The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: kaizen on April 09, 2015, 12:59:12 AM
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I am maxing out my 401k with my current employer, but the available funds are not that great. I have all my monies going to the index fund with the lowest expense ratio (BSPAX, 0.37%; everything else is closer to 2% and up)
However, there is a 'self-directed' option which would let me invest in anything I want - i.e., Vanguard funds. The self-directed account is a lot more involved than the traditional 401k:
- Can only have 75% of the 401k balance in the SDBA, so would still have 25% of $$ in the traditional 401k plan.
- It has a $100 annual fee that would be deducted from the account balance every year.
- I would also have to pay commissions on the trades that are made within the account (I'm waiting to hear back what the commission is).
- I would have to call them any time I want to make a trade in the account, as there is no online interface at the moment.
Per a financial advisor with the 401(k) company, it is not a great option because of the extra cost, work and attention required... but I thought I'd ask the Mustachians about this first, because the work may well be worth it.
I don't have to make trades every pay period, and to start I could invest 75% of the ~$20K currently in the account, so $15K, then leave it alone to accumulate some more, adding to the self-directed account every quarter or so. But if I went that route, the $100/year is about 0.67% of $15K - that plus whatever the commission is would negate the expense ratio savings of VTSMX vs. BSPAX, right?
Am I missing anything, or is really better to stick with the traditional set up?
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Am I missing anything, or is really better to stick with the traditional set up?
Appears you have analyzed this correctly. Too bad about the $100/yr fee - that does kill the advantage.
E.g., over the past 10 years a $10K investment directly into each fund would have grown to
BSPAX = $20,961
VTSAX = $22,892
...but take the $100/yr fee away and the $2K difference is down to at least $1K and actually lower - maybe negative? - you'd have to calculate year-by-year to check for sure.
The BSPAX fee isn't all that bad. Things could be worse....
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BSPAX fee is .37%
VTSAX fee is .05% (go with this instead of VTSMX)
On a $15k balance, BSPAX costs about $50 more. As your balance grows from contributions and earnings grows, the premium for BSPAX will approach the $100 annual fee.
If you have any significant amount of holdings at 2%, they likely cost you more than $100 a year.
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Another key would be commissions since the SDA would required new trades every paycheck. Mine thru TD Ameritrade allows for free ETF trades IF you sign up for the promotion before you start trading. If you don't get free trades then it most certainly is not worth it.
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If you have any significant amount of holdings at 2%, they likely cost you more than $100 a year.
Agreed, but I don't have any holdings at a 2% expense ratio; everything is in BSPAX.
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Another key would be commissions since the SDA would required new trades every paycheck.
I hadn't even thought about new trades being required. I will definitely ask about that too.
What I am thinking is that it will be worth it, if allowed, to make one large dump at the end of this year/beginning of next, of say $28.5K, with a single trade purchasing VTSAX. Whatever the trade fee, if trades are required monthly that would make no sense.
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You could just leave it with your current fund. You're not stuck with that arrangment for life (unless you die before leaving the company anyway). Just roll it over into an IRA when you separate from that employer.
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I think that given your current account balance, the brokerage window doesn't make sense for you at this time. As you note, the $100 annual fee is like adding on 0.67% to the expense ratio of whatever fund you invest in if you only have $15k to invest in there, and any trading fees will only add to this expense. As your balance grows, the effective expense ratio of the brokerage window may go down to the point where you might actually see some savings by moving your money. Revisit the option once that happens.
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Thanks all for your feedback. I'm going to keep doing what I'm doing and revisit in a year or more.
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While it looks like a bad deal now, you are maxing out your 401k. So in another year from now it will be about even and 2 years from would be cheaper. Just something to keep in mind.
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We are going through this right now at DW's workplace 401k. The company is changing to a new system that all the 401k will be in a mix of funds administered by schwab. I don't like the mix because although it includes some vanguard, it also includes more schwab w/ higher fees and lower returns. Oh, and they are not the best vanguard funds.
So we have signed up for a Schwab Personal Choice Retirement Account, where we will not receive the 'advantage' of having their salesmen planners selecting investments for us, and we can buy almost any fund or ETF available. Fortunately there is no annual fee, but there is a $9/trade fee. I think that means I will let the 401k deductions accumulate in the basic schwab moneymarket fund, then make 1 trade/purchase per month or quarter. IOW, buy $4000 of VBTLX 1st qtr, then $4000 into VTSAX 2nd qtr, etc.
Thoughts?
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We are going through this right now at DW's workplace 401k. The company is changing to a new system that all the 401k will be in a mix of funds administered by schwab. I don't like the mix because although it includes some vanguard, it also includes more schwab w/ higher fees and lower returns. Oh, and they are not the best vanguard funds.
So we have signed up for a Schwab Personal Choice Retirement Account, where we will not receive the 'advantage' of having their salesmen planners selecting investments for us, and we can buy almost any fund or ETF available. Fortunately there is no annual fee, but there is a $9/trade fee. I think that means I will let the 401k deductions accumulate in the basic schwab moneymarket fund, then make 1 trade/purchase per month or quarter. IOW, buy $4000 of VBTLX 1st qtr, then $4000 into VTSAX 2nd qtr, etc.
Thoughts?
I have the same Schwab option in my 401k. I've elected to invest in the Schwab total market ETF (SCHB) since it was no transaction costs and a .04 ER). I prefer BND, VCIT and VXUS to the Schwab ETF offerings and pay the transaction fees if adding to those positions when rebalancing.
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Good news! We are switching to a new provider, and there will be Vanguard fund options in the new plan.
The benefits of working at a small but growing company: the squeaky wheel gets the grease. I've been quietly urging better options since I started here. :)
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We are going through this right now at DW's workplace 401k. The company is changing to a new system that all the 401k will be in a mix of funds administered by schwab. I don't like the mix because although it includes some vanguard, it also includes more schwab w/ higher fees and lower returns. Oh, and they are not the best vanguard funds.
So we have signed up for a Schwab Personal Choice Retirement Account, where we will not receive the 'advantage' of having their salesmen planners selecting investments for us, and we can buy almost any fund or ETF available. Fortunately there is no annual fee, but there is a $9/trade fee. I think that means I will let the 401k deductions accumulate in the basic schwab moneymarket fund, then make 1 trade/purchase per month or quarter. IOW, buy $4000 of VBTLX 1st qtr, then $4000 into VTSAX 2nd qtr, etc.
Thoughts?
Sounds like a solid plan. $9 for $4000 is a very low addition to the VBTLX or VTSAX existing expense ratio (keep in mind that you'd need $10K+ for the VTSAX though - so either wait a few more quarters or go with VTSMX to start, then switch over a few quarters in once you have $10K).
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Thanks Claycord & Kaizen. I'll look into those options when the new UI is fully up & running. Will be another week or two.
And good job Kaizen, being the squeaky wheel. Actually, that is kaizen in action: always optimizing the system.