401k (404c) Investing

[L0stman]

Wifey just received her 401k plan - I guess index funds have spoiled me... the expense ratios just look so large on some of these things. That said, we are maxing roth, going into taxable accounts, and were looking to use her 401k contributions as a way to get rid of some of our current tax liability. Can I get some opinions regarding her current list?

401k is through AUL Retirement: http://www.eretirement.aul.com/prospectus.html.

She has access to:
AUL Fixed Interest Account
OneAmerica Investment Grade Bond
Alger American Balanced
AmCent Income and Growth
SSgA S&P 500 Flagship
Alger America Growth
Fidelity VIP Contrafund
AIM Dynamics
Calvert Social MidCap Growth
Vanguard Explorer
Janus Aspen Ser Worldwide Growth

Of note - we are currently invested heavily into Small cap growth and mid cap growth accounts. We were considering the Large Cap, or foreign for her 401k as it would give us some movement in that area for our asset allocation. Its just - the lowest expense ratio was 0.25% for the S&P500 one, jumping up to 0.57 (0.83 on the site) for Vanguard small growth, and mean'ing out to be about 66% (just about the worldwide growth fund).

Does this seem pretty standard fare for 401k expense ratios? I would like to get some exposure to foreign and large cap, but prices just make me cringe. So many of her "Good Choices" included funds with 1.1-1.2% expense ratios. Wincing when I look at our 0.17% indexes. At least none of the funds (that I paid attention to) have a load.

[LOL!]

The S&P500 index fund in my 401(k) plan has an expense ratio of 0.65%.

My spouse's 401(k) plan is filled with high-expense ratio funds. Her previous plan was filled with B-class share funds. At least her employer pays the 1.25% expense of the variable annuity wrapper.

Maybe your spouse gets a match from the employer?

[L0stman]

They match 50% of the first 6%.

We were going to at least capture the match - was planning on depositing the max in hers... just disliked the expenses...

[L0stman]

I have some more information on her actual 401k.

Its a variable annuity... that is wrapped in a 401k...

Correct me if I am wrong but the variable annuity only really has two benefits (this is not a lifetime payout phase one): Tax Benefits and Death benefits. Since its wrapped in a 401k tax benefits do not matter. If I considered it likely that I would need to make use of the "well, at least if I die you will get the money I put into it, or the balance, whichever is higher" then I do not believe in the long range market - IE planning for FIRE would be improbable.

She is finding out the actual plan details tomorrow regarding the extra fees she has to pay to upkeep the plan given the charges.

Since I am considering it - someone smack me with the common sense board. Is there ever a reason not to contribute to at least capture the match? They match 1/2 up to 6%. We originally wanted to max out her 401k, but with higher than normal (index) expense ratios and the likelyhood of being dinged every year some expense to maintain the item it seems kinda iffy. Add to that the fact that she doesnt actually own any shares of the fund (if the insurance company bites it, its gone), but has all the liability, with extra expenses. I dont know. It just seems not-so-good. Oh, and if her school decides to drop the company before another 5 years are up, eithe rthe school will have to pay large expenses or everyones 401k gets dinged a hefty amount.

She has not found out about the surrender/etc fees yet and I am already more than leary.

Opinions?

[ats5g]

Hey L0stman,

I think I'd get the match and then run screaming. If your wife is a teacher, how does she have a 401(k)? or do you mean 403(b)?

Also, if the investments are variable annuities, then the underlying investments are usually are not backed by the insurance company, unlike a "fixed account" or "fixed annuity". IIRC the variable annuities are not liabilities of the insurance company, so if the insurance company goes under, the money isn't gone. That's why most variable annuities are sometimes called "seperate accounts." The money is seperate from the general account of the insurance company.

- Alec

[L0stman]

Hey Alec,

Private school - 401k.

Sure, her public teaching colleagues have pensions - but she gets to hug "her kids" so it evens out.

RE the Variable Annuities being seperate accounts - that would be awesome... when we spoke to the gentleman, however, it did not necessarily seem that way. Wifey will ask more about it tomorrow when she gets her interview with the sales person.

[LOL!]

Many 401(k) plans are wrapped in annuities. That's not the problem. For example, folks in the well-regarded TIAA-CREF 403(b) (i.e. CREF stock) are in variable annuities. The problem is the expense. If the expense is too high, then it is not worth it.

So I have TIAA-CREF 403(b) and I am not bother by their expense ratios. It is lower than my 401(k) plan.

My spouse's 401(k) has 1.25% annuity fee added on top of all the mutual fund expense ratios. That bothers me alot, but the company match offsets that. Therefore, she puts the maximum in ($20K this year) and saves us a bunch in income tax.

Since it reads like y'all already max out the Roth IRA, I see no reason not to max out the 401(k) even with the higher expense ratios. You can just consider the match as paying for the expenses.

I doubt there are any surrender fees for a 401(k) plan.

Bottom line: use her 401(k); max it out and pick the best funds in it and use your other accounts to get the overall asset allocation you want to end up with.