ClockWatcher
Dryer sheet aficionado
- Joined
- Apr 15, 2013
- Messages
- 43
Hi Everyone,
I’ve made a few posts already, but didn’t introduce myself here before because I didn’t have any pressing questions to put out to everyone. Now I do: My wife and I have been married for 1 ½ years and are between 8 and 16 years away from retirement depending upon how well our portfolio does and how well we manage our expenses. My wife moved to a higher paying job 2 years ago. The 401(k) plan came with no match and with high fees. My wife and I spoke with management and they initially agreed to implement a low-fee option, but a couple of months later informed us that they were going to revamp the whole program with all new options. This took place at the end of March. We did not expect a match to be added, and none was. My wife’s existing monies were transferred into their lowest cost option, an S&P 500 index fund. What I discovered this weekend, is that while the fees were made very explicit for easy computation, they are even worse than in the prior plan. My wife’s fund comes with a 1.38% annual fee attached!
This morning I put together a spreadsheet comparing pre-tax contributions with a 1.38% fee attached, versus investing in an identical after-tax fund with a .1% fee (I know there are a few funds out there with lower expenses, but I wanted this to be a reasonable match-up). There were some assumptions involved, for example:
(a) Initial investment sum of $40,000
(b) ongoing pre-tax contributions of $17,500,
(c) any monies diverted away from the 401(k) would be taxed at the 28% marginal rate,
(d) 50% of the growth in the taxable fund would be taxed when earned (dividends) while the remainder of the growth would be taxed in a lump sum upon retirement (capital gains), and
(e) monies withdrawn from the 401(k) at retirement would be taxed half in the 15% marginal tax bracket and half in the 25% tax bracket (for an average of 20%).
My spreadsheet became a bit complex, but what I found was that whether at the 8-year mark or the 16-year mark, and regardless of whether I used a growth rate of 5%, 7%, or 9%, the threshold for whether to participate in the 401(k), versus taking a big one-time hit with income taxes and then ongoing smaller dividends and capital gains taxes, was if the 401(k) management fee was greater or less than .87%. To restate, if the annual management fees in the 401(k) are less than .87%, there appears to be benefit to tax deferral. If the annual management fees in the 401(k) are greater than .87%, then it is better to invest in a .1% fee after-tax fund.
Has anyone else calculated this out? What were your results? Is there something you think I might be missing? I welcome your feedback!
I’ve made a few posts already, but didn’t introduce myself here before because I didn’t have any pressing questions to put out to everyone. Now I do: My wife and I have been married for 1 ½ years and are between 8 and 16 years away from retirement depending upon how well our portfolio does and how well we manage our expenses. My wife moved to a higher paying job 2 years ago. The 401(k) plan came with no match and with high fees. My wife and I spoke with management and they initially agreed to implement a low-fee option, but a couple of months later informed us that they were going to revamp the whole program with all new options. This took place at the end of March. We did not expect a match to be added, and none was. My wife’s existing monies were transferred into their lowest cost option, an S&P 500 index fund. What I discovered this weekend, is that while the fees were made very explicit for easy computation, they are even worse than in the prior plan. My wife’s fund comes with a 1.38% annual fee attached!
This morning I put together a spreadsheet comparing pre-tax contributions with a 1.38% fee attached, versus investing in an identical after-tax fund with a .1% fee (I know there are a few funds out there with lower expenses, but I wanted this to be a reasonable match-up). There were some assumptions involved, for example:
(a) Initial investment sum of $40,000
(b) ongoing pre-tax contributions of $17,500,
(c) any monies diverted away from the 401(k) would be taxed at the 28% marginal rate,
(d) 50% of the growth in the taxable fund would be taxed when earned (dividends) while the remainder of the growth would be taxed in a lump sum upon retirement (capital gains), and
(e) monies withdrawn from the 401(k) at retirement would be taxed half in the 15% marginal tax bracket and half in the 25% tax bracket (for an average of 20%).
My spreadsheet became a bit complex, but what I found was that whether at the 8-year mark or the 16-year mark, and regardless of whether I used a growth rate of 5%, 7%, or 9%, the threshold for whether to participate in the 401(k), versus taking a big one-time hit with income taxes and then ongoing smaller dividends and capital gains taxes, was if the 401(k) management fee was greater or less than .87%. To restate, if the annual management fees in the 401(k) are less than .87%, there appears to be benefit to tax deferral. If the annual management fees in the 401(k) are greater than .87%, then it is better to invest in a .1% fee after-tax fund.
Has anyone else calculated this out? What were your results? Is there something you think I might be missing? I welcome your feedback!