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Advice needed for a 401k plan or other option
Old 11-09-2011, 07:55 PM   #1
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Advice needed for a 401k plan or other option

My GF is eligible next month to start in her companies 401k program.They offer 3% match. She told me she wanted to put 10% of her income into it yearly. She gave me the list of possible options and wanted me to research for her what to do. Here is what I came up with. They only offer about 8 different American Funds, but they ALL apppear to have a dreadful 5.75% load with modestly high expense ratios. Is this normal for 401k plans? Do you just eat it and go on? I only use no loads at Vanguard and figured those type of plans faded away along time ago. My original thought was to suggest she just invest 3% to get the company match, then put 5k into a Vanguard IRA fund ( she is really interested in the tax deduction).
The trouble is she is not going to meet the income restriction for this deduction as she will be over the 66k AGI threshold (earns about 75k)She would benefit from a tax deduction, because she defintely wont be in this tax bracket when she retires, as she is only starting to accumulate assests at age 43. Being a pensioner, my investing skills arent much in this area. So I guess my questions are:
1) Should she contribute more than minimum and pay that ghastly upfront fee?
2) Is there any other tax deferred options, since the IRA option is out?
3) Is funding a Roth IRA a better option than the high expense 401k fund option, even though she will be in a low income bracket when she retires?
3) Are 5.75% load funds normal in the 401k world?
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Old 11-09-2011, 08:13 PM   #2
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I don't think load funds are typical. My 401k are all no-load as I recall.
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Old 11-09-2011, 09:54 PM   #3
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My son's 401k has a number of American funds with load fees when you look them up. However, when you look into the details of the 401k plan, they waive the load fees. The ER's on the funds are still very high so he puts the max he needs to get the company match and also funds a Roth IRA each year.

Check the details on the match, for example she may have to put in 6% to get a full 3% company match
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Old 11-09-2011, 10:05 PM   #4
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If she was going to stay in the funds for 30 years the front load wouldn't be too bad. For something closer to 5 years it would be pretty wasteful. I've never had a 401k with a front load. Do get the match. Run a spreadsheet to see how a Roth might compare. You may not be able to contribute as much as you want to a Roth, but it might be nice to max it out while her income is below the limit. With that income I can't think of any commonly available tax-deferred accounts. An HSA if available would be one.

Edit: Per Alan, if the load is waived then American Funds is a respected and well performing firm, so I'd go ahead and max out the 401k if you want. Not exactly optimum, but should be decent.
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Old 11-09-2011, 10:15 PM   #5
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Originally Posted by Animorph
If she was going to stay in the funds for 30 years the front load wouldn't be too bad. For something closer to 5 years it would be pretty wasteful. I've never had a 401k with a front load. Do get the match. Run a spreadsheet to see how a Roth might compare. You may not be able to contribute as much as you want to a Roth, but it might be nice to max it out while her income is below the limit. With that income I can't think of any commonly available tax-deferred accounts. An HSA if available would be one.

Edit: Per Alan, if the load is waived then American Funds is a respected and well performing firm, so I'd go ahead and max out the 401k if you want. Not exactly optimum, but should be decent.
You and Alan brought up a good point worth having her checkout, to see if it is waived. I thought she would be able to bring a packet of info home concerning this. All they gave her was than a half page sheet of info with just the names of the fund, ticker symbol, and current price. I had to check online to see investment focus, expense ratio, and upfront fee. You would think there would be more info provided to her.
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Old 11-10-2011, 06:14 AM   #6
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I'd contribute enough to get the max employer match and then open an account with Vanguard and set up an IRA or ROTH IRA and make regular after tax investments too. Then your GF should ask here company why they have front load, expensive funds in the 401k.

I really don't understand how front loaded funds with high expense ratios survive.
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Old 11-10-2011, 06:59 AM   #7
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My spouse has worked for some small firms and many of them had a 401(k) plan with load funds where one paid the load. When she switched employers, she was able to rollover the assets to an IRA with low-expense-ratio funds.

So is this a small employer? Will your GF change jobs in a few years?

Your GF is eligible for Roth IRA, so the idea to contribute enough to get the match and then put rest of money in IRA is a good one. She can also lobby to get a better 401(k). See, for example: Setting up a 401(k) plan - Bogleheads
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Old 11-10-2011, 08:17 AM   #8
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Originally Posted by Alan View Post
My son's 401k has a number of American funds with load fees when you look them up. However, when you look into the details of the 401k plan, they waive the load fees. The ER's on the funds are still very high so he puts the max he needs to get the company match and also funds a Roth IRA each year.

Check the details on the match, for example she may have to put in 6% to get a full 3% company match
My 401k is also American funds with load fees waived. I believe a company's 401k plan gets fees waived when it reaches a certain $ level.
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Old 11-10-2011, 12:20 PM   #9
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Originally Posted by Ronstar

My 401k is also American funds with load fees waived. I believe a company's 401k plan gets fees waived when it reaches a certain $ level.
She told me she asked the onsite administrator ( who probably is just a secretary ) today, and she said she didnt know for sure, so she will contact the company. A couple of co- workers who participate in the plan already, thought the fees were waived, but weren't for sure.These small employment companies must really be a riot to plan your retirement objectives around. Hopefully she will find out soon. It would seem if almost 6% were coming off the top of your contribution you would surely notice, but maybe some dont even notice, but you never know.
I remember talking to a first year teacher at the end of the school year, what he was going to do for the summer, and he said he had to get a job for the summer. I asked him why and he said because he wont get another school check for 3 months until school starts. I asked him if he knew his salary was spread out over 12 months and he would get paid all summer. He said he didnt, was thrilled to know that and didnt need a job after all then!
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Old 11-10-2011, 12:29 PM   #10
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My 401k is also American funds with load fees waived. I believe a company's 401k plan gets fees waived when it reaches a certain $ level.
I think the number is or was) one million dollars at least if you are buying them through a broker. Took what turned out to be some bad advice and I bought 100K of their stuff back in mid 2006? and it was 3% front load (they had some other options) and 5.75% if under 100K. Should have just bought some CD's.
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Old 11-10-2011, 02:38 PM   #11
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I'd contribute enough to get the max employer match and then open an account with Vanguard and set up an IRA or ROTH IRA and make regular after tax investments too. Then your GF should ask here company why they have front load, expensive funds in the 401k.

I really don't understand how front loaded funds with high expense ratios survive.
American Funds has some of the lowest expenses in he non-VG arena. If the 401K has over $1 million in assets (Likely), the funds are purchased at NAV, and most American Fund expenses are around .50-.65.

Higher than VG, but low compared to most others............
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Old 11-10-2011, 03:05 PM   #12
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American Funds has some of the lowest expenses in he non-VG arena. If the 401K has over $1 million in assets (Likely), the funds are purchased at NAV, and most American Fund expenses are around .50-.65.

Higher than VG, but low compared to most others............
I would second this, my wife has "load" funds in her fidelity 401k, but all are purchased at NAV (meaning no load). It is worth asking who the 12b1 fee is being paid to on those load funds...

The match beats the load, IMO, in most cases.

50k income, 3% match (dollar for dollar on first 3%)=

3% of $50k=$1500
5.75% of $1500=$86.25 Lose $87 to gain $1500 is a no brainer (do it)

If another 7% was put in that math is 7% of $50k=$3500.
The sales charge might be $201.25
in 25% tax bracket That $3500 saves her $875.

$875>>$201.25 which means tax deduction is higher than sales charge.
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Old 11-10-2011, 03:41 PM   #13
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I would find out who the administrator is... ie, is it American Funds doing the account maintenance, sign up etc. Then call that company and find out...


Our company uses Fidelity, but we offer about 80 funds... some have 'loads' if you only look at the fund prospectus, but are waived for our employees... that is not usually shown on that 1/2 sheet of paper...
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Old 11-10-2011, 03:49 PM   #14
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I would find out who the administrator is... ie, is it American Funds doing the account maintenance, sign up etc. Then call that company and find out...

Our company uses Fidelity, but we offer about 80 funds... some have 'loads' if you only look at the fund prospectus, but are waived for our employees... that is not usually shown on that 1/2 sheet of paper...
Hopefully, she will get some of this info. My only experience was with 403b's. I had choices from several companies, all with dozens of choices with explanations. A half sheet page of info listing 8 choices from class A, one of those is a money market, doesnt appear to be very informative!
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Old 11-11-2011, 04:36 PM   #15
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Originally Posted by FinanceDude

American Funds has some of the lowest expenses in he non-VG arena. If the 401K has over $1 million in assets (Likely), the funds are purchased at NAV, and most American Fund expenses are around .50-.65.

Higher than VG, but low compared to most others............
FinanceDude, You were spot on. She had to email American to find out today, as nobody there knows a thing. Because of the $1 mill. in assets it is no charge. If a large withdrawal occurs and balance dips below $750,000 , they charge 1.5%. I'm still amazed how little they knew about their own 401k program.
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Old 11-11-2011, 06:49 PM   #16
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FinanceDude, You were spot on. She had to email American to find out today, as nobody there knows a thing. Because of the $1 mill. in assets it is no charge. If a large withdrawal occurs and balance dips below $750,000 , they charge 1.5%. I'm still amazed how little they knew about their own 401k program.
Most plan sponsors don't. I do some advisory work for several 401Ks in my area, so I know a little bit......
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