Plan through employer or not

[palomino]

Hi everyone, I am brand new here and have discovered the site just last week. My question may be obvious but I can't find an answer on the Internet anywhere. I would appreciate any responses very much. I am currently employed and have not ever started a 401k with my employer. After listening to Dave Ramsey, I now want to start a retirement plan. Can you tell me if there is any logic to not using the employer plan, and going directly to Vanguard and setting things up there? Advantages such as lower fees, more options, etc.? Has anyone done this or is it inherently smarter to use whatever employer plan is available? There is no match of any kind where I work, so no 3% match to consider.

Sorry if this has a very obvious answer. I had thought of going on to Vanguard and setting up index funds to invest in, then wondered if I was crazy not to use what my employer offers. The stocks/bonds/mutual funds world is new for me and has always scared me, that is why I have not invested this way before.

Thank you for your help!

 

[Keim]

Usually the advice is to at least put in enough with the employer to get the match. That is not a consideration for you. The only other advantage I can see with going with the employer plan is the higher contribution limit with an employer 401k ($17k I believe) vs an IRA ($5k).

Two major potential disadvantages of going with the employer 401k:
1. Cost. Vanguard is probably cheaper.
2. Selection. Most 401k's have a very limited selection. Certainly won't match the 1000s of selections in the many IRA's available.

In your case I believe I'd fill the IRA first. Then any other money after it is filled could go in the 401k.

If you are a Ramsey listener, I asume you have followed the other baby steps, have a good emergency fund set-up and are paying down debt religiously (joke intended). This will be money you can't easily tap!

 

[2035]

Welcome! Have you considered a Roth IRA? That would be my choice if my employer didn't offer a 401(k) match. I have one with T Rowe Price and they'll let you open an account with $50 or $100, if you sign up for automatic contributions. I contribute $415 each month ($435 in December) and I get a free color magazine every quarter, plus another newsletter.

 

[ziggy29]

Most likely I'd first fund the IRA, and then I'd look at the fund options my employer's 401K had. If the employer 401K had some decent low fee fund options I'd continue there. If they all stunk I might invest on my own elsewhere. Do you have any list of the funds that are available in the 401K?

 

[palomino]

Thanks everyone, I will research and see what funds there are and share a few that seem low-cost. So new to me but it looked like they all had that annual maintenance percentage they charge which I hate to see. And thank you for clearing up something very important for me: What is different, in my case it sounds like, is that they have just now added a Roth option attached to the 401k. I had not realized that normally Roths are done on your own. I thought they always came through the employer. That is why I was getting confused. I knew we had it, but thought it had been there all along (the Roth option), and then just looked a few minutes ago, and yes, it is a brand new option this year for us.

So given that, I am not sure if doing a Roth through my employer or on my own would have any advantage? I suppose it now depends on what funds there are and the fees attached, which at least gives me an area to focus on.

I need to research more and see if there are the low-cost index funds through Vanguard that I was getting very interested in.

Yes, I have followed Dave's steps His plan is very good, and I am amazed at what I have cleared in debt and built up for the EF. I just don't really want to follow his investments advice to the letter because index funds attract me the most, with the low fees. I know so little but plan to read as much of this site as possible so I can retire early. Thank you all so much!

 

[Keim]

Ramseys investment advice is generally considered poor here. His advertised returns are way higher than most can expect.

I got a lot out of The Bogleheads Guide to Investing. It is all about investing via a low-cost index fund approach.

 

[Animorph]

If you have decent funds in the 401k you'll be better off there in most cases. You can't make pre-tax contributions to an IRA if you have a 401k at work, so the 401k is your only pre-tax option. Plus you can contribute more to the 401k.

If you are currently in the 15% tax bracket I'd consider contributing to a Roth IRA first and the Roth 401k second, just for added flexibility. Above the 15% bracket I'd consider the Roth but probably stick with the traditional 401k.

 

[2B]

Welcome to the forum.

You neglected to say what your marginal tax rate is and how much you are looking to save. Since you get no employer match, I would suggest you first fund a Roth IRA and I vote for the Vanguard Total Stock Market Index Fund. I think the limit for non-geezers (under 50) is $5,000 per year in 2012. If you want to save more that that and your marginal tax rate is 15%, I'd just open a Vanguard account (or wherever) and put your money in after tax. If you are at 25% or higher, you can tax defer $17,000 in a regular 401k or, since your employers offer it, save after tax in a Roth 401k that pays out tax free. You get to guess whether you will be in a higher or lower tax rate when you retire. I'm sure there are threads on the forum that have argued this point before.

You might want to put in the details of your 401k choices and any fees. Some employers have good choices and some don't. Since you don't get any match, I suspect you have high fee, managed funds. I'd steer away from them since there is no match.

Dave Ramsey is great for getting out of debt and establishing an emergency fund. Most of us here are debt free (I think) except for the mortgage and that subject gets beaten to death every so often. He steers people to his "endorsed local provider" investment counselers which make most of us here shudder. As you already have probably figured out, we encourage self-directed investing mostly (but not all of us) in low cost, index mutual funds.

Feel free to update your info and ask more questions.

 

[palomino]

Below is what is available, through my employer. I am in the 15% tax rate. I must add that I will not use anything on it with the name Wells Fargo due to a terrible history of banking with them. It may sound irrational, but since canceling my simple bank account with them almost two years ago, I do not wish to do business of any kind with them, so the target funds are not an option for me. I do not know what fees are charged with this list.

I do not know my target number yet of what I want to save for retirement. I will research on the site to see the best way to calculate that.
My employer charges anywhere from 15 dollars to 185 per year per amount contributed...185 for 64,000 or more, 15 dollars for 1,000 or less. I will get the whole breakdown if it helps, between 16,000 and 32,000 it is 75 dollars. I think I would fit in there.






Expense
Wells Fargo Advantage Dow Jones Target Date Funds1
Target Today Fund (WOTDX)
Target Retirement
Passive


0.20%
Target 2010 Fund (WFOAX)
Target-Date 2010-2014
Passive


0.23%
Target 2015 Fund (WFSCX)
Target-Date 2015-2019
Passive


0.24%
Target 2020 Fund (WFOBX)
Target-Date 2020-2024
Passive


0.25%
Target 2025 Fund (WFTYX)
Target-Date 2025-2029
Passive


0.25%
Target 2030 Fund (WFOOX)
Target-Date 2030-2034
Passive


0.26%
Target 2035 Fund (WFQRX)
Target-Date 2035-2039
Passive


0.27%
Target 2040 Fund (WFOSX)
Target-Date 2040-2044
Passive


0.27%
Target 2045 Fund (WFQPX)
Target-Date 2045-2049
Passive


0.27%
Target 2050 Fund (WFQFX)
Target-Date 2050-2054
Passive


0.27%
Target 2055 Fund (WFQUX)
Target-Date 2055+
Passive


0.27%
Core Funds1
BlackRock Liquidity TempFund, Instl Shares (TMPXX)
Domestic (US) Money Market
Active


0.18%
BlackRock Bond Index Fund (Collective Trust Fund)
Domestic (US) Intermediate-Term Bond
Passive


0.12%
Vanguard Wellington Fund (VWENX)
Domestic (US) Balanced (Stock and Bond)
Active


0.22%
Davis New York Venture Fund A (NYVTX)
Domestic (US) Stock Large Cap Value
Active


0.44%
Vanguard Institutional Index Fund, Instl Plus Shares (VIIIX)
Domestic (US) Stock Large Cap Blend
Passive


0.02%
Vanguard Growth Index Fund, Instl Shares (VIGIX)
Domestic (US) Stock Large Cap Growth
Passive


0.08%
First Eagle Fund of America Y (FEAFX)
Domestic (US) Stock Mid Cap Blend
Active


1.09%
Munder Mid-Cap Core Growth Fund Y (MGOYX)
Domestic (US) Stock Mid Cap Growth
Active


0.83%
Lord Abbett Small Cap Value Fund I (LRSYX)
Domestic (US) Stock Small Cap Value
Active


0.83%
Fidelity Diversified International Fund (FDIVX)
Foreign Stock / Large Cap Blend
Active


0.65%
Schwab Personal Choice Retirement Account6
Self-Directed Brokerage Account

 

[2B]

My employer charges anywhere from 15 dollars to 185 per year per amount contributed...185 for 64,000 or more, 15 dollars for 1,000 or less. I will get the whole breakdown if it helps, between 16,000 and 32,000 it is 75 dollars. I think I would fit in there.

I suspect that that fee is based on your account balance. I didn't see anything on your list that would lead me to say it was worth paying $185/yr. You will get up to $64,000+ pretty quickly.

Go with the Vanguard $5,000 Roth and save extra in an after tax account.

 

[palomino]

Go with the Vanguard $5,000 Roth and save extra in an after tax account

Thank you so much 2B...I wish I didn't have to ask, but still learning, what exactly is an after tax account? Would I get that at Vanguard?

 

[MichaelB]

Hi palomino, welcome to the forum. AN after tax account is an account which is funded with money after you have paid income tax. The other accounts are tax deferred, you don't pay income tax until you withdraw, hopefully when you retire.

Palomino, I don't see it mentioned. Does your employer match part of your contribution to the 401(k)?

 

[palomino]

Hi Michael, Thank you and no, I do not have any match available in the plans.

 

[Keim]

No, MichaelB, the employer offers no match.

Palomino: Generally people fund their tax deferred accounts first(IRA, 401k, HSA, 529). The reason for this is that you can only put so much money into each every year. It is an immediate savings due to the tax benefits. Since the money isn't taxed, more of it goes into helping your investments grow. But, it is money you can't touch for many years, or only under specific circumstances, without heavy penalties.

 

[MichaelB]

In that case, the only advantage to the employer 401(k) is if palomino can save more than the IRA limit. Roth IRA is also a good choice with such a low tax rate, especially if you think your income is likely to grow over time.

 

[2B]

In that case, the only advantage to the employer 401(k) is if palomino can save more than the IRA limit. Roth IRA is also a good choice with such a low tax rate, especially if you think your income is likely to grow over time.

His 401k fund choices are pretty lame and there is a significant fee for having a 401k with his employer.

 

[ziggy29]

The problem with that fee structure is that if you have several hundred thousand in the account and the fee caps at $185, it wouldn't be all that horrible. On $300K, for example, that adds only 6 basis points to the overall fees and wouldn't be a deal breaker.

The problem is that in order to get there, you have to start at zero where you pay 150 basis points on the first $1000. That might be worth eating with an employer match but without it, I'd prefer to look for low-fee, tax-efficient equity funds in a taxable account.

 

[palomino]

You have all been extremely helpful. I will get the Bogleheads Guide, I have seen it mentioned on this site a couple of days ago. I am not online again until next Monday, but I have learned more than I could have imagined from your responses and will be examining them closely! I will probably have more questions so I will hope for your patience.

But the important thing is that you have made me not afraid to go outside the traditional route if I choose to anyway. And confirmed my feeling that the fees are killers and index funds are a world I want to enter. I will definitely be doing a Roth as soon as next week probably.

Thank you again.

 

[Keim]

Unsolicited advice: Don't open anything yet. Wait until you've read the Bogleheads Guide, and maybe another book or two. Just let the money sit in savings for a month or two until you feel more educated. This will save you from making any basic mistakes.