Using a high-fee 401k

[baffi]

Hi, I'm new to the forums but an avid reader of the blog.  I'm trying to figure out whether it is a good idea to participate in my employer's 401k plan beyond the match amount and am struggling to come up with an answer as there seem to be so many variables.  I max out a Roth IRA every year and otherwise have invested in taxable accounts with Vanguard index funds. 

This is the first year I will have access to a 401k plan.  The lowest fee rate available is 1.69% of assets in the plan each year.  This is the rate for the only index fund offered through the plan (it's a Vanguard small-cap stock fund).  The expense ratio of investing in a taxable account is a fraction on this.  I've already tried to get my employer to switch plans (have failed so far and not for wont of trying) but did get them to add a Roth option.  Given the high fee for the 401k, would I be better off investing in a taxable account than the 401k? 

If the 401k is better than a taxable account, is the Roth or traditional option better?  I've always favored Roth for IRAs b/c I started at age 18 and the Roth seemed a better option for my long investment horizon, however I am now 30.  I'm in the 15% tax bracket and have $230,000 in assets which is roughly split equally between Roth IRAs and non-retirement accounts.  Thank you for any advice anyone can offer.  I very much admire the cleverness of those in this community.

[MDM]

Timely question.

See http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-new-job-new-life/
and
https://www.bogleheads.org/forum/viewtopic.php?t=144787.

The bogleheads thread contains the statement "This is the basis for my 30% rule of thumb; multiply the number of years you will be with the employer by the extra fee, and if this exceeds 30%, consider taxable investing in preference to unmatched 401(k) contributions."  That may be true, but the validity range of the rule of thumb is not stated, and that result is not apparent from looking at a variety of cases using the formulas shown in the MMM thread.  Haven't studied closely enough to say more at this point.

[forummm]

I would lean towards maxing out, even with absurdly high fees (such as yours). You can only make those 2015 contributions now, and that opportunity is lost to you in 7 more months. But the benefits of having that tax-advantaged cash will last for decades. Few people stay with the same employer for that long anymore. And a lot of people here retire after 10 years of working anyway. Just roll it over to an IRA when you leave this job. And in the meantime you can lobby the benefits people to pick a better 401k provider (like Vanguard).

[maizefolk]

The key thing is to get as much money into your tax advantaged pot as possible and it's a lot easier to build up a significant tax advantaged balance if you are adding 18k per year through the 401k than trying to do it solely with IRA contributions.

• If your employer's plan allows in-service rollovers, you can shift the money from the 401k plan to a traditional IRA every couple of years, in which case the cumulative effect of the high expense ratios prior to rollover won't be too great.
• If your employer's plan does not allow in-service rollovers, but you are in a field where people tend to find new jobs every 5-10 years (or you plan to be FIRE within that timeframe), you can still rollover your 401k contributions after you leave and come out significantly ahead relative to investing in a taxable account.
• The only situation in which you need to put serious consideration into avoiding your 401k would be if you are planning to continue to work, and continue to work for this same company, for multiple decades. In that case, it may make sense to invest in a taxable account account instead of your company's 401k.

[zephyr911]

Hi, I'm new to the forums but an avid reader of the blog.  I'm trying to figure out whether it is a good idea to participate in my employer's 401k plan beyond the match amount and am struggling to come up with an answer as there seem to be so many variables.  I max out a Roth IRA every year and otherwise have invested in taxable accounts with Vanguard index funds. 

This is the first year I will have access to a 401k plan.  The lowest fee rate available is 1.69% of assets in the plan each year.  This is the rate for the only index fund offered through the plan (it's a Vanguard small-cap stock fund).  The expense ratio of investing in a taxable account is a fraction on this.  I've already tried to get my employer to switch plans (have failed so far and not for wont of trying) but did get them to add a Roth option.  Given the high fee for the 401k, would I be better off investing in a taxable account than the 401k? 

If the 401k is better than a taxable account, is the Roth or traditional option better?  I've always favored Roth for IRAs b/c I started at age 18 and the Roth seemed a better option for my long investment horizon, however I am now 30.  I'm in the 15% tax bracket and have $230,000 in assets which is roughly split equally between Roth IRAs and non-retirement accounts.  Thank you for any advice anyone can offer.  I very much admire the cleverness of those in this community.

Good gawd, that's friggin' highway robbery.
I'd still max out, since the IRS bite is ~9x that, and (as mentioned) rollovers are possible. But also, talk to your HR or payroll department about why they're screwing their employees with such a bad investment plan.

[baffi]

Thank you so much to everyone for the replies!  I've worked really hard to get my employer to look into better options for our plan.  I work for a small and newish non-profit and was able to get our CFO to get a quote for us from Vanguard.  Due to our current plan assets being small, Vanguard's fees are only slightly lower currently but become hugely lower for us as our plan assets increase.  I was very surprised that having this data in front of him, our CFO wasn't on-board for making the switch since our plan assets are increasing every month.  He did say that John Hancock, our current plan provider, had told him that Vanguard doesn't offer the range of options that they do and he seemed to think this was a valid concern (I don't, I think JH is just trying to hold onto business).  I've also tried using calculators that show how investment costs eat away at earnings over time as a way to show my employer why this is an important thing to fix in our plan, and, since those staggering graphs and numbers didn't do it, I don't know what will.

Based on the replies I received here, I have asked my employer whether our plan allows for in-service withdrawals.  Whether it does our not, it seems like the best way for me to proceed is to continue maxing our my Roth IRA and also my HSA and then to, despite the high fees, invest as much as possible in my 401k rather than in a taxable account (I do think that either, 1) I will have left this job within 10 years, or 2) They will have improved the 401k plan). 

If the above is the best strategy, I just have one other question:  given that I am in the 15% tax bracket, does it make sense for me to use our Roth 401k option or the Traditional 401k?  It was always an easy decision for me to go Roth with my IRAs but what I've been reading about Roth conversion ladders seems to indicate that I could rollover a traditional 401k to a traditional IRA when I leave my job and then slowly convert the traditional IRA to a Roth year by year and not pay taxes.  Is that accurate?  I just want to make sure that I am choosing the best 401k type given that the plan itself is already handicapping the earnings significantly with its fees.   Thank you to everyone! :)

[forummm]

He did say that John Hancock, our current plan provider, had told him that Vanguard doesn't offer the range of options that they do and he seemed to think this was a valid concern (I don't, I think JH is just trying to hold onto business). 

When any business tells me they are the best business to receive my money, I believe them without question, reserve, or having any further evidence to support that assertion.

You don't need a big range of options. You need one really good fund. At most 3.

[baffi]

:)  I totally agree re: not needing a big range of funds and also re: doing some research/not just blindly trusting the company selling the service.  But I'm finding that I'm the "weird" one out there in the world---we have about 30 employees and I'm the only one who questioned our plan at all.

[forummm]

Most people aren't very well informed about investing. It's too bad your CFO appears to be one of those who needs more education.

[Frankies Girl]

Just in case this hasn't been thrown out here yet...

http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

Watch this, and ask your CFO to check it out as well. It's pretty easy to understand how poorly you do when you have high fees eating away at your 401k.

Might help your case anyway.

[baffi]

Thanks, Frankies Girl.  I will definitely check that video out myself and consider sending it along to my CFO.  I'm trying to balance getting the point across as effectively as possible while also not ruffling any feathers.  Since I'm pretty sure at this point that I'm not going to be able to effectively lobby for a change, I'm thinking it may not make sense to push the point any further

[BEN_BANNED]

He did say that John Hancock, our current plan provider, had told him that Vanguard doesn't offer the range of options that they do and he seemed to think this was a valid concern

My company also uses John Hancock as it's 401k provider and it's practically highway robbery with their outlandish fees, sub accounts, trusts, and repackaged funds. They also take a 1%-2% haircut off the plan's total assets in addition to the expense ratios.

You should stress to your employer that the company has a fiduciary responsibility to offer the best plan available to it's employees.

I passed my concerns about J.H.'s absurd expense ratios on to H.R. who in turn passed it on to a Financial Advisor(aka Broker) employed by the company to manage our plan. He's allegedly searching for more cost effective plans (it's going on 6 months so far).

[baffi]

Hi Banned Ben-- That sounds so frustrating.  We also have a financial advisor who is getting a cut.  Ours is not employed by JH but rather by a bank.  He takes .5% (included in the 1.69%).  When I got the full fee breakdown from JH, I asked my employer whether the FA position was something we were legally obligated to maintain and also what this person has done in the past for us.  The answers were: no, not obligated to have and we haven't had any analysis from our FA in 4 yrs.  I'd love to eliminate this portion of the fee--doesn't that seem logical to do?  However, my company's reaction was to ask the FA to conduct an analysis for us too, which sounds like where you are.  Do you have any Vanguard index funds offered through your JH plan?  I'm grateful at least to have the one Vanguard index available to me b/c even though 1.69% sounds very high to me, it's significantly lower than the other fund options.  Have you still decided to use your plan despite the fees or have you diverted any investments to taxable accounts instead?

[BEN_BANNED]

During our annual meeting last year I brought up Vanguard and index funds to the F.A. and he quickly shut me down. He went off a tangent about "having a captain steering a ship or letting the wind guide the ship.".

After the meeting I decided to only contribute to the company 401k up to the match and max out my Vanguard IRA and HSA.accounts. I'm still debating whether to put any extra money after the IRA and HSA max into a taxable account or "backflush" the company 401k to lower my AGI.

The most cost effective 401k plan is run by a firm called Employee Fiduciary. They only charge 8 basis points to administer the plan  The employer has to put some upfront money out of his own pocket though instead of passing all the costs on to the employee. The owner of my company is apparently too tight with his wallet to do that unfortunately.

[forummm]

M

The most cost effective 401k plan is run by a firm called Employee Fiduciary. They only charge 8 basis points to administer the plan  The employer has to put some upfront money out of his own pocket though instead of passing all the costs on to the employee. The owner of my company is apparently too tight with his wallet to do that unfortunately.

For 8 bp, maybe you guys can take up a collection to fund it yourselves. That's nothing.

[BEN_BANNED]

I think it's $1500 for the first 30 employees and a small cost for any additional employees.

[forummm]

I would totally pay $50 as a one-time fee to get Vanguard funds (or equivalent) added to my 401k instead of 2% fees. It would pay for itself in months (or days if you have a high balance). Ask for it to be taken out of your bonus, or to work free overtime for a couple hours or whatever. Over the years, it could save you tens of thousands.

[BEN_BANNED]

I'll try to pass it on to H.R. and I'll also suggest that they shit can the "Advisor".

I work in a blue collar manufacturing enviroment where retirement  planning falls below other "priorities"  like Harley UltraGlides, neck tattoos, and wing night at the local dive.

[forummm]

Maybe you just need to rally the crowd around how many more Harleys and wings they can buy if the fees are lower.

BEN_BANNED: "Over the next 10 years, you could save enough to get 750 neck tattoos while doing nothing more than just sitting at the local dive"