Author Topic: Help me decide whether to invest in a 401(k) with high fees  (Read 3028 times)

ricgnzlzcr

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Help me decide whether to invest in a 401(k) with high fees
« on: November 19, 2013, 12:36:01 PM »
I work with a small company that offers a 401(k) through American Funds with no match at all. From what I understand, the fees on these are pretty killer since my company has been cutting costs aggressively. Should I invest in my company's 401k?

Here is some relevant information:
  • I'm 27 and my wife is 29
  • We make a combined $133k and max out her 403b
  • We will be maxing out both our Roth IRA
  • I plan to be with this company for 3 more years at most
  • My wife and I own a house and have no children

These are the investment plans I have available through American Funds:
  • American Funds 2055 Target Date Fund R2
  • American Funds AMCAP R2
  • American Funds New World R2
  • Oppenheimer International Growth C
  • Royce Total Return Fund - Consultant
  • American Funds Invmt Co of America R2
  • Invesco Global Real Estate Fund C
  • American Funds Bond Fund of Amer R2
  • American Funds Capital World Bond R2
  • American Funds American Hi Inc Tr R2
  • American Funds ST Bond of Amer R2
  • American Funds US Government Sec R2

Any input would be much appreciated.

RaveOregon

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Re: Help me decide whether to invest in a 401(k) with high fees
« Reply #1 on: November 19, 2013, 12:56:44 PM »
If you want to get some money tax sheltered I would probably go ahead and invest in it. 3 years at most of high expenses isn't so bad and then you can roll over to something you like that is cheaper.

the fixer

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Re: Help me decide whether to invest in a 401(k) with high fees
« Reply #2 on: November 19, 2013, 01:01:13 PM »
Are there ANY benefits at all that come from this 401(k) other than the tax-deferred status of the investments? Profit-sharing contributions, maybe?

You have two options that I see. The financially smartest move is to just invest anyway, but it only works in your favor because you plan to move on in 3 years.

If you want to do the "right" thing, I would suggest you stay out and heavily lobby your company to change (you not participating makes your position look better). Since that Frontline story was done on high 401(k) fees earlier this year there have been some resources shared on the Internet with suggestions for how to do this effectively. Start with http://www.obliviousinvestor.com/whats-involved-in-switching-401k-providers/ and http://www.obliviousinvestor.com/getting-changes-in-your-401k/).

From my own experience with this, I suspect part of your company's problem may be a lack of sufficient assets in the 401(k) plan. I've been told that it's hard to find low-cost 401(k) providers if your plan has less than $1M in assets. If that's the case, you might be able to make a financial argument that better investing options or a match will increase participation (this is where you not participating comes in, you're anecdote #1; but find more), which increases plan assets, and in turn helps the plan lower its costs.

Of course, you'd have to tie it all back to a 401(k) being a benefit that helps attract and retain talented employees. As you're starting to hear in this thread, a crummy 401(k) only benefits employees who are going to stay for a couple years then leave. It penalizes loyalty because the high costs compound over time, and as long as you're an employee you can't take your money out without some kind of penalty. Also take a look on the Internet (sites such as Glassdoor) and find out if your company's terrible 401(k) is public knowledge. If it is, you can use that.

seattlecyclone

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Re: Help me decide whether to invest in a 401(k) with high fees
« Reply #3 on: November 19, 2013, 03:30:16 PM »
If you still have money to invest after maxing out your wife's 403(b) and both of your Roth IRAs (which it sounds like you do), I would recommend you join the 401(k) with this company. Paying high expense ratios on your funds for a few years isn't ideal, but the long-term benefit of deferring taxes on this money should more than outweigh this cost. Plan to roll this money over to Vanguard or another low-fee provider when you leave your current employment, and lobby for a better 401(k) in the meantime.

Mr. Sharma

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Re: Help me decide whether to invest in a 401(k) with high fees
« Reply #4 on: November 19, 2013, 08:33:43 PM »
I would, especially at your ages.  Even without the match, you are still adding more money to the pool of tax deferred/tax free growth that will grow for decades.  Plus, if you ever leave the company, you will have the option to rollover your 401k to an IRA and pick almost any investment you want. 

bUU

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Re: Help me decide whether to invest in a 401(k) with high fees
« Reply #5 on: November 28, 2013, 03:47:05 AM »
I was discussing this with the the other two members of what will probably soon be our small company's 401k investments committee. It's shocking how many people forego the advantages of tax deferral. Yes, we have some crap funds with relatively high fees, and no there is no match. But there is simply no other way to push income from this year's income taxes, paying a 25% marginal rate, into a tax year when you're going to use that money, ten or twenty years from now, when you might be paying a 15% marginal rate, and in the meantime you're also earning gains on what you would have paid in taxes this year. I've seen a lot of attempts but no proofs that don't rely on assumptions that marginal tax rates are going to double over the next twenty years that anyone is actually better off saving for retirement in a taxable investment account.

hoppy08520

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Re: Help me decide whether to invest in a 401(k) with high fees
« Reply #6 on: November 28, 2013, 01:02:25 PM »
If you want to get some money tax sheltered I would probably go ahead and invest in it. 3 years at most of high expenses isn't so bad and then you can roll over to something you like that is cheaper.
I agree 100%. If it's only 3 years, just swallow the fees. It's worth it to lower your taxable income.

chasesfish

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Re: Help me decide whether to invest in a 401(k) with high fees
« Reply #7 on: November 29, 2013, 04:39:36 AM »
I would swallow the fees and do it.  American funds aren't *that* bad as the commissioned salesperson fees go, I'd be very happy if my wife's Simple IRA would move to American funds over the garbage there now,