High 401K Fees

[postvmvs]

The company I work for has a 401K plan where the options and fees are not great, so the best I can do is a 1.2% fee and there is no employer match. I have come to realize that although I have always been good on the frugal side of things, I am "investment-dumb" so I have been working hard to try to correct this.

I recently opened (and maxed) a Roth IRA with Vanguard and dumped everything into VTSAX which has only a 0.05% fee -- which really helps drive home how sucky the other plan is (although other 401K plans may be even worse). As I understand it, the core advantage of the 401K is that it is tax deferred and I can put up to $18k in this year and reduce my tax burden. The downside is being stuck with the plan that my employer offers. So what are my other options? Would a taxable account make more sense and how could I calculate when this would be the better option? Should I just learn to live with this 401k plan and work towards maxing it out anyway?

Some personal info: I am 32 and would like to retire "early" (but not as early as some people around here). I live in a HCOL area (yeah, I realize this is a choice) which puts a damper on my ability to save, but I have no debt other than the mortgage. I currently have an emergency fund that is larger than I probably need (earning about 1% at Ally).

Thanks

[nereo]

Sorry to hear about your sucky 401(k) options.  a 1.2% fee is no fun, although it should be said that there are far worse plans out there, including ones that have front-loaded fees and annual administrative fees in the 2% range.

To address some of the things you said in your post:
Yes, the big advantage of a 401(k) is that it lowers your taxable income now, it grows tax-free every year (no annual capitol gains tax) and then it is only taxed when you withdraw funds later.  Because you lower your tax bill now with the last-dollar-earned, and pay taxes on the first-dollar-withdrawn, it's almost always a smart move.
You can also use your 401(k) to do a "Mega-backdoor Roth," which allows you to contribute up to $35k extra to your ROTH IRA every year.  Read about it here:
http://www.madfientist.com/after-tax-contributions/

"What are my other options"
A: Health Savings Accounts.  Check them out:

http://www.madfientist.com/hsa/

Finally, I'd call your HR department and complain about your poor 401(k) options, and tell them you'd like a low-cost index fund that tracks either the total market or the SP500.  Seriously, most HR departments have no idea and just go with whatever options some broker sells them.  Very often there are low-cost index options available, but the broker that your work goes through often won't tell your company that because they make less money selling them. 

Good for you for seeing the light at age 32.  Feel free to post a case-study when you are ready for more help and some friendly face-punches.
N

[postvmvs]

Thanks for the reply.

Based on the first link, I have to look into the 401k plan to see if it allows "after-tax contributions" and "in-service withdrawals" to be able to do a mega-backdoor Roth. I doubt it, but I will definitely follow up given the potential upside.

It's funny you mention a Health Savings Account, because just earlier this week my employer announced we were changing health insurance providers for the 4th time in 4 years. This year I can look forward to a 40% cost increase per pay period. Apparently it is "Obama's fault" or so they claim. Based on the very limited HSA research I did just now, I believe my first step is finding out if the health insurance is "HSA-eligible".

I think part of the issue is that the company doesn't have an HR "department". One of the secretaries is in charge of this stuff, but she isn't qualified to do so in my humble opinion.

I will look into doing a case study.

[a1smith]

For the health insurance to be HSA eligible it has to be a CDHP (consumer driven health plan).  It used to be called an HDHP (high deductible health plan) but that sounded awful so the IRS changed the acronym to CDHP.  :-D

[msilenus]

Whether or not a 401(k) with no match and a 1.2% annual fee is worth it depends mostly on three things:

1) Your marginal tax rate.  (Higher makes it more attractive.)
2) Your marginal tax rate in retirement (Lower makes it more attractive.)
3) How long you will stay at your employer.  (Shorter makes it more attractive.)

The difference between your retirement and working tax rates is what makes 401(k)s attractive at all.  If they're equal, just go taxable.  They're probably not equal.

When you leave your employer, you're liberated from that plan.  You can roll it over into a rollover tIRA.  Hopefully your next employer is better.  If not, you could leave it in the tIRA.

Trivial example: you plan to work one more year at a 25% marginal rate and FIRE into a 0% marginal rate.  You pay 1.2% for the deferral because you roll over after only one year.  (Could be different depending on timing and other things, but whatever --we're just scribbling on a napkin here.)  Then you roll over into a tIRA after quitting.  You never pay taxes again, so whenever you withdraw the money, you withdraw 23.8% more than if you hadn't done the 401(k).  If you were going to work there for 30 years, then you'd probably want to stay away from the plan.

Note that having money in an IRA can complicate Roth backdoor conversions and render them unattractive.  If you have a tIRA already, that's a wash.  If your income isn't so high that you can contribute to a Roth without backdoor shenanigans (and will continue to be) then it doesn't matter either. 

[postvmvs]

So the best scenario right now seems to be to work towards maxing out the 401k and look for a new employer?

[Jags4186]

Work on maxing and look for a new employer if you want a new job. I wouldn't change jobs solely because of a 1.2% mutual fund fee.

[msilenus]

Yeah, I wouldn't let the 401(k) fees wag your life around.  I'd just take a best guess.  Whatever's typical for your industry might be a good starting point.

[postvmvs]

I wouldn't change jobs solely because of a 1.2% mutual fund fee.

Agreed. I have other motivations as well.