Author Topic: How much is a good 401k worth? 36k salary increase, but bad investments options  (Read 1600 times)

aes421

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Hello all,

I was recently offered a new job.  The salary increase is 36k.  I typically max 401k and HSA through my current employer, but the new employer seems to have bad investment options.

With the new job I would:
- Pay 3% more in taxes (state change)
- Lose 6k in employer match (no match)
- No HSA
- Have to use Slavic401k - I've never heard of this company and I'm worried about putting so much money with a no name company.  It also looks like Slavic may charge up to 0.35% administration fee, but I'm having a hard time finding info about them.

So what is a good 401k and HSA really worth?  Is a big salary increase worth losing these investment vehicles?

Thanks in advance

« Last Edit: October 03, 2020, 11:41:31 AM by aes421 »

shinn497

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If you earn 10000 and put it in a taxable account. That money will be taxed at some double digit tax rate (I am assuming).  I am going to take a stab that this is 20% or more. I'll use 20%. You have to use the top marginal tax rate since that is what you would not pay in a 401(k). If you earn 10000 and put it in a 401(k), that money is not taxed at the same tax rate, but you might pay a fee vs vanguard or something.

Ok so lets consider 2 situations.

1. 10000 -> 8k and invested for 30 years , growing at 7% each year:  (10000*.8)*1.07^30 = 60898 


2. 10k invested for 30 years but subject to a .35% fee, and growing at 7% a year: (10000)*(1 + 0.07 - 0.0035)^30 = 68996.2986822

So, suffice to say, something like a 0.35% fee isn't as important as the saving you get from taxes.

Some considerations.

  • To do this properly you would have to simulate continuous contributions and not a single lump sum
  • With more time, the less important the tax benefit is, but I substituted 30 years for 60 years and still got a benefit of the 401(k) with the fee
  • Not factoring the HSA, employer match, or taxes. These could really tip the scales. Then again not factoring in the increase in salary
  • 7% appreciation is inflation adjusted. Still a big assumption. I actually suspect future appreciation, at least for the next 10 - 15 years, to be lower. After that it is anyone's guess. Lower appreciation means the fee is greater.

Me personally. I think that apples to apples the 401(k) alone is ok. Factoring in the taxes, lose of employer match, and loss of HSA, is a different story. Compounded these aleast cut in half the increase. There are some other factors to consider such as quality of job, career aspirations, scenery, quality of location, etc. etc.

If I were you , I would still consider my options but also see if you can negotiate better benefits. Getting an HSA, moving to Fidelity or Vanguard, and maybe getting a match changes things a LOT.

terran

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https://www.bogleheads.org/wiki/401(k)#Expensive_or_mediocre_choices offers a framework to use when considering whether investing in a 401(k) with poor investments options is worth it that I think you could use to put a dollar value on the loss of a good 401(k).

Cadman

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Do you have a HDHP? If so, you could open your own low/no-cost HSA at the provider of your choice. You wouldn't get the payroll tax deduction, but you'd avoid income tax on contributions, and you'd have flexibility on investment choices. I think I'd fill this bucket first before loading up the 401k.

aes421

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If you earn 10000 and put it in a taxable account. That money will be taxed at some double digit tax rate (I am assuming).  I am going to take a stab that this is 20% or more. I'll use 20%. You have to use the top marginal tax rate since that is what you would not pay in a 401(k). If you earn 10000 and put it in a 401(k), that money is not taxed at the same tax rate, but you might pay a fee vs vanguard or something.

Ok so lets consider 2 situations.

1. 10000 -> 8k and invested for 30 years , growing at 7% each year:  (10000*.8)*1.07^30 = 60898 


2. 10k invested for 30 years but subject to a .35% fee, and growing at 7% a year: (10000)*(1 + 0.07 - 0.0035)^30 = 68996.2986822

So, suffice to say, something like a 0.35% fee isn't as important as the saving you get from taxes.

Some considerations.

  • To do this properly you would have to simulate continuous contributions and not a single lump sum
  • With more time, the less important the tax benefit is, but I substituted 30 years for 60 years and still got a benefit of the 401(k) with the fee
  • Not factoring the HSA, employer match, or taxes. These could really tip the scales. Then again not factoring in the increase in salary
  • 7% appreciation is inflation adjusted. Still a big assumption. I actually suspect future appreciation, at least for the next 10 - 15 years, to be lower. After that it is anyone's guess. Lower appreciation means the fee is greater.

Me personally. I think that apples to apples the 401(k) alone is ok. Factoring in the taxes, lose of employer match, and loss of HSA, is a different story. Compounded these aleast cut in half the increase. There are some other factors to consider such as quality of job, career aspirations, scenery, quality of location, etc. etc.

If I were you , I would still consider my options but also see if you can negotiate better benefits. Getting an HSA, moving to Fidelity or Vanguard, and maybe getting a match changes things a LOT.

Thank you.  I really appreciate the feedback and being able to see the numbers.  Are benefits actually negotiable?  I assumed you just have to go with whatever they provide.  I didn't realize all those benefits would amount to such a big amount of the increase.

aes421

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Do you have a HDHP? If so, you could open your own low/no-cost HSA at the provider of your choice. You wouldn't get the payroll tax deduction, but you'd avoid income tax on contributions, and you'd have flexibility on investment choices. I think I'd fill this bucket first before loading up the 401k.

Unfortunately no because I would have an HRA which pays first, which I think disqualifies me.

Steeze

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Seems like a good move to me -

Letís say you are going to max the 401k no matter what, so the only difference is the fees, not the tax savings. So on 19,500 with an extra 1% expense ratio you are looking at $195 the first year, then ~$400/600/800 in subsequent years. Chances are they have a standard SP500 index fund or equivalent, so quality is not a concern. Donít roll over your current 401k if it is better & cheaper.

Now look at the HSA. Letís say you can deduct $3350/yr from your taxable income at 30%, not having this account will cost you about $1000/yr. since you have an HRA the funds are already pretax so we can ignore the cost savings on medical spending.

Add $6k/yr for employer match worth about $8500 post tax
Add the additional state tax
Add in moving expenses, cost of living adjustments

If the sum is <36k (probably) then it is worth it on paper

Of course there are many other factors - proximity to family and friends, expected salary limits, expected raise schedules, bonus opportunities, how the move will impact your resume, Learning opportunities, etc.

thesis

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I'm not very knowledgeable in this area, but it's my understanding that some employer 401k plans allow you roll money over to other plans even while you're employed with them (though there may be restrictions such as only being able to do this X number of times per year). This typically isn't allowed until you leave the company, but it doesn't hurt to ask if that is an option. In the rare case it is allowed, you might be able to shovel money from that 401k into, say, a Vanguard IRA. Somebody else might know more about this, though.

If the non-financial reasons add up, I think the pay increase definitely outweighs the cons in this situation.

Good luck! :)

J Boogie

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That's got to be among the worst names for a 401k provider. Or am I the only one who perceives a correlation between Slavic countries and a lack of trust and stability when it comes to finance?

For example, if your trusted friend pitched you on his uncle as a maverick investor with an amazing track record who has tripled his money over the past 5 years, would your spidey sense start tingling if he then mentioned his uncle was a Macedonian national? Mine would.


ChpBstrd

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Very few people stick with the same 401k provider for decades. Either the 401k provider or your job will likely be different 3 years from now. When either change happens, your balance will roll over to the new provider or your brokerage. In other words, not a biggie.

DO NOT roll your old 401k into the new plan. Set up a rollover IRA type account with your online brokerage and pay 0% in annual fees. You might even find a brokerage that will pay YOU!

So the damage is limited. Only the contributions since you started the job are affected, and even this will only occur for a finite period of time.

 

Wow, a phone plan for fifteen bucks!