Author Topic: 401k fees  (Read 3066 times)

Jesstache

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401k fees
« on: June 10, 2015, 02:44:23 PM »
Just wanted to get some opinions from fellow Mustachians.  I have been working on optimization and recently my focus has been on our investment accounts.  We've always been in the max out 401k's camp and never done much more than that but now I'm getting deeper into it all thanks to threads and posts I've seen on here. 

The current situation is that we have six (yes, 6) company 401k accounts between the two of us from former and current jobs.  Two in my name, and four in my husband's name.  There are two with Schwab, one with Lockheed Martin (they seem to have their own thing going), one Principal, one with Fidelity and one with John Hancock (through my husband's current employer).  I spent the afternoon going through all the expense ratios for the funds in our 401k's.  The total amount in all 6 is somewhere around $640k.  I realize the expense ratio audit has been a long time coming (and deserving of a face punch for not doing it sooner) but going through it all yesterday, I found they range from 0.006% to 1.46% with a total yearly expense (based on current balances) of about $2200 (ouch!).  The John Hancock plan is target date only funds at 0.8% expense ratio and is really the only one we don't have a choice in.  That balance is only around $30k due to it being a relatively short time since starting at the company.

My question is, do you recommend opening an account through Vanguard and investing in their VFIAX and VTSAX funds, with expense ratios of 0.06% and 0.05% and rolling over the basically $610k we have to play with into there?  What would you round that out with in terms of bond funds and what allocation?  My  husband and I are 46 and 31, respectively.  Is there any reason why I might not want to roll over any of the 5 accounts that are eligible?

To complicate it, I am self employed (about $80k/yr) and am working on setting myself up to be an LLC, S-Corp so that I can open a solo 401k and would hope to be able to incorporate that into whatever we end up going with for the rollover, should we do that, though I'm not sure if that'd have to be completely separate.

Any additional insights or recommendations?  Anything I'm missing?

NathanP

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Re: 401k fees
« Reply #1 on: June 10, 2015, 02:54:37 PM »
The quick answer is to do one of two options:

1. Roll everything over to an IRA at Vanguard or Fidelity or wherever you can get the lowest cost funds.

2. Roll everything over to your current employer's 401k provider. This can be the better choice if your current investment options are good and low cost. Other reasons for rolling over into your current 401k is to allow for back-door Roth contributions or if you live in a state that provides creditor protection against 401k and not IRAs.

Having your accounts all in 1 place makes it easy to maintain your desired asset allocation and minimizes the hassle factor of keeping your account information up to date when you move or get married etc..

Cheddar Stacker

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Re: 401k fees
« Reply #2 on: June 10, 2015, 02:55:27 PM »
The solo 401k, or any other self employed type accounts, would have to be kept separate at least for now.

Since you will have that avenue for tax deferral this might not apply, but the biggest drawback to pulling these all into 2 IRA's (one for you and one for him) is potentially damaging the backdoor Roth option. See further discussion here:
http://forum.mrmoneymustache.com/investor-alley/rolling-over-a-401k/msg689717/#msg689717

But in general, you want to pay close attention to expense ratios and administrative charges within 401k plans. If you can go from 1.46% down to 0.05% it's a no brainer.

Allocation depends on timeline, risk tolerance, etc. I'm about 80/20 stocks/bonds, but that will change depending on many factors like short-term need for the funds saved. Many people around here argue for 100/0, and I was one of them. I still think it's a viable option, but some convinced me the extra risk isn't worth the extra reward at that point. Most people around here are above 70% stocks, and plan to be that way well into retirement. Your portfolio has a much better chance of long-term success (based on historical performance) if it's more heavily weighted to stocks.

Good job building up such a large stache. Now it's time to simplify and optimize.

ZiziPB

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Re: 401k fees
« Reply #3 on: June 10, 2015, 02:56:14 PM »
Yes, I would definitely roll the various 401k accounts into an IRA.  Much simpler and your investment choices are not limited so you will have a lot more inexpensive choices.  Either Fidelity or Vanguard would work fine.

The only reason why not to do it would be if you are currently doing (or could be doing in the future) backdoor Roth contributions.  In that case, traditional IRAs are not good.

Jesstache

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Re: 401k fees
« Reply #4 on: June 10, 2015, 03:23:14 PM »
I had not thought about the back door Roth being a no-go after a roll-over to IRA so I'm really glad I asked because, strictly fee-wise, it seemed like a no-brainer.  We are no more than 10 years off from retiring.  We also have rental property income that will likely cover a large portion of our living expenses by then so the plan is to not have to touch the 401k/IRA money until the earliest penalty free time.   I have a lot longer to go to traditional retirement age than my husband though so it's another thing to consider.

Looks like we'll have to really plan out how much we think we might need available through the back door Roth in a worst case scenario.

I'll probably go for 80% max on the stocks and probably closer to 70%.  I'm a big fan of diversification but I'll search the forum for some of the arguments for a higher stock to bond ratio.  It may make sense since our children's college funds are all in Ibonds (about $50k, currently) and I don't generally lump that in with the rest of our portfolio when looking at asset allocation but maybe I should.  I think my husband may try to lobby for closer to 60% but honestly, he's likely to just go with whatever I choose and be glad he doesn't have to worry about it.

Cheddar Stacker

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Re: 401k fees
« Reply #5 on: June 10, 2015, 03:34:21 PM »
Just so we're on the same page since your reply seems a bit off to me:

Back Door Roth = Making post-tax (non-deductible) contributions to an IRA/401K then immediately converting them into Roth.

Roth Pipeline = Creating a laddered T.IRA to R.IRA conversion to facilitate penalty free withdrawals from tax deferred accounts.

Holding funds in a T.IRA forces you to pay some taxes when making back door Roth contributions. It does not have any negative consequences in facilitating a Roth Pipeline (that I'm aware of).

It seems your response might have conflated these two often referenced strategies.

The fact that you own a rental property makes me think maybe you're not doing the back door Roth, since you have some alternative investments. If this is the case, consolidate away.

Jesstache

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Re: 401k fees
« Reply #6 on: June 10, 2015, 03:48:53 PM »
Oh yes, I was thinking of Roth Pipeline to avoid early withdrawl penalties, thank you.  I've done neither back door Roth or Roth pipelines so I got the two confused. 

I don't plan on doing a back door Roth ever, really because our tax bracket is currently high and I'd prefer to maximize all before tax contributions (hence the setting up of solo 401k) so now it's definitely clear: I shall be doing the 401k rollover to IRA as soon as I can get it all set up and hopefully knock down those fees from ~$2200/year (and growing) to ~$400/year (and also growing).

Thanks all for the input! 

seattlecyclone

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Re: 401k fees
« Reply #7 on: June 10, 2015, 06:30:24 PM »
Oh yes, I was thinking of Roth Pipeline to avoid early withdrawl penalties, thank you.  I've done neither back door Roth or Roth pipelines so I got the two confused. 

I don't plan on doing a back door Roth ever, really because our tax bracket is currently high and I'd prefer to maximize all before tax contributions (hence the setting up of solo 401k) so now it's definitely clear: I shall be doing the 401k rollover to IRA as soon as I can get it all set up and hopefully knock down those fees from ~$2200/year (and growing) to ~$400/year (and also growing).

Thanks all for the input! 

The backdoor Roth is really only an issue if your income is (or is planned to be) too high to directly contribute to Roth IRAs. The current income limit for a married couple to make a full contribution is $183k. That's after any pre-tax payroll deductions like traditional 401(k) contributions. If you don't plan to have this high of an income before you retire, just ignore the backdoor Roth and roll over your 401(k) accounts to Vanguard IRAs.

protostache

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Re: 401k fees
« Reply #8 on: June 10, 2015, 06:44:18 PM »
Roth Pipeline = Creating a laddered T.IRA to R.IRA conversion to facilitate penalty free withdrawals from tax deferred accounts.

For the record, you can do this with a self-directed solo 401(k) as well. I'm in the process of opening one and made sure to grill them about it. It involves three steps:

  • Contribute pre-tax to your 401(k) plan.
  • Do an in-plan conversion into a designated Roth account within your 401(k) plan. Pay income taxes at this stage.
  • Immediately roll the converted amount into a Roth IRA. Let it sit for 5 years.

As far as I can tell, there's a 5 year clock on the designated Roth account, which means you should open and minimally fund it immediately so it's ready when you want to start the pipeline.

I'm using MySolo401k and will be opening Fidelity accounts, one for pre-tax and one for designated Roth. If anyone is interested I'll start a separate thread when I'm further into the process.

protostache

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Re: 401k fees
« Reply #9 on: June 11, 2015, 12:26:43 PM »
Turns out I'm wrong, sort of. Contributions to a solo 401k fall into two buckets: Elective Deferral (salary contributions) and Profit Sharing. Elective deferrals are basically off the table until you retire or close the plan down, but profit sharing seems like it's amenable to a Roth-pipeline-like structure.