what's your fee ceiling on retirement investments?

[FinanceDude]

Quote:

Originally Posted by mickeyd What is the basis for this statement? Are there any studies that you can site that indicate that the investment in a VA that is included in a 403(b) is a worthy financial investment? The reason that I am inquiring is that I have read a number of articles and reports that indicate otherwise.

Umm.......I posted a scenario on page 1 OF THIS THREAD We are not debating whether he has a "good" plan or a "bad" plan...........we are debating/refuting the advice to "not invest" because the costs are higher than a Vanguard or Fido plan. But, you are the expert in benefits........seems to me you have the studies yourself.............

[saluki9]

Quote:

Originally Posted by mickeyd What is the basis for this statement? Are there any studies that you can site that indicate that the investment in a VA that is included in a 403(b) is a worthy financial investment? The reason that I am inquiring is that I have read a number of articles and reports that indicate otherwise.

Seems like simple math to me :P I'll use my situation as an example. I'm 29 and contribute the max to my 401(k) which will be $15,500 this year.

Instead I could just take that money as W2 income, pay around 36% in taxes, and then pay taxes on dividends and interest each year.

Please tell me under what expense ratio my plan would need for that to make sense? Even if my plan charged 2% or more it would still make sense for me to contribute and take the tax deduction. The value of tax dererral is very very high.

[jazz4cash]

Quote:

Originally Posted by saluki9 The value of tax dererral is very very high.

I agree, but HOW MUCH of that value is the financial institution entitled to? I think that is the OP's original q. I don't think they are entitled to capture much of the savings just because the investor gets a tax break. The fees should be competitive to comparable plans and the value added by the financial institution. A small overcost compounded over many years will make a big difference in the end.

[LOL!]

Quote:

Originally Posted by jazz4cash .... The fees should be competitive to comparable plans and the value added by the financial institution.

The fees are competitive to comparable plans because most all 403(b) plans charge relatively hefty fees.

I am a member of my employer's 401(k) committee. One pitch that a financial institution made to us was how cheap their plan was -- to the company. They had no consideration whatsoever to how much expenses the employees paid at all. I'm afraid that many employers just look at what it costs them and not what it costs their employees.

[FinanceDude]

Quote:

Originally Posted by LOL! The fees are competitive to comparable plans because most all 403(b) plans charge relatively hefty fees. I am a member of my employer's 401(k) committee. One pitch that a financial institution made to us was how cheap their plan was -- to the company. They had no consideration whatsoever to how much expenses the employees paid at all. I'm afraid that many employers just look at what it costs them and not what it costs their employees.

A really good way to get them to pay attention is to ask the board of directors how THEY like PAYING the most fees of everyone in the plan.............they usually say wha??

[livnlow]

Quote:

Originally Posted by saluki9 Ok, what would the cost to you be if you gave up the tax deferral on that money?

I will keep my money in tax deferred accounts, so have not attempted to figure that out. My goal is to get my plan changed to allow inservice non hardship withdrawals, then periodically transfer funds into an IRA setup strictly for the rollover funds.

Comparing what I would make in the current plan to what I would make if my money was not tax deferred has nothing to do with the fees being reasonable or not. I do not believe a 2.24% expense ratio is reasonable for my funds. I would be surprised if anybody except those collecting the fees would claim they are reasonable.

[bright eyed]

so i asked my finance director about the fees, she said she knew they were high.

they had tried to switch to a new plan which was "great" but ING basically made it very difficult, if not impossible to get out of it - i think by charging terrible fees for switching (to non-ING other plan).

I asked her to inquire about adding other funds to our plan, vanguard and fidelity like, if not exactly, she said she would.

[saluki9]

Quote:

Originally Posted by jazz4cash I agree, but HOW MUCH of that value is the financial institution entitled to? I think that is the OP's original q. I don't think they are entitled to capture much of the savings just because the investor gets a tax break. The fees should be competitive to comparable plans and the value added by the financial institution. A small overcost compounded over many years will make a big difference in the end.

I didn't say they were entitled to them, I just said that when they are out of your control you shouldn't stop contributing to the plan.

[FinanceDude]

Quote:

Originally Posted by livnlow Comparing what I would make in the current plan to what I would make if my money was not tax deferred has nothing to do with the fees being reasonable or not. I do not believe a 2.24% expense ratio is reasonable for my funds. I would be surprised if anybody except those collecting the fees would claim they are reasonable.

One way to look at it. I guess saluki wasn't clear enough:

If you have the "common match" (50% on the first 6%), then here's the return MINUS whatever the market does:

$50,000 salary:

10% deferral = $5000
company match = $1250
tax savings = $ 1250

In other words, your NET investment was $3750 and you got a $1250 match thrown at you, so you made 33.33% on EACH dollar you deferred. Does that 2.24% (while not ideal at all) really cost you all that much Push for changing providers, but still defer until the cheaper plan comes along...............

[bright eyed]

since you like playing with numbers

$70k salary
$11,000 into 403b in 2006 (current balance is $44k, making 12%)

$3500 - 4% employer match (5% in 2006, 1 % increase as additional bonus)

28% tax bracket


now i feel naked.

[FinanceDude]

Quote:

Originally Posted by bright eyed since you like playing with numbers $70k salary $11,000 into 403b in 2006 (current balance is $44k, making 12%) $3500 - 4% employer match (5% in 2006, 1 % increase as additional bonus) 28% tax bracket now i feel naked.

So your $11000 invested was taken out pre-tax. In the 28% federal bracket, you saved $3080 in taxes. Your match was $3500.

You made 28% on the investment because you didn't pay taxes. Your employer chipped in a match of $3500, so you made almost 32% on that. And that's BEFORE any investment return...........

Oh, and it only "cost you" $7920 in "real dollars to achieve that!! Of course, when you take it out in 20 years.........you'll pay ordinary income taxes on it, but you can't have everything...........

[livnlow]

Quote:

Originally Posted by FinanceDude One way to look at it. I guess saluki wasn't clear enough: If you have the "common match" (50% on the first 6%), then here's the return MINUS whatever the market does: $50,000 salary: 10% deferral = $5000 company match = $1250 tax savings = $ 1250 In other words, your NET investment was $3750 and you got a $1250 match thrown at you, so you made 33.33% on EACH dollar you deferred.

How does any of this justify high fees?

Quote:

Does that 2.24% (while not ideal at all) really cost you all that much

Is one million dollars "all that much"?

[saluki9]

Quote:

Originally Posted by livnlow How does any of this justify high fees?

I don't think he was trying to justify high fees. What FD and I have said (oh, about 3 or 4 times in this thread alone) is that just because your plan has high fees does not mean you shouldn't participate.

[FinanceDude]

Quote:

Originally Posted by livnlow How does any of this justify high fees? Is one million dollars "all that much"?

Yes, it's a lot...........very expensive. On the assets already in the plan, it's obviously hurting the return........2.24% off of an investment return, deferred or not, is a drain.

But getting 32-33% return on new contributions, BEFORE any market gain can not be overlooked.

IMO, if one does not maximize their 401K contributions as early as possible, and keep it going, how can they FIRE?? Seems to me at least half of the FIRE'd people on here don't have pensions to work with. Why invest after-tax dollars in a taxable account if you can get a match and defer taxes for 30 years??

[ats5g]

Ed Chang wrote an article, Looking at Expenses of 401K Plans, to calculate the fee ceiling one would be willing to pay on an unmatched 401(k), or contributions in excess of a match, versus a fully taxable account. The article comes with a spreadsheet, but I can't seem to download it at the moment.

Anyway, for someone who is very near retirement or leaving employment, and can likely roll over their 401(k) in a few years, paying the high fees for only a couple of years can make sense. However, for someone who is many years from retirement [20+], contributing to a high fee (1.50% and up) 403(b)/401(k) after the match makes virtually no sense, and the person is better of investing in a taxable account with tax efficient funds/etfs.

My suggestion is to get the match, then run away and use Roths and taxable accounts.

- Alec

[FinanceDude]

Quote:

Originally Posted by ats5g Ed Chang wrote an article, Looking at Expenses of 401K Plans, to calculate the fee ceiling one would be willing to pay on an unmatched 401(k), or contributions in excess of a match, versus a fully taxable account. The article comes with a spreadsheet, but I can't seem to download it at the moment. Anyway, for someone who is very near retirement or leaving employment, and can likely roll over their 401(k) in a few years, paying the high fees for only a couple of years can make sense. However, for someone who is many years from retirement [20+], contributing to a high fee (1.50% and up) 403(b)/401(k) after the match makes virtually no sense, and the person is better of investing in a taxable account with tax efficient funds/etfs. My suggestion is to get the match, then run away and use Roths and taxable accounts. - Alec

Good idea..........you would be amazed at how many people aren't even contributing up to the match amount.............if it's 50% up to 6%, then why not at least do 6%??

[bright eyed]

Quote:

Originally Posted by FinanceDude Yes, it's a lot...........very expensive. On the assets already in the plan, it's obviously hurting the return........2.24% off of an investment return, deferred or not, is a drain. But getting 32-33% return on new contributions, BEFORE any market gain can not be overlooked. IMO, if one does not maximize their 401K contributions as early as possible, and keep it going, how can they FIRE??[/color] Seems to me at least half of the FIRE'd people on here don't have pensions to work with. Why invest after-tax dollars in a taxable account if you can get a match and defer taxes for 30 years??

ok, so seems you think maxing out is important (which was what i had read/heard up to this point)- others disagree - that i should just do the match and run. i looked at the spreadsheet and since i am far far away from retirement - i should keep the fees below 1.5ish - which is near impossible in that the admin fee is 1.2 plus fund fees all above 0.6...

i have no pension...

if i have $44k in my fund now, put $15k (plus % increase each year) and 4% salary match for next 30 years - and i pay an average fee of 1.8 - what will i pay in fees? how do i calculate that so i stop bothering you all with this i am not mathematically inclined - but also not impaired either!

maybe i should poll folks to see what they've done and how it turned out - for those closer to retirement than me?!!!

[saluki9]

It also depends on how long you're going to be with the company. I speak from personal experience, I once had a job that put all of their 410(k) money into A shares, meaning I paid a 4.25% load on each dollar I put into the plan.

I still contributed because I knew I wouldn't be there long and the tax savings were more valuable.

[bright eyed]

oooh i have no idea how long - it's already been 6 years and looks like at least 2 more if not forever.

things change a lot with the economy etc. so in the next 2 years we could really grow or not...i'm doing well, have good reviews and a solid place in the org, so i'm ok for now... :P

if my DH's work goes well and they take off (could increase income substantially in next few years) i might ratchet down my work to 30 hrs per week to help kids with school etc, but would at least maintain my current contribution to 403b...