Author Topic: Employer's 401k plan only offers managed funds, and no match... skip it?  (Read 1098 times)

thenewguy

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I suppose it comes down to determining (guessing?) whether the additional tax deduction now (expecting to be in 12% bracket) is worth the reduced ROI over time. Any advice on how to determine that?

- I'm expecting to invest ~$20k in 2019. If I skip the employer 401k, my plan would be $12k into traditional IRAs and the rest into taxable accounts, all in VTSAX.
- Not sure how long I will be with my current employer, but I don't anticipate it will be 20+ more years.

The fees on the funds available (see attachment) range from .9% to 2.02%.

MDM

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AnonymousCoward

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Re: Employer's 401k plan only offers managed funds, and no match... skip it?
« Reply #2 on: December 17, 2018, 09:30:27 PM »
You don't have to pay income taxes on the money you put in your 401k. To figure out how much you'd save on taxes, multiply the amount you contribute by your effective tax rate. To figure out how much you'll pay in fees, multiply the amount you contribute by the annual fee percentage. If your tax savings are more than the fees you pay, then the 401k saves you money.

After you leave this job you can roll the 401k into an IRA and use lower fee funds.

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my plan would be $12k into traditional IRAs

I don't understand this. You can only put $6,000 into your IRAs in 2019.
« Last Edit: December 17, 2018, 09:32:58 PM by AnonymousCoward »

MDM

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Re: Employer's 401k plan only offers managed funds, and no match... skip it?
« Reply #3 on: December 17, 2018, 10:12:08 PM »
You don't have to pay income taxes on the money you put in your 401k. To figure out how much you'd save on taxes [in this year], multiply the amount you contribute by your effective [marginal] tax rate.
Agreed, as edited.

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To figure out how much you'll pay in fees, multiply the amount you contribute by the annual fee percentage. If your tax savings are more than the fees you pay, then the 401k saves you money.
Unfortunately it's not that easy.  Taxes are only deferred, not avoided, by using a 401k.

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After you leave this job you can roll the 401k into an IRA and use lower fee funds.
Yes!  Thus, the sooner one expects to leave the employer with a high fee 401k, the less harm the high fees will do.

Comparison should be between using the 401k and investing taxably.  See the thread linked in reply #1 for more details.

tralfamadorian

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Re: Employer's 401k plan only offers managed funds, and no match... skip it?
« Reply #4 on: December 18, 2018, 08:20:42 AM »
Does the 401k allow in service rollovers? If so, then your problem's solved.

If it doesn't, there's a thread around here where someone went to their employer and was able to diplomatically convince them to add some more fund options. I think it helps that there have been quite a few large employers sued by their employees for not including some low fee funds.

PDXTabs

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Re: Employer's 401k plan only offers managed funds, and no match... skip it?
« Reply #5 on: December 18, 2018, 08:27:28 AM »
Please see the Bogleheads wiki entry on 401(k)s with Expensive or mediocre choices. I am in the same situation and max out that lousy 401k. Hopefully we can get it fixed, and if not I can roll it over into an IRA as soon as I leave.

EDITed to add: my fees are actually worse than yours. But yes, max out any traditional IRAs you have access to first.
« Last Edit: December 18, 2018, 08:30:05 AM by PDXTabs »

thenewguy

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Re: Employer's 401k plan only offers managed funds, and no match... skip it?
« Reply #6 on: December 18, 2018, 11:41:32 AM »
Thanks everyone! A few more questions:

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my plan would be $12k into traditional IRAs
I don't understand this. You can only put $6,000 into your IRAs in 2019.

Married filing jointly, so in my case it would effectively be $6,000 x2 - once under my name and once under my wife's.

Comparison should be between using the 401k and investing taxably.  See the thread linked in reply #1 for more details.

I'm a little confused by this... The post referenced above as well as the boggleheads link seem to be making the comparison this way. But why should the comparison not be between using the 401k and using whatever other tax advantaged options (IRA) exist before investing taxably?

As far as my 401k options, the general theme to the advice I've seen here and at jlcollins's blog seems to be that if there's not a total market index fund available, go for a large cap/growth fund. It looks like my choices are:
Lord Abbett Calibrated Dividend Gr Fund (A) - ER: 0.97%; Maximum Sales Charge: 5.75%
American Funds Growth Fund of America (R2) - ER: 1.42%; Maximum Sales Charge: 0%

Seems like a no-brainer that between those two I'd want the American Funds one (despite the higher ER) in order to avoid that sales charge, correct?

PDXTabs

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Re: Employer's 401k plan only offers managed funds, and no match... skip it?
« Reply #7 on: December 18, 2018, 12:06:18 PM »
I'm a little confused by this... The post referenced above as well as the boggleheads link seem to be making the comparison this way. But why should the comparison not be between using the 401k and using whatever other tax advantaged options (IRA) exist before investing taxably?

Because the Bogleheads wiki assumed that you would max out your IRA before using a lousy 401k. Absolutely max out your IRA before using a lousy 401k. But lots of people can't contribute to a traditional IRA because they make too much and have a retirement account at work:
https://www.fidelity.com/retirement-ira/contribution-limits-deadlines (click on Traditional IRA deduction limits)

MDM

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Re: Employer's 401k plan only offers managed funds, and no match... skip it?
« Reply #8 on: December 18, 2018, 02:09:40 PM »
I'm a little confused by this... The post referenced above as well as the boggleheads link seem to be making the comparison this way. But why should the comparison not be between using the 401k and using whatever other tax advantaged options (IRA) exist before investing taxably?
PDXTabs already answered.  See also Investment Order.

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It looks like my choices are:
Lord Abbett Calibrated Dividend Gr Fund (A) - ER: 0.97%; Maximum Sales Charge: 5.75%
American Funds Growth Fund of America (R2) - ER: 1.42%; Maximum Sales Charge: 0%

Seems like a no-brainer that between those two I'd want the American Funds one (despite the higher ER) in order to avoid that sales charge, correct?
Need to assume some before-ER return "r", then solve 0.9425*(1+r-0.0097)^n = (1+r-0.0142)^n for "n", then compare that number of years to the length of time you expect to be stuck with those choices.  E.g., for r=5% n = ~13 years 8 months.  Shorter than that AF wins, longer than that the LA wins.