Author Topic: Escape high-cost 401k choices?  (Read 4592 times)

Beaker

  • Bristles
  • ***
  • Posts: 334
Escape high-cost 401k choices?
« on: March 23, 2013, 10:43:39 AM »
I've just switched jobs and am looking at the fund options in my new 401k plan. The administrator is Great Western Retirement Services, which seems to have absolutely ridiculous expense ratios. As an example, their S&P 500 Index fund has annual expenses of 0.60% for 401k investors. For comparison, Fidelity charges 0.05% per year for the same thing - a 12x difference! That's going to compound out to probably tens of thousands of dollars by the time I start taking withdrawals.

Is there any way I can escape from these ridiculous expense ratios while retaining the tax benefits of the 401k? Unfortunately substituting an IRA is not a solution for me right now, or I would just do that.

MooreBonds

  • Stubble
  • **
  • Posts: 193
  • Age: 43
  • Location: St. Louis, MO
Re: Escape high-cost 401k choices?
« Reply #1 on: March 23, 2013, 10:51:08 AM »
I've just switched jobs and am looking at the fund options in my new 401k plan. The administrator is Great Western Retirement Services, which seems to have absolutely ridiculous expense ratios.

Is there any way I can escape from these ridiculous expense ratios while retaining the tax benefits of the 401k? Unfortunately substituting an IRA is not a solution for me right now, or I would just do that.

I have similar heartburn with some of my 401k choices. I also don't have much 'choice' to sock away that much into other accounts. I look at it 2 ways:

1) Look at your entire portfolio together. In other words, what are some fund choices you would invest in in your taxable accounts, and what are those expense ratios? I put a bunch into foreign funds/stocks. My 401k foreign funds aren't really too terribly much higher ER (maybe .90%-1.00%) compared to my taxable options (0.60%-1%). Sure, it still sucks, but the spread isn't as bad as, say, a 0.10% index fund in a taxable account, versus a 0.90% index fund in my 401k.

2) I don't plan on being with my employer for more than maybe 5 more years. If you truly think you'll be with your employer for another 20-30 years, then yes, by all means, rethink how much you put in your 401k (or lobby with coworkers to hit up your HR department for better fund  choices). But, if you really think you'll be changing employers in 5-10 years, just max out your 401k now, and when you leave, roll over that 401k to Vanguard or another low cost provider and manage it yourself.

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1035
  • Location: Seattle, WA
Re: Escape high-cost 401k choices?
« Reply #2 on: March 23, 2013, 03:08:37 PM »
You think that's bad? At least you have an index fund to choose! The best fund I can choose in my 401(k) is the Growth Fund of America (RGABX), at a whopping 1.5% expense ratio. It's fallen significantly behind the S&P 500 over the last 5 years probably because of the expenses.

Basically your options are:
  • No matter what, contribute the minimum to get your employer match (as long as you're pretty sure you'll meet any vesting requirements). That's a 60-100% upfront return. Even if you did immediate early withdrawals of this money and paid penalties on it, you'd still come out ahead.
  • Consider if you're eligible to make a deductible contribution to a traditional IRA (depends on your income)
  • Invest only in the lowest cost, diversified fund in the 401(k) that gives reasonable return (e.g. if in my plan, a bond fund only has a 1.2% ER I still won't choose it because RGABX's return makes up for the extra .3% expenses). Make up the rest of your asset allocation in other accounts (IRA, Roth, taxable)
  • If you can do a significant amount of self-employment work, open a solo 401(k) with your low-cost provider of choice. Contribute all your self-employment profits to that in lieu of contributing to your employer's plan past the match.
  • As a last resort, don't stick around at your job too long. Roll over the 401(k) to an IRA or solo 401(k) as soon as you leave. If you really like the job and they really like you, you could do a serious money hack by resigning, rolling over the 401(k), then trying to get re-hired.
FWIW I still contribute the max to my 401(k). I don't plan on being around long enough for the expenses to make a huge difference.

What I think is super-ironic about bad 401(k) plans is that these retirement plans, like most job benefits, are meant to attract and retain employees. But a bad 401(k) is actually incentivizing the financially literate employees to LEAVE so they can get control of their money.

Beaker

  • Bristles
  • ***
  • Posts: 334
Re: Escape high-cost 401k choices?
« Reply #3 on: March 25, 2013, 11:15:54 AM »
Thanks for the notes, guys. There are some creative ideas here, but unfortunately it sounds like I'm just going to have to suck it up and be sure to get my money out of there as soon as I leave. I looked through some of my other options, and they're mostly even worse. Expense ratios of 1-2%, and loads of up to 6% on top of that!

Fixer, my plan doesn't currently have an index fund. I'm in the process of getting the administrator to add one. You may want to see if you can get your administrator to add something a little better.

I have to imagine the company HR people just aren't financially literate enough to be outraged over this. But the investment companies are being just plain evil, in my book. They know people are trapped in these options so they can get away with this kind of highway robbery.

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1035
  • Location: Seattle, WA
Re: Escape high-cost 401k choices?
« Reply #4 on: March 25, 2013, 11:29:02 AM »
I've talked to my plan administrator. In my case, we're a small company with retirement assets under $1 million. Larger accounts can take advantage of economies of scale to pay for administration costs of the plan (administering a 401(k) is not cheap), but for smaller accounts the per-employee cost is higher. The plan can pay these fees in one of two ways:
  • transparently through management fees that the company has to pay as an overhead expense
  • opaquely through higher ERs on the funds that employees can invest in, presumably a portion of which gets paid back to the plan administrator as a sales commission.
My company chooses the latter, and it's hard to show how this is a bad deal.

When you really think about it, it's actually to my benefit for them to make the choice they've made. If my company had to cover a fixed management fee, it would probably get paid for by reducing the employer match. I benefit more from the match than I would from low-fee funds because I won't be around that long. It's not until my balance gets ridiculously high (presumably from working a long time) that the high ER would eat into my assets more than the match on new contributions can make up for it.