the taxes you pay in a taxable account on dividends which keep skewing the benefit towards tax deferral. If you further reduce your fees to a more reasonable .6% you would need a balance of $222500 to be generating the amount in fees you would save with tax deferral.

Tax deferral is almost always worth it. Instead of being scared away from your 401k because of fees try changing your 401k.

cityhippie

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Re: 401k - what am I missing?
« Reply #15 on: July 16, 2013, 10:19:32 PM »
Why don't you post the funds you have along with the ERs and get some advice?  You don't have to put the $ amounts down, if you don't want to, but just the % of your total investments in that fund, e.g. 100K total and 25 in fund a with ER of .0001(just playing) so you post:   

Okay, AJ, here you go:

I have about $80k total in the portfolio

Asset Class/Fund                                                                 % of portfolio          ER

Bond

Intermediate Term/PIMCO Total Return Ret Opt                      16%                 1.15%
   
Hybrid-Balanced
           
American Funds Balanced Ret Opt                                        8%                   .9%

Hybrid - Strategic Allocation Series

TA Asset Allocation Moderate Growth Portfolio Ret Opt                    28%                1.43%

Large, Mid Blend Equity - Large Cap

American Funds Fundamental Investors Ret Opt                            11%                  .96%

Specialty

SSgA Emerging Markets Index Ret Opt   $14,256.80                   17%                   .99%

Vanguard REIT Index Ret Opt                                                 20%                   .83%
      

Well, look at that, I unwittingly put some of it into the one with the lowest ER and it's an Index fund, to boot. 

The ERs for all of the funds available range from .83% to 1.52%.  In addition to the ERs charged by the funds, TA charges "Asset Based Fees" of .632% (this we only knew about this year because of the new law).

I was wrong about the performance of the Index funds (this adventure is really taxing my overworked brain); there are four offered and, two are performing very, very well and their ERs are under 1%.

Lastly, I do have retirement money socked away elsewhere (old 401k that I'm rolling into Vanguard Index ASAP, a Roth IRA and a Traditional IRA) - total of all retirement savings is only about $133k. 

Fiveoclock, I promise to check out Bogleheads (mostly because I have fallen in love with Jack these last few weeks), etc.  ;)

matchewed

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Re: 401k - what am I missing?
« Reply #16 on: July 17, 2013, 04:02:08 AM »
You may also want to post what are your options other than what you've invested in.

aj_yooper

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Re: 401k - what am I missing?
« Reply #17 on: July 17, 2013, 07:34:45 AM »
cityhippie, you are showing sisu. 

Now you need to figure out what asset allocation or your risk/reward profile you want for your investments.  Your current AA looks like 80/20 (16% Pimco +1/2 of hybrid 8%) in the 401k, but your other assets may show a different pattern.  So you need to figure out for all of your portfolio-tax advantaged and taxable -how you want your AA.  Put your AA in a spread sheet format with locations for your fund choices and what % you are shooting for overall and what share each vehicle (401k, Roth IRA, IRA, taxable) has.  Bogleheads will help you figure out the efficient way to place funds, basically, keep funds that throw off income and funds that have more frequent changes in their stocks (like small cap) in tax advantaged.  Then, you can figure out which funds in your 401k would be best for you.  Don't feel bad about 'only' $133 in your stash; be glad you are awakening to your financial life. 

Bogleheads also has some sample fund allocations that are simpler to implement; that might be a good option at this time for you, but you might also want to get more complex.  Find the best ER funds in your 401k and see how you can work them into your overall plan.  Good on moving your other stuff to Vanguard.  IMO, they are the best for financially efficient investing.  For the transfer of assets, call Vanguard when you are online and they can help do the paper work to start the transfer right before your screen eyes; it does take a while for the funds to arrive at V though, but you can use the lag to peruse the fund choices.  I like Total Stock Market Index for a good portion of our assets. 

Is it possible to advocate for cheaper ways to invest at your job?  The 401k provider has a pretty sweet deal now, but not so for the participants.  I think it still is very worthwhile to use the 401k vehicle, just pick the best options they have and make up the rest of your AA in Vanguard.

 

cityhippie

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Re: 401k - what am I missing?
« Reply #18 on: July 17, 2013, 12:06:35 PM »
cityhippie, you are showing sisu. 

If I understand that correctly, then thank you.


Bogleheads also has some sample fund allocations that are simpler to implement; that might be a good option at this time for you, but you might also want to get more complex.  Find the best ER funds in your 401k and see how you can work them into your overall plan.  Good on moving your other stuff to Vanguard.  IMO, they are the best for financially efficient investing.  For the transfer of assets, call Vanguard when you are online and they can help do the paper work to start the transfer right before your screen eyes; it does take a while for the funds to arrive at V though, but you can use the lag to peruse the fund choices.  I like Total Stock Market Index for a good portion of our assets. 

Is it possible to advocate for cheaper ways to invest at your job?  The 401k provider has a pretty sweet deal now, but not so for the participants.  I think it still is very worthwhile to use the 401k vehicle, just pick the best options they have and make up the rest of your AA in Vanguard.

The moves to Vanguard are already in process.  :)  I'm throwing everything into the Social Index fund (my monniker isn't cityhippie for nothing) until I can do more research (including Bogleheads).

I will be speaking to my boss (he's the owner of the company) about the 401k fees.  I doubt he knows what's going on.  I'll pick the best options in the 401k and contribute as much as I can after the Roth contributions.  Or, maybe I'll change my mind again tonight and boycott the 401k entirely....  My head is spinning from the differing opinions/articles. 

cityhippie

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Re: 401k - what am I missing?
« Reply #19 on: July 17, 2013, 12:08:57 PM »
Tax deferral is almost always worth it. Instead of being scared away from your 401k because of fees try changing your 401k.

Thanks, match, yes, I'm hoping to institute a change in our 401k.

matchewed

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Re: 401k - what am I missing?
« Reply #20 on: July 17, 2013, 12:09:26 PM »
Keep it to math instead of opinions and articles. It will lead you to the most optimal outcome while you sort out your education in these manners.

cityhippie

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Re: 401k - what am I missing?
« Reply #21 on: July 17, 2013, 12:33:35 PM »
Also, just for kicks,  here are the choices in my current 401k (let's see if I can get the attachment to work - cutting and pasting was a disaster).

cityhippie

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Re: 401k - what am I missing?
« Reply #22 on: July 17, 2013, 10:29:51 PM »
Keep it to math instead of opinions and articles. It will lead you to the most optimal outcome while you sort out your education in these manners.

You are absolutely right about that - what's the saying "A camel is a horse by committee"? -  but the Frontline show had some pretty convincing math.

matchewed

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Re: 401k - what am I missing?
« Reply #23 on: July 18, 2013, 03:42:22 AM »
But you're not the person who was interviewed in Frontline. Your situation will have different math.

Freeyourchains2

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Re: 401k - what am I missing?
« Reply #24 on: July 18, 2013, 11:07:07 AM »
The beauty in 401k investing, for the Managers of 401k funds, is that the customer/ 401k investor usually panics emotionally.

When the stock market's crash, every 401k investor moves their money around, thus selling their positions in stocks and buying new ones like in bonds.

The Fund Managers keep racking in the commissions on such exhchanges, expense ratio fees, and these hidden fees for exclusivity into their funds, and also by selling off the proxy votes to the highest CEO bids from fund company holding positions, who use the votes to increase their yearly salaries and benefits by about 10% a year by ways of a unnoticed default proxy vote for the "for" position that only taxable accounts get to vote in. Since all 401k investors just gave up their rights for their share's proxy votes to the Fund manager.

Thus CEO's get richer,  Fund Managers get richer, and the 401k investors have their earnings locked up until age 59.5, to make sure they keep working.

Government doesn't mind because they tax the income of all classes, whether there are 250 Million people making $10k a year, or 100 person making $3 Billion a year; the government gets their taxes, as long as people keep working.

All the while fund managers play with the big money, making all the decisions, having all the control in the general themed fund and promoting "10 year average* returns" to get more investors and more commissions and more money to play with.