22 year old relative new job 401k questions

[nancy33]

I have a single 22 year old asking my advice. Has a new  job paying 68 k a year. No debt. New job offers a 401 k thru John Hancock 6 percent company match. Any advice? I looked up John  Hancock. Looks bad. High fees. Maybe crappy mutual funds? I'm thinking a Roth IRA max out with vanguard index fund. What about this 401k? Ideas? Thank you all

[use2betrix]

I have a single 22 year old asking my advice. Has a new  job paying 68 k a year. No debt. New job offers a 401 k thru John Hancock 6 percent company match. Any advice? I looked up John  Hancock. Looks bad. High fees. Maybe crappy mutual funds? I'm thinking a Roth IRA max out with vanguard index fund. What about this 401k? Ideas? Thank you all

If he gets a match, no amount of shitty fund with high fees will likely be so bad as to outweigh the benefits of the match.

If he is getting a 100% match that that 6%, that’s 6% of free money. When he leaves the company some day I’d immediately roll it over to Vanguard, but for the time being, you definitely want to invest enough to get that full match.

[Sisyphus]

My 401k was through an insurance company with high fees but they did have 1 index option, sp500, with low ER.  I would check out the prospectus of what was offered and at least contribute to the company match on a lowest cost option.  Then diversity using the Roth

[Fire2025]

Also look at the Large Cap, Mid Cap and Small Cap funds.  They are usually very inexpensive.  I have done Large cap and small cap mix and had less than 1% fees.  The tax advantages and making it easy to start young maybe enough to out weigh bad options........for now.

[Greystache]

My daughter was recently in a similar position. I advised her to contribute just enough to the 401K to get the full company match and invest in a low-cost target date fund. The rest of her savings goes into a Roth IRA.  I think young people starting out with relatively low salaries and historically low income tax rates should take advantage of Roth IRAs. In my personal case, I waited too long. I was only able to contribute to a Roth IRA for a few years before I exceeded the income limits. 

[dberk]

This is not uncommon at all, unfortunately there are still too many companies that don't look out for the best interest of their employees and go with brokers such John Hancock.
Having said that, 6% of match is a no brainier, regardless of the fees and "crappy funds".

I would do the following:
- Contribute to 401K to get a full 6% match
- Look for any diversified fund with low(er) fees

- Open another account with Vanguard or Fidelity and crunch the numbers to compare Traditional IRA and Roth IRA. Either way, he will be fine.
- As soon as he leaves this company, roll any amount from 401K to Vanguard or Fidelity into an IRA account.

What is up in the air is to whether to put any more money into 401K above the match. I guess, it depends on his/her situation. For now, I wouldn't worry about it too much. He/She can gradually increase contribution amount with every pay raise.

[FIRE@50]

Absolutely put in 6% at a minimum. Also check the actual fees though. Just because JH charges high fees to the general public doesn't mean that the employer didn't negotiate a better fee structure for their plan.

Also, 68k at 22yo? Nice work!

[Spitfire]

Agree with Fire2025. See if they get you the list fund options that shows the fees, it is likely there is some sort of index fund on there with low fees even if most funds are high. I have a lot of high fee actively managed options in my plan but the S&P500 is cheap so I put everything in that.

[runningthroughFIRE]

The tax advantaged status of 401(k) accounts have been proven to outweigh all but the most damaging of high investment fees.  If the fees are really that bad, then this 22 year old can regularly empty out the 401(k) by rolling it over into an IRA. 

If you want to do your own reading on the topic, I suggest starting with this article by JL Collins.  In it, he actually argues NOT funding the 401(k) past company matching, but also includes an addendum by the MadFientist demonstrating mathematically that you're better off using the tax advantaged account despite high fees.  To summarize his analysis, he determined that a traditional 401(k) with front-loaded fees of 3.5% AND an expense ratio of 1.32% is still more beneficial in the long run than a Vanguard fund with an expense ratio of 0.05% for an investor making $80K/year.

Ultimately I prefer the mathematically optimal route, but some people are better served with a more simple investing strategy that doesn't include things like 401(k) rollovers.  I would recommend prioritizing:
1. 401(k) up to the match
2. Emergency fund (can't forget this!)
3. IRA
4. Remaining space in 401(k)
5. Taxable/regular investment fund

[radram]

A 22 year old fresh out of college student with a $68,000 salary? GET HIM HERE!

Max the 401k AND max out a Roth or IRA after that, beginning with the FIRST paycheck. He was probably just living the past 4 or 5 years on about $10,000- $15,000 per year, not counting tuition.

He now has the opportunity to live on almost TRIPLE that income, AND max a 401k, AND max a Roth or IRA. He will never again have such a jump in income as a percentage of his current cost of living.

I would max the 401k first due to the high maximum ($19,000 for 2019). This is a "use it or lose it" bin that should only be left unfilled if absolutely necessary. Get a side hustle if you need to, but max that 401k!

As far as Roth or IRA up to the limit($6,000 for 2019), it would depend on whether his future self will have more or less income and whether his tax rate changes(not at all predictable). A FIRE person should go with a 401k and convert to Roth after his working life. Life long worker most likely should go Roth.

The bigger answer here is MAX the 401k AND max either a Roth or IRA. The high fees over a lifetime would be HUGE, but every job change allows us to roll over into low cost options. A few years of high fees is worth that. And he should be pestering HR to get more reasonable choices if the fees are indeed high.

If he does not max them both(he should), use the list created by @runningthroughFIRE.


Keep us posted.

[trollwithamustache]

So... don't stress over 401k fess too much. Realistically, you're gonna change jobs/companies withing 4-6 years.

When that happens you'll roll over the 401k to an IRA and have super low fees for the rest of your life.  Fees are a bigger issue for someone in their 30s who may be settling into a job for the next 10+ years.

[dougules]

My 401k was through an insurance company with high fees but they did have 1 index option, sp500, with low ER.  I would check out the prospectus of what was offered and at least contribute to the company match on a lowest cost option.  Then diversity using the Roth

+1.  Make sure there isn't something low cost somewhere in there.

If not, he might stop by HR to ask them if they could get any low cost funds added. 

[nancy33]

Thank u all! I sent your suggestions to him. He decided on 1 k a month to 401 k. Which looks like it offers John Hancock vanguard  growth index fund with .05 expense ratio! He will open a roth IRA with vanguard on his own and contribute $500 a month and save $500 a month for his emergency fund which already he has 10 k saved! Such an exciting opportunity. Plus he is an engineer so all the math makes sense to him. I impressed upon him the importance of starting this NOW. Thanks again I knew this was the right place to get good advice

[Assetup]

Good for him tell him congrats on the smart decision from all of us...then give him a slight punch and make him Max out that 401k(kind of kidding)

[radram]

Good for him tell him congrats on the smart decision from all of us...then give him a slight punch and make him Max out that 401k(kind of kidding)

+1

[thd7t]

Why a Roth?  He should do what he can to lower tax liability.

[Scortius]

There isn't a need to get fancy. As a young worker bringing in a good salary, all Traditional (not Roth) accounts should be maximized to their fullest potential. That's up to $19k in the 401k and $6k into a Traditional IRA. The first priority is the 6% match in the 401k, after that fill the Traditional IRA if it has better fund options, then continue to max the 401k to $19k. Make sure not to front load the 401k if you're only doing it partially as that may miss out on the match (keep it at a minimum (6% of each paycheck).

High fees in a 401k plan are only a problem if you plan on staying at the same job for 10-20 years. Once you leave for a new job you can immediately move the account into a personal IRA with better fund options. The match and the tax advantages of Traditional retirement accounts are too good to beat for people who are pulling in a good salary.

[Greystache]

Why a Roth?  He should do what he can to lower tax liability.

I like using a Roth IRA when your salary is lower and your top marginal rate is not very high. It is impossible to know for sure, but I am guessing that future income tax rates will be higher than they are now.  Also, Roth IRAs are bit more flexible when it comes to taking out contributions before age 59. Young people who are starting families, buying houses and educating kids might need that flexibility. Also, Roth IRAs have income limits. If you expect to have a high income later, you should take advantage of a Roth while you are still under the limit. Withdrawals from Roth IRAs don't increase your MAGI. If you are retired early, it is sometimes handy to be able to keep your MAGI low to reduce your tax rate or qualify for ACA subsidies.

[Scortius]

Why a Roth?  He should do what he can to lower tax liability.

I like using a Roth IRA when your salary is lower and your top marginal rate is not very high. It is impossible to know for sure, but I am guessing that future income tax rates will be higher than they are now.  Also, Roth IRAs are bit more flexible when it comes to taking out contributions before age 59. Young people who are starting families, buying houses and educating kids might need that flexibility. Also, Roth IRAs have income limits. If you expect to have a high income later, you should take advantage of a Roth while you are still under the limit. Withdrawals from Roth IRAs don't increase your MAGI. If you are retired early, it is sometimes handy to be able to keep your MAGI low to reduce your tax rate or qualify for ACA subsidies.

The flexibility of a Roth is a definite benefit, but the OP's son is already making nearly $70k/year which puts him solidly in the 22% bracket. It would be hard to do worse than this in the future, especially when taking distributions as qualified capital gains. Planned large purchases should not come out of your Roth if possible as you would lose the limited tax advantaged space, although I guess it's better than simply not putting any money into your IRA.

Further, Roths do have an income limit, but those can be arbitrarily ignored using the backdoor. On the other hand, Traditional IRAs have lower limits that you can not work around. You can also gradually transition your Traditional IRAs to Roth IRAs at rates that keep you just under the next tax bracket threshold which is especially useful if you have a low-income year or two.

In the end, the difference will be pretty small for the IRA and the Roth flexibility may be worth the small monetary trade-off. The most important thing is to keep contributing!