High-Fee Tax Deferred 401k vs. Low-Fee Taxable Index Fund

[tojnom]

Hello, first time poster here...lurking the past few weeks.  Love the site!

Here's my dilemma...I have the opportunity to participate in my company's 401k plan now (1 year of service prior to signup). After some research, I finally found the mutual fund expenses & the management/maintenance fees. I was initially going to max out the plan in Vanguard Wellington (VWENX) but the total operating expenses come out to 1.62% ($16.20 per $1000) & this is lowest expense ratio available in my plan. It will take me 6 years to become fully vested & it's a 3% match (.50 cents on 6%).

For hypothetical purposes, let's say I stick with the company for 10 years & I can contribute 20% annually to either the 401k or an index fund.

Current Retirement Investments/Background:
Emergency funds: 1-year covered, cash
Debt: Primary & Vacation residence are paid off. No student or car loans.
Tax Filing Status: Single. 25% Tax Bracket
Age: 35
Investments: VTIVX Traditional/Roth - 150k

I think this covers it...If you need more information, please let me know. Would I be better off investing in a low-fee taxable index fund or go with the tax-deferred 401k with high fees or a combination of both? I'm leaning towards the 401k plan & when I leave the company I can roll it over into my IRA. Probably looking north of 2k in fees though... :^/.  Any advice would be appreciated...Thanks, Joe

[Zaga]

I know it's painful, but I would still go ahead and max out your 401-K.  Reason being you will most likely not be in that job for long enough for the fees to eat up the tax savings.  Most people just do not stay in the same job for their whole career anymore, and for various reasons.  Once you leave that job you can immediately roll to a low fee IRA.

[Khan]

1. Contribute the minimum to get the full value of the employee match. Even including the high final expense ratio due to shitty plan, you still wind up way ahead, even 10 years out.
2. Complain to HR about the quality of the plan. The more people that do this, the more likely it is to gain traction for them to switch to a provider/plan that's not screwing their employees.

[ioseftavi]

I know it's painful, but I would still go ahead and max out your 401-K.  Reason being you will most likely not be in that job for long enough for the fees to eat up the tax savings.  Most people just do not stay in the same job for their whole career anymore, and for various reasons.  Once you leave that job you can immediately roll to a low fee IRA.

What Zaga said.  The tax deductions are still awesome on a 401(k), even though your plan investment choices clearly suck.  Once you leave, you can rollover directly to Vanguard or Fidelity or whoever, and your fees will drop.  Giving up a $17,500 tax deduction (if you maxed it out) is not worth saving 1-1.5% on plan expenses.  I mean yes, 1.6% stinks for an expense ratio, but that won't counterbalance the massive tax advantages that come with a 401k.

EDIT:  Also, Khanjar's point is a good one.  Complain to HR - that's a very high expense plan.  And at the very least, contribute enough to get the maximum match (in fact, I would say that you should do as much as you can, but at the minimum get your full match).

[GreenGuava]

Complain to HR about the quality of the plan. The more people that do this, the more likely it is to gain traction for them to switch to a provider/plan that's not screwing their employees.

Agreed completely; see also  How to campaign for a better 401(k)

[tojnom]

Thanks for all of the advice. I did put in an email to HR this morning. We're approaching the end of our 3yr contract so they will be going to market soon. I recommended taking a look at Vanguard Small Business, Employee Fiduciary, & a couple others.

Regardless, even if we don't make a switch I'll still contribute as much as possible. 1.62 is high but it could be worse...