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When are 401k fees just too high?
Old 03-20-2009, 02:49 PM   #1
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When are 401k fees just too high?

I love my BigMegaCorp employer's 401k plan, where I invest in Vanguard Institutional Index funds with expense ratios of 0.05% and 0.06%. My overall 401k/IRA/taxable portfolio's average expense ratio is 0.13% according to Morningstar's portfolio X-ray tools.

Just before the crash last fall, my wife decided to follow her heart, and went to work for the local Humane Society. They have a "grandfathered 401k" plan offered through an insurance company. The good news is they offer a 3% match, she can contribute up to 100% of salary subject only to the federal annual limit, and she has now been there long enough to participate.

The bad news is the insurance company charges a 1.25% variable annuity wrap fee on all the fund options, and the funds are all managed funds with 12b-1 fees. Once you add it all up the expense ratios range from a low of 2.01% on a high-yield bond fund, to 3.47% on a managed mid-cap fund. The problem seems to be the Humane Society only has about 9 employees who qualify for the 401k, and my wife doubts all of them even participate. The Humane Society wants to minimize its expenses, so the employees end up with a high fee plan.

I will certainly have her contribute 3% to capture the match. Before I knew the expense ratios, I planned to have her contribute to the federal limit. Eventually, once she retires in 1,2,5,10,20,30... years, I expected to roll the 401k into a Vanguard IRA, and slowly convert the IRA to a Roth IRA.

Now that I've seen those expense ratios I'm torn between wanting to stuff as much money as possible into a Roth, despite the high fees on the 401k conduit we'll have to use to get there, and total disgust at the fees.

There is also an automatic investment issue. Our cash flow has declined because of her job change. If we max out her 401k it will be even more pinched. While not entirely pleasant, that will probably push us towards greater frugality.

We already max out our non-deductible IRA accounts with Vanguard and my 401k. The majority of our assets are in taxable accounts. Neither I nor my wife expect any pension or health-care benefits when we eventually FIRE.

Any suggestions, or forumulas I can use to decide how much she should contribute?

Thanks in advance.

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Old 03-20-2009, 03:03 PM   #2
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I would only put in 3% to capture the match. Assuming she can't deduct IRA contributions, I'd start a Roth.

Still, consider the tax consequences of the income. For instance, this additional income might bump you up a bracket. In that case, you'd want to prevent that with a larger 401(k) contribution.

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Old 03-20-2009, 03:11 PM   #3
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Agreed with the above. I'd put in enough to get the match, but no more.
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

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Old 03-20-2009, 03:24 PM   #4
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Even a high fee 401(k) plan turns out to be better than other options if you are in a high tax bracket. Also, I doubt your spouse will leave this money there forever, so it will eventually end up in a low-fee IRA.

So, you should pick the lowest expense option which could easily be a bond fund (I wouldn't use high yield myself) and adjust the rest of your combined portfolio to reflect that asset allocation.

For more help on this TheFinanceBuff had a calculator ... let me see if I can find a link.
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Old 03-20-2009, 03:29 PM   #5
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Alternatives to a High Cost 401k Or 403b Plan - The Finance Buff
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