Author Topic: Bad 401k options?  (Read 6055 times)

kudy

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Bad 401k options?
« on: September 11, 2012, 12:51:54 PM »
Received info on the funds being offered through my 401k... and it's not looking good.  The lowest expense ratio available is 1.38% and the highest is 1.86% - I was hoping for some hands-off funds that aren't actively managed, but I don't think any of these qualify.

I will get a 4% match, so I know I'll be contributing at least 4% - but I am not sure how to do the math on these expense ratios, or evaluate the funds (nothing says "index fund" on it)... I am sure that getting the tax deduction will help offset the lousy expenses, but should I adjust percentage of contribution based on the funds available? When does it become better to put money in a taxable account with better fund choices?

I imagine I'm not the only one who doesn't really like the fund options or expense ratios in my 401k - do people just deal with it and use it anyway, because it's the single largest way to invest pre-tax dollars?

TLV

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Re: Bad 401k options?
« Reply #1 on: September 11, 2012, 02:18:55 PM »
Ouch, those are high expenses. I think the main variables are your current marginal tax rate and how long you'll be at your current employer (because you can roll it over to an IRA when you quit).

In a taxable account, you lose X% of your realized gains each year to taxes. If your gains are 8% total, and you're in the 25% tax rate, your net gain might be 7% (you don't lose a full 25% of the 8% because not all the gains are realized each year, especially if you go with something like a vanguard index fund).

In the 401k that had the exact same holdings but 1.5% additional management fee, your net gain is only 6.5%. The longer your money is in that high expense account, the more that extra .5% or so adds up, and over a long period can negate and exceed the tax benefits.

If you're already in 15% bracket and you'll be at the employer a really long time (I'd guess 15+ years offhand) then taxable with low expenses could be better.

If you're in the 25% bracket, or will be able to roll over to an IRA in the relatively near future, the tax benefits of the 401k will outweigh the management costs

kudy

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Re: Bad 401k options?
« Reply #2 on: September 11, 2012, 07:37:08 PM »
Hmm.. I'd love a tool that'd show me the point where the two lines cross.

Ideally, I will be at this job ~10 years and then switch to a consulting gig - but the company isn't that old, and I don't know what life holds.

I will have to figure out my estimated margin tax rate - everything about my finances changed this year, so it is unclear.

MooreBonds

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Re: Bad 401k options?
« Reply #3 on: September 11, 2012, 07:56:17 PM »
Received info on the funds being offered through my 401k... and it's not looking good.  The lowest expense ratio available is 1.38% and the highest is 1.86% - I was hoping for some hands-off funds that aren't actively managed, but I don't think any of these qualify.



I (along with millions of Americans that are clueless about the predicament they're in) share your 401k expense ratio pain. In my particular plan (employer of 140 people), the lowest ER funds are a Vanguard Target Retirement fund, and a Vanguard Small Cap Index Fund. However, My excitement at seeing the investment choices quickly turned to disappointment, as I saw the listed ERs as 1.00%! That means they're taking a 0.20% ER Vanguard fund, and tacking on 0.80% for their take! And that's the CHEAPEST fund. (the other choices are 1.2%-1.7%).

I've been at my employer for nearly 5 years. I max out my 401k each year because I know in  (probably) 3-5 more years my situation will probably change and I'll be able to roll it over to a self-controlled IRA and be a master of my own domain. I'd rather sock away all that money now and be able to roll it over not too far down the road, versus forever losing the opportunity to grow the tax-deferred accounts and maximize my tax benefits down the road from year to year by timing my withdrawals.

One way to look at what to invest in your 401k: I diversified in my 401k fund selections, but what you could do, is look at what the higher expense ratios are for. In my case, a few international funds are offered in the plan. Since I have a decent overall net worth in international funds (which traditionally always have higher expense ratios compared to domestic funds, due to the foreign exchange rates, and higher direct/indirect costs of owning foreign equities), the int'l funds in my 401k aren't as bad  of an expense ratio (relatively speaking, of course) compared to my taxable int'l funds, compared to the domestic funds/bond funds outside of my 401k.

I'd rather pay 1.5% 401(k) int'l fund compared to a 1.0% taxable int'l fund, compared to, say, 1.3% 401(k) domestic stock fund vs a 0.15% taxable domestic stock fund.

moneymohawk

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Re: Bad 401k options?
« Reply #4 on: September 12, 2012, 07:01:35 AM »
Years ago, our company was in the same position. One of our engineers took it upon himself to fix it.

He spent a while talking to and educating the staff member that managed our benefits and ever since then our plan has three indexes (SP500, mid, small) with decent expense ratios.

It's good to be reminded that things we might be tempted to treat as constraints are sometimes mutable!

ivyhedge

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Re: Bad 401k options?
« Reply #5 on: September 12, 2012, 02:36:55 PM »
@Kudy,

Another way to look at this is how most folks should regard their total financial picture: consider the full scale asset allocation that is the collection of *all* of your holdings, from indexed funds to private real estate. Pick  the best of this worst bunch.

Generally there is, at least, a short term bond fund that you could use as your cash allocation. Granted, it would be (relatively) illiquid, but it might be advisable to use something generally less volatile than add your full contribution - plus your employer's match - to something oft volatile (developed non-US smallcap, for example). Also, if there's just a money market option, you could consider that (though keep in mind for many of the ultra-/short duration debt options you'll experience a negative real yield).

I'd be happy to review the options with you on a general basis if you'd post their monikers and fees. If they say something like {YourCompany}Domestic Midcap Fund, just drop the company name to maintain anonymity.   

kudy

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Re: Bad 401k options?
« Reply #6 on: September 12, 2012, 06:17:32 PM »
Even the money market has a pretty high expense ratio!

The management company is American Funds. They are obviously pushing the "target date funds" - but here are the individual funds:

  • AMCAP Fund - 1.49%
  • American Funds Global Growth Portfolio - 1.71%
  • American Funds Growth Portfolio - 1.58%
  • EuroPacific Growth Fund - 1.62%
  • SMALLCAP World Fund - 1.86%
  • The Growth Fund of America - 1.39%
  • American Funds Growth and Income Portfolio - 1.53%
  • Capital World Growth and Income Fund - 1.56%
  • International Growth and Income Fund - 1.77%
  • The Investment Company of America - 1.41%
  • American Funds Income Portfolio - 1.53%
  • Capital Income Builder - 1.42%
  • American Balanced Fund - 1.38%
  • American Funds Balanced Portfolio - 1.54%
  • American Funds Preservation Portfolio - 1.70%
  • American High-Income Trust - 1.53%
  • Capital World Bond Fund - 1.72%
  • Intermediate Bond Fund of America - 1.41%

MooreBonds

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Re: Bad 401k options?
« Reply #7 on: September 12, 2012, 06:30:10 PM »
Years ago, our company was in the same position. One of our engineers took it upon himself to fix it.

He spent a while talking to and educating the staff member that managed our benefits and ever since then our plan has three indexes (SP500, mid, small) with decent expense ratios.

It's good to be reminded that things we might be tempted to treat as constraints are sometimes mutable!

As soon as our new HR employee was hired back at the mothership last year, I fired off an e-mail to her, telling her that I have extensive knowledge of investments, and helped my previous employer (my father) review and analyze the insurance benefits he offers his employees, and that I would be more than happy to help review and suggest alternatives for not only the investment choices, but even 401k providers.

Despite her canned response of "oh, yes, thanks for the offer, I was looking to start an ad hoc focus group of employees in the near future", I'm still waiting for any changes or solicitation of input.....

Kriegsspiel

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Re: Bad 401k options?
« Reply #8 on: September 13, 2012, 09:04:12 AM »
Even the money market has a pretty high expense ratio!

The management company is American Funds. They are obviously pushing the "target date funds" - but here are the individual funds:

  • AMCAP Fund - 1.49%
  • American Funds Global Growth Portfolio - 1.71%
  • American Funds Growth Portfolio - 1.58%
  • EuroPacific Growth Fund - 1.62%
  • SMALLCAP World Fund - 1.86%
  • The Growth Fund of America - 1.39%
  • American Funds Growth and Income Portfolio - 1.53%
  • Capital World Growth and Income Fund - 1.56%
  • International Growth and Income Fund - 1.77%
  • The Investment Company of America - 1.41%
  • American Funds Income Portfolio - 1.53%
  • Capital Income Builder - 1.42%
  • American Balanced Fund - 1.38%
  • American Funds Balanced Portfolio - 1.54%
  • American Funds Preservation Portfolio - 1.70%
  • American High-Income Trust - 1.53%
  • Capital World Bond Fund - 1.72%
  • Intermediate Bond Fund of America - 1.41%

Good lord... those are awful.  What about just contributing to the match, then forgetting about it? 

kudy

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Re: Bad 401k options?
« Reply #9 on: September 13, 2012, 03:36:57 PM »
I am seriously considering it - it just hurts that I'll lose my #1 tax-reducing tool.

ivyhedge

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Re: Bad 401k options?
« Reply #10 on: September 14, 2012, 12:16:27 PM »
Kudy, I'll PM you this weekend.

Best,
ivy

kudy

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Re: Bad 401k options?
« Reply #11 on: September 14, 2012, 01:26:50 PM »
Kudy, I'll PM you this weekend.

Best,
ivy

Thanks!

I plan to discuss choices with our HR when possible, but I think they're pretty tied to American Funds :(

Sylly

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Re: Bad 401k options?
« Reply #12 on: September 14, 2012, 03:35:56 PM »
ivyhedge & Kudy,

If your conversations aren't too personal, may I be CCed? I too have American Funds, and when I first set up my contributions (almost 2yrs ago), I knew very close to zilch about investing and didn't bat an eye at those ERs. Now, I still don't know much, but at least more than I did when I started my job. I'd be interested to see what you have to say about these options.

I never questioned the benefit of maxing out my 401k, despite 0 employer match (25% bracket FYI). This discussion is making me re-think that assumption. Looks like I have some math to do.

Kriegsspiel

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Re: Bad 401k options?
« Reply #13 on: October 05, 2012, 07:46:50 AM »
Just coming back to this, does anyone know off hand if you can have a 401k, AND a traditional IRA?  IE, contribute to the company match in the 401k, and then just start a regular IRA at Vanguard or whatever to contribute the rest of the $17,000?

TLV

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Re: Bad 401k options?
« Reply #14 on: October 05, 2012, 09:37:48 AM »
You can have both a 401k and a traditional IRA, but the contribution limits are separate. 17k for 401k and 5k for IRA.