Author Topic: 401k fees - is there a point where it isn't worth it?  (Read 793 times)

icyappraiser

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401k fees - is there a point where it isn't worth it?
« on: December 30, 2021, 12:26:11 PM »
So my wife got a new job and the 401k offers Vanguard index funds with their typical fees (<=0.1%), but there is an additional 0.5% management fee on all assets in the plan. I'm not sure how this compares to other's plans, but all the 401k plans her & I have had haven't had anything like that - just index funds with low fees.

Would there ever be a point with fees where it makes more sense to opt out of the tax benefits to just go for funds with better fees in a taxable account?

I've seen examples of what fees can do to an account over time, so it's not a huge deal now but could add up over time if she's with the company awhile.

Thoughts?

travel2020

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #1 on: December 30, 2021, 01:46:14 PM »
I am in a similar situation. New 401k offers low cost vanguard funds but the administrator adds in .40% fee. There’s a decent employer match so that make up for it somewhat and the 401k allows me to put away a decent chunk in nontaxable which I wouldn’t be able to do otherwise so I’ve signed up despite my dislike of the administrative fees.

DaTrill

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #2 on: December 30, 2021, 01:58:52 PM »
Plans with small employers typically have high fees as the cost to administer plans is roughly 30 bps/yr.  If the plan is with Fidelity, Vanguard or other large provider, they sometimes offer self-directed options where the investor can take the money from the employer plan and directly manage the money, avoiding the management fees, in Fidelity, Vanguard, or similar directly.   

I've had similar experiences and tried in vain to get the fees lower or add the self-directed option.    Bad plan was costing me about $500 per year times number of years at employer ($4000/yr. when I left) but worth the match.  Most decisions are made by committees made up of people who do not use this investment, not their money and they don't care about the higher fees.     

EvenSteven

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #3 on: December 30, 2021, 02:00:51 PM »
Yes, there is a point, but I think 0.5% is below that point. Two factors that will affect what that number is would be (1) time at that employer and (2) amount of tax rate arbitrage (difference between tax rate at contribution and tax rate upon withdrawal).

Sorry for the non-quantitative answer, but the things I've read all put that number well above 1%.

seattlecyclone

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #4 on: December 30, 2021, 02:04:05 PM »
Remember that you'll have the opportunity to roll this money into a low-fee IRA the next time you switch employers. One rule of thumb I read somewhere (I forget where) is that you might want to opt out of the 401(k) in favor of a taxable account only if the fee percentage multiplied by the number of years you expect to remain with that employer is higher than 30.

ChpBstrd

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #5 on: December 30, 2021, 03:09:25 PM »
There is a point, but I don't think 0.4% is it. The benefits of deferred taxation far exceed that.

I wish 401k plans could deduct their fees as a tax deductible payroll deduction, instead of taking it out of returns. That would be quite an innovation if someone could pull it off.

Check into how the fees and taxes would work if you moved everything to cash/money market and then took out a large loan against your 401k to invest in VTI at your brokerage.

index

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #6 on: December 30, 2021, 03:28:30 PM »
So my wife got a new job and the 401k offers Vanguard index funds with their typical fees (<=0.1%), but there is an additional 0.5% management fee on all assets in the plan. I'm not sure how this compares to other's plans, but all the 401k plans her & I have had haven't had anything like that - just index funds with low fees.

Would there ever be a point with fees where it makes more sense to opt out of the tax benefits to just go for funds with better fees in a taxable account?

I've seen examples of what fees can do to an account over time, so it's not a huge deal now but could add up over time if she's with the company awhile.

Thoughts?

Assuming you are in the 22% tax bracket, deferring 20.5k per year saves you $4.1k per year on which you will have to pay back about 9% of the principal in combined tax when you retire ($1850) so the yearly benefit is around 2.3k plus whatever the match is. Lets assume the match is 4% on 60k ($2.4k). So the is it worth it question becomes a function of assets under 401k management and the management fee.

If the yearly total benefit of having the 401k is as shown above ($4.7k) and you have 130k in your 401k (average balance according to google), you should be willing to pay 3.6% in management fees before it "isn't worth it". In your case of a 0.5% management fee and fund fees of around 0.1%, you should be willing to keep the 401k until you have around $780k (4.7k annual benefit / 0.6% fees).   

nereo

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #7 on: December 31, 2021, 12:48:46 PM »
So my wife got a new job and the 401k offers Vanguard index funds with their typical fees (<=0.1%), but there is an additional 0.5% management fee on all assets in the plan. I'm not sure how this compares to other's plans, but all the 401k plans her & I have had haven't had anything like that - just index funds with low fees.

Would there ever be a point with fees where it makes more sense to opt out of the tax benefits to just go for funds with better fees in a taxable account?

I've seen examples of what fees can do to an account over time, so it's not a huge deal now but could add up over time if she's with the company awhile.

Thoughts?

Assuming you are in the 22% tax bracket, deferring 20.5k per year saves you $4.1k per year on which you will have to pay back about 9% of the principal in combined tax when you retire ($1850) so the yearly benefit is around 2.3k plus whatever the match is. Lets assume the match is 4% on 60k ($2.4k). So the is it worth it question becomes a function of assets under 401k management and the management fee.

If the yearly total benefit of having the 401k is as shown above ($4.7k) and you have 130k in your 401k (average balance according to google), you should be willing to pay 3.6% in management fees before it "isn't worth it". In your case of a 0.5% management fee and fund fees of around 0.1%, you should be willing to keep the 401k until you have around $780k (4.7k annual benefit / 0.6% fees).

You beat me to it.
The math here isn’t tricky. Plug in your tax rate, your 401(k) Balance and your yields.

ETA: remember that you can roll-over your 401(k) if desired into your IRA later on.
« Last Edit: December 31, 2021, 01:06:02 PM by nereo »

Wolfpack Mustachian

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #8 on: December 31, 2021, 01:02:45 PM »
So my wife got a new job and the 401k offers Vanguard index funds with their typical fees (<=0.1%), but there is an additional 0.5% management fee on all assets in the plan. I'm not sure how this compares to other's plans, but all the 401k plans her & I have had haven't had anything like that - just index funds with low fees.

Would there ever be a point with fees where it makes more sense to opt out of the tax benefits to just go for funds with better fees in a taxable account?

I've seen examples of what fees can do to an account over time, so it's not a huge deal now but could add up over time if she's with the company awhile.

Thoughts?

Assuming you are in the 22% tax bracket, deferring 20.5k per year saves you $4.1k per year on which you will have to pay back about 9% of the principal in combined tax when you retire ($1850) so the yearly benefit is around 2.3k plus whatever the match is. Lets assume the match is 4% on 60k ($2.4k). So the is it worth it question becomes a function of assets under 401k management and the management fee.

If the yearly total benefit of having the 401k is as shown above ($4.7k) and you have 130k in your 401k (average balance according to google), you should be willing to pay 3.6% in management fees before it "isn't worth it". In your case of a 0.5% management fee and fund fees of around 0.1%, you should be willing to keep the 401k until you have around $780k (4.7k annual benefit / 0.6% fees).

You beat me to it.
The math here isn’t tricky. Plug in your tax rate, your 401(k) Balance and your yields.

Furthermore, there are added benefits to having your AGI lower beyond the direct taxes saved on that money (i.e. stimulus payments with income phase outs recently, Roth IRA phaseouts, etc.) if you fit into that income range.

MDM

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #9 on: December 31, 2021, 02:16:36 PM »
The Expensive or mediocre choices section of the Bogleheads 401(k) wiki has the summary, and the last of the External links goes into some detail on how one could analyze this.

nereo

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Re: 401k fees - is there a point where it isn't worth it?
« Reply #10 on: December 31, 2021, 04:23:42 PM »
The Expensive or mediocre choices section of the Bogleheads 401(k) wiki has the summary, and the last of the External links goes into some detail on how one could analyze this.

Thanks for that link - had not seen it before