Bad 401K still worth it?

[aaronc879]

I just became benefits eligible at my new job. I am very disappointed with the 401K plan. The fees area almost all .8-1.2% for their mediocre funds. I'm wondering if it's still worth it for the tax deferral or if I should invest in something like VTI with a much smaller fee in a taxable account. I would still put in enough to get the small company match but maybe not any more than that. What do you think?

 

[pb4uski]

Can you just do VTI in a deductible IRA instead?

 

[aaronc879]

Can you just do VTI in a deductible IRA instead?

Yes, but then I can't do the ROTH IRA I was planning to do.

 

[RobbieB]

Do they match any of your contributions?

 

[aaronc879]

Do they match any of your contributions?

3% automatic and another 1% if I invest 2%. Then an additional 15 cents gets invested for every hour worked which doesn't amount to much.

 

[harley]

Well, certainly put in whatever it takes to get the match. Then I would do the Roth IRA you want to fund, and I would just put whatever else I had to invest in an after tax account. Unless putting it in the 401(k) would keep you in a lower tax bracket (unlikely), in which case I would do that too, and just pick the lowest cost total stock market fund I could find and not worry that much about the extra cost.

 

[UnrealizedPotential]

There's not a SP 500 index fund in the plan? Those usually have the lowest fees you can get.

 

[aaronc879]

There's not a SP 500 index fund in the plan? Those usually have the lowest fees you can get.

The closest it has is Nuveen Equity Index(FAEIX) which has a .62% fee which is low compared to other options. Doesn't look very good though. The limited info I can find shows a 5% YTD compared to 14% for the S&P so I don't know what that's about. Maybe I will just invest in a target date fund.

 

[aaronc879]

Well, certainly put in whatever it takes to get the match. Then I would do the Roth IRA you want to fund, and I would just put whatever else I had to invest in an after tax account. Unless putting it in the 401(k) would keep you in a lower tax bracket (unlikely), in which case I would do that too, and just pick the lowest cost total stock market fund I could find and not worry that much about the extra cost.

I should make around $54-58K/yr depending on how much overtime I have to work so I could, and probably will save enough to get me down to the top of the 15% bracket which I believe is around $49K for a single person.

 

[RobbieB]

Yes, get the match and get all of it. 1% in fees don't matter if the Co is paying you 4%.

 

[UnrealizedPotential]

The closest it has is Nuveen Equity Index(FAEIX) which has a .62% fee which is low compared to other options. Doesn't look very good though. The limited info I can find shows a 5% YTD compared to 14% for the S&P so I don't know what that's about. Maybe I will just invest in a target date fund.

It's still worth doing the 401k their offering because of the match and the tax deferral . I would try not to go over 1% in fees though. IMO 1% in fees wouldn't bother me as long as I got a decent fund along with the match and tax deferral. I think it makes it worth doing. Good luck!

 

[dvalley]

Most 401ks have higher fees but free money from the employer is more than worth it, not to mention lowering your income taxes. I started a new job late last year, prior job didn't have 401k. I maxed it out and in 1.4yrs my balance is almost $40k and it lowered my AGI.

When I leave I'll roll it over to my vanguard IRA as I've done for prior employers to avoid the high 401k plan fees.

 

[EvrClrx311]

I enjoy this kind of math

Some variables at play to figuring out the answer to your question, but in almost every circumstance, it's better to go with the company match over anything else.


For comparison sake... let's say that you'll experience a 7% growth 'on average' and that the funds in your 401k cost you 1% more in fees vs. taking your 2% and investing on your own without the match. [so lets say 7% return outside your 401k, and 6% return inside]

Taking advantage of the 1% match on your 2% contribution would leave you with the following...

50% more right off the bat on every dollar you're putting away - $100 in is really $150 in because of match. Over time the 1% loss in fees would eat away at the compounding, but at a slower rate than that initial 50% boost. That is, after 10 years you'd have 42% more in total having gone with the company match vs. doing it on your own. After 20 years you'd be 33% better off getting the company match. After 40 years you'd still be 25% better off in total account value getting the company match than having taken your 2% somewhere else for the 7% return.

That is... even after 40 years of compounding at a lower rate because of the fee... your final balance would be 25% more if you go the company match (free 1% match) vs going at it on your own with lower fees (giving you a 1% boost). The match wins.

The real question... is can you get a better return outside your 401k investments. Maybe... but who knows? Hence why I'm using the 7% baseline here for comparison sake (if we knew what funds returned more, then we'd all be in them). I'm sure you can find the same kind of risk in the less ideal fund choices you have through this plan than what you'd find outside of it. Others might disagree. The math above doesn't change much at all for other percentages (say the control return were 5% or 10% in place of 7%)... the 10 year, 20 year, 40 year values only deviate maybe a couple points one direction or the other.

Basically... it is always worth it to get a free match from your employer. Fees or performance of the funds in the 401k factor in, but not enough to offset the free money the company is giving you.

 

[aaronc879]

I was always planning to take the full match. What i'm wondering is if it's worth investing more for the tax deferral even with the bad funds. I also have a Roth 401K option. If the funds weren't garbage then my plan would be to invest in deductible 401K until my AGI was down to the top of the 15% bracket then invest in the ROTH 401K until I hit the max if I can afford it. Should the bad funds change those plans.

 

[Z3Dreamer]

I don't disagree with OP, I just want to explain 401k plans. As an administrator of small company 401k/403b plans for over 25 years, virtually no one thought we had a good plan. Some of them, I built from no plan. Others, I inherited and "improved". In all cases, I attempted to bump up the company contribution, increase investment options and the like. I am not really sure what employees think a company should have.

Now, to your specifics. There are expenses of running the fund. Some of the great Vanguard funds that are not actively managed are under .2% for fees. Some of the actively managed funds are about .6%. IMHO most plan administrators are going to have a mix of actively and not actively managed funds. And those bond funds should be real low. So I would expect at least two in the .3% range and the rest in the .7% range.

An option for 401k plans is to wrap plan expenses into the funds. What I mean is that 401k plans have thousands of expenses. If your plan elects to include those in fund expenses, this will cost you .2% to .4%.

 

[harley]

I was always planning to take the full match. What i'm wondering is if it's worth investing more for the tax deferral even with the bad funds. I also have a Roth 401K option. If the funds weren't garbage then my plan would be to invest in deductible 401K until my AGI was down to the top of the 15% bracket then invest in the ROTH 401K until I hit the max if I can afford it. Should the bad funds change those plans.

That sounds like a good plan, in general. Roth 401(k)s came along just as I was retiring, so I'm not sure of the details. But I would think you would still be stuck with the mediocre fund choices in the Roth 401(k). It might be better to just fund a regular Roth and choose your own investments. But maybe the Roth 401(k) allows you to put more away, I don't know. But funding the traditional 401(k) to get the match and keep you below the 15% bracket is a no brainer. After that, assuming no extra benefit from the Roth 401(k) I would start a regular Roth, fund it fully and choose my investments, then if there's any savings money left just do a regular savings/brokerage account. Yes, you'll have to pay taxes on the investments eventually, but only if you sell. If you invest in something long term (TSM or something) you can hold it forever.

 

[jazz4cash]

Have you looked st the rules for vesting the match and ability to do rollovers out of the plan?

 

[aaronc879]

Have you looked st the rules for vesting the match and ability to do rollovers out of the plan?

100% vested right away so that's a plus. I can rollover stuff to my 401K but can't rollover out until after i'm no longer employed.

 

[jazz4cash]

100% vested right away so that's a plus. I can rollover stuff to my 401K but can't rollover out until after i'm no longer employed.

Yeah I'd just max out the match and put add'l savings in taxable/IRA

 

[DrRoy]

Well, certainly put in whatever it takes to get the match. Then I would do the Roth IRA you want to fund, and I would just put whatever else I had to invest in an after tax account. Unless putting it in the 401(k) would keep you in a lower tax bracket (unlikely), in which case I would do that too, and just pick the lowest cost total stock market fund I could find and not worry that much about the extra cost.

+1. The match gives you a return on your own $ that you cannot get anywhere else.