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WWYD- Husbands craptastic 401k plan
Old 10-16-2012, 05:19 PM   #1
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WWYD- Husbands craptastic 401k plan

My husband works for a firm that is based in another state. He's the only employee in this state.
They offer a 401k to employees who have been there a year.
They offer a match of $1 for every $1 up to $1000/year.
That all sounds good.

Up till now, since he's worked for small firms, he's just been doing IRAs w/catchup... And I've born the brunt of the tax advantaged savings by maxing my 401k and catchup.

The problem with the 401k he's being offered - it's 100% full of load funds.
The loads vary from 5.75% (stock funds) to 3.75% (bond and/or money market funds.)

I think the $1k/year match is still worth it... And if he participates in the 401k, he can't do the IRA. So I told him to do $6k /year into the 401k, and any money left over can go into taxable savings (same as before.)

I suggested he put it in the bond fund - and I'll adjust my asset allocation to account for this 100% bond allocation on his side. I just can't see giving up 5.75 cents for every dollar to loads. It's bad enough giving up almost 3.75 cents/dollar.

Should we have just stayed with IRA?

FWIW - he's retiring in Jan 2014... so we only have to deal with this craptastic plan for 1 year.
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Old 10-16-2012, 05:25 PM   #2
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Quote:
Originally Posted by rodi View Post
My husband works for a firm that is based in another state. He's the only employee in this state.
They offer a 401k to employees who have been there a year.
They offer a match of $1 for every $1 up to $1000/year.
That all sounds good.

Up till now, since he's worked for small firms, he's just been doing IRAs w/catchup... And I've born the brunt of the tax advantaged savings by maxing my 401k and catchup.

The problem with the 401k he's being offered - it's 100% full of load funds.
The loads vary from 5.75% (stock funds) to 3.75% (bond and/or money market funds.)

I think the $1k/year match is still worth it... And if he participates in the 401k, he can't do the IRA. So I told him to do $6k /year into the 401k, and any money left over can go into taxable savings (same as before.)

I suggested he put it in the bond fund - and I'll adjust my asset allocation to account for this 100% bond allocation on his side. I just can't see giving up 5.75 cents for every dollar to loads. It's bad enough giving up almost 3.75 cents/dollar.

Should we have just stayed with IRA?

FWIW - he's retiring in Jan 2014... so we only have to deal with this craptastic plan for 1 year.
Crapastic! What a great word. Very descriptive.

Even though you are paying excessive fees, for the $1000 you put in you get an immediate additional $885 - the employer match minus all the fees. Grit your teeth and do it. When he leaves, roll it over into an IRA.
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Old 10-16-2012, 05:36 PM   #3
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Actually our plan is to have him put $6000 in. That's what would go into an IRA. He isn't allowed to do both a traditional IRA and a 401k.

His employer is relatively small - around 50 people. But they're all highly educated... you'd think they'd want to avoid the fees. Not sure if it's possible to get a no-load 401k plan set up for 50 employees or less.
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Old 10-16-2012, 05:46 PM   #4
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The limitation on deductible contributions to IRA is by his income. Look for an online calculator that let's you enter both incomes, whether covered by retirement plan, and age.

The load fees are ugly. Contribute to get match in 401, then fund IRA or Roth-IRA. Then go back to 401(K).
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Old 10-16-2012, 05:46 PM   #5
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Crapastic! What a great word. Very descriptive.

Even though you are paying excessive fees, for the $1000 you put in you get an immediate additional $885 - the employer match minus all the fees. Grit your teeth and do it. When he leaves, roll it over into an IRA.
+1. You shouldn't turn down $1000 just to save $50.

The difference in overall costs between the bond and stock funds isn't much. If all else is equal, then go with the bonds.

And even if he contributes $1000 to the 401K he definitely can also contribute to a Roth IRA. Also, (apologies if you already know this, just being thorough here) if he falls below the income limits he could still contribute (something) to a traditional IRA despite contributing to a 401K. More here.
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Old 10-16-2012, 05:53 PM   #6
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Calculator here:
http://turbotax.intuit.com/tax-tools/calculators/ira/
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Old 10-16-2012, 06:15 PM   #7
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When I worked for a similar small company, the owner's friend set up the 401(k) with 7.5% load. There was an option for doing trustee to trustee transfers while I was still with the company so I put the money in the fee free money market fund and transferred it out to my IRA once a quarter. Other than that, you don't have too many options.
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Old 10-16-2012, 06:42 PM   #8
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Hmm. I thought we were above the income caps for Roth. That turbo tax calculator suggests other wise.

Off to go read some more.
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Old 10-16-2012, 06:47 PM   #9
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I suggested he put it in the bond fund - and I'll adjust my asset allocation to account for this 100% bond allocation on his side.
If your AA allows, that's exactly what I'd do.

My 401k had crummy stock fund choices (though not due to loads) too, and in time I had it all in the bond fund. All my equity fund holdings were in our taxable brokerage account. DW's 401k fund choices are also rotten, so we hold bond funds there too.

If it helps, you're not alone, lots of us had/have 401k's chosen by a committee of HR and/or a CFO with no clue about investing. The fund admin sells them a bill of goods...and they fall for it. Unfortunately most employees don't know any better, so the merry-go-round continues to go round and round...
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Old 10-16-2012, 07:02 PM   #10
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Hmm. I thought we were above the income caps for Roth. That turbo tax calculator suggests other wise.

Off to go read some more.
Yeah, I'd look to go Roth after contributing to get the match. After that run with taxable. However it depends how close you are to RE.
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Old 10-16-2012, 09:16 PM   #11
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Any chance of going to HR to get the administrator changed? That actually happened at the last company I worked for. I hadn't been there long when it changed, and what I'd heard is that a number of investment savvy employees had complained about either the choices or fees or both, so the administrator was changed.

I agree with others, I'd only contribute up to the match.
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Old 10-16-2012, 10:01 PM   #12
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Where I work had a terrible 401k. Not quite as bad as this one, but pretty terrible. It took three years, but they have finally improved the plan.

When I looked at my options, the tax deduction for 401k contributions still made participating in the terrible plan profitable. Especially because I always had the option to change jobs and rollover whatever I had saved into an IRA with excellent investment choices. As it happened, the plan improved and I'm in decent shape.

One thing to also think about. Just because 401k and IRA are retirement savings vehicles, does not mean that you are limited to only save for retirement in those programs. If you don't like your choices or want to save more than the limits, a taxable investment account (especially for equities) can be tax efficient and a fine way to save for retirement.
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Old 10-16-2012, 10:48 PM   #13
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So for every $100 he puts in he ends up with $188 - $192. Sounds like free money to me. Does the company match vest immediately so if he leaves in a year or two he still gets to keep it?
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Old 10-16-2012, 11:31 PM   #14
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Does the 401k plan happen to have a money market fund with no load / low ER? That's what I put my money into when I knew I'd be in a crappy plan for a short time.
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Old 10-16-2012, 11:34 PM   #15
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He isn't allowed to do both a traditional IRA and a 401k.
I don't understand why he can't contribute to a 401(k) and also contribute to a conventional IRA-- sez who?
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Old 10-17-2012, 12:02 AM   #16
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I don't understand why he can't contribute to a 401(k) and also contribute to a conventional IRA-- sez who?
My understanding is that if you are covered by a 401k employer plan you are not eligible for the Ira deduction if your income is above a threshold (110k for married)
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Old 10-17-2012, 12:08 AM   #17
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Interesting. I retired from a Cdn 'big 50' company a few years ago. We were part of a large DC pension fund (historically, we went independant as a company but retained the pension links). Surprisingly enough, our head of HR fought a bit of a battle to separate our DC pension fund from the previous one. His rational was a saving of about 10 BP and he didn't like the 'smoothing' of results (ask if it matters, too long to post what it was).

I worked fairly closely with him, he was an AH except on this issue. Of course, we had 5K employees. 50 might be a different matter.
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Old 10-17-2012, 12:33 AM   #18
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My understanding is that if you are covered by a 401k employer plan you are not eligible for the Ira deduction if your income is above a threshold (110k for married)
You may not be able to deduct it, but as I understand it, you can still contribute, and the earnings from that point on are still tax-deferred.
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Old 10-17-2012, 02:45 AM   #19
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If your husband is 59 1/2 of age, can't he transfer his money out to an IRA ?

I would leave a small amount and capture the company's match of $ 1K. I know this is an early retirement forum, so you and he maybe alot younger than the 59.5....
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Old 10-17-2012, 06:27 AM   #20
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You may not be able to deduct it, but as I understand it, you can still contribute, and the earnings from that point on are still tax-deferred.
I've always wondered about this myself, since we both contribute the max to our 401(k)s and our household income exceeds the amount that would allow us to contribute to individual retirement accounts outside of those company 401(k)s.

But if that limitation is only for "tax deductable" contributions and still allows after-tax dollars to be contributed, is there a maximum of after-tax dollars that can be contributed each year and does it make financial sense to do that instead of putting the money into regular after-tax investment accounts?
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