Why not contribute to the 401(k)?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Why not contribute to the 401(k)?

Postby bUU » Fri Jan 25, 2013 6:26 am

We all have seen the discussions about where to put retirement contributions first, and second, and third, and the discussions in that regard. However, given the scenario that someone (over 50) has the $29,500 to contribute in a year, is there a formula for determining when investing the $23,000 that would otherwise go into a 401(k) should instead be just invested as ~$15,000 (i.e., after taxes) in a regular investment account? We've got some awesomely bad choices - ERs in the 1.3%-1.8% range down the line - and little if any chance that anyone in the company will do anything about the choices in the short-term (since we're in the process of being gobbled up by someone else). How do we know if "bad" is bad enough to forego the tax-advantage entirely? My assumption has always been that there really cannot be any such point.
User avatar
bUU
 
Posts: 557
Joined: Sun Nov 25, 2012 11:41 am

Re: Why not contribute to the 401(k)?

Postby Bob's not my name » Fri Jan 25, 2013 6:39 am

grabiner wrote:My rule of thumb is that if the product of the expenses and the years you will be in the plan exceeds 30%, then a taxable stock investment may be better.
In other posts grabiner has clarified that "expenses" means the differential vs. what you can get at Vanguard. I believe almost anybody over 50 would meet this rule of thumb.
Bob's not my name
 
Posts: 7026
Joined: Sun Nov 15, 2009 9:24 am

Re: Why not contribute to the 401(k)?

Postby dickenjb » Fri Jan 25, 2013 7:27 am

Bob's not my name wrote:
grabiner wrote:My rule of thumb is that if the product of the expenses and the years you will be in the plan exceeds 30%, then a taxable stock investment may be better.
In other posts grabiner has clarified that "expenses" means the differential vs. what you can get at Vanguard. I believe almost anybody over 50 would meet this rule of thumb.


Don't you have it backwards? Anyone over 50 would have few years left in the plan, so would not meet the rule of thumb and the 401(k) would be superior.
Philly Chapter Coordinator
dickenjb
 
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: Why not contribute to the 401(k)?

Postby NYBoglehead » Fri Jan 25, 2013 7:35 am

Start an e-mail chain in the company about how bad the 401(k) choices are. Petition your HR department and management about making a change. Do not accept that things cannot be changed. If enough people start complaining something might eventually happen.

In the meantime, with awful ERs you should at least contribute up to the match, then max out Roth IRAs after that. As another poster mentioned, since you're in your 50s there is less time for ERs to eat away at your returns, so providing you have no debt to pay down and have a sufficient emergency fund, go ahead and contribute more to the 401k.
NYBoglehead
 
Posts: 1588
Joined: Fri May 25, 2012 9:38 am

Re: Why not contribute to the 401(k)?

Postby Bob's not my name » Fri Jan 25, 2013 7:58 am

dickenjb wrote:
Bob's not my name wrote:
grabiner wrote:My rule of thumb is that if the product of the expenses and the years you will be in the plan exceeds 30%, then a taxable stock investment may be better.
In other posts grabiner has clarified that "expenses" means the differential vs. what you can get at Vanguard. I believe almost anybody over 50 would meet this rule of thumb.


Don't you have it backwards? Anyone over 50 would have few years left in the plan, so would not meet the rule of thumb and the 401(k) would be superior.
Yes, meant I what that's.
Bob's not my name
 
Posts: 7026
Joined: Sun Nov 15, 2009 9:24 am

Re: Why not contribute to the 401(k)?

Postby bUU » Fri Jan 25, 2013 8:43 am

NYBoglehead wrote:In the meantime, with awful ERs you should at least contribute up to the match

No match.

NYBoglehead wrote:then max out Roth IRAs after that.

My current situation is to do both.
User avatar
bUU
 
Posts: 557
Joined: Sun Nov 25, 2012 11:41 am

Re: Why not contribute to the 401(k)?

Postby porcupine » Fri Jan 25, 2013 9:03 am

Bob's not my name wrote:
dickenjb wrote:
Bob's not my name wrote:
grabiner wrote:My rule of thumb is that if the product of the expenses and the years you will be in the plan exceeds 30%, then a taxable stock investment may be better.
In other posts grabiner has clarified that "expenses" means the differential vs. what you can get at Vanguard. I believe almost anybody over 50 would meet this rule of thumb.

Don't you have it backwards? Anyone over 50 would have few years left in the plan, so would not meet the rule of thumb and the 401(k) would be superior.
Yes, meant I what that's.

unBob:

Stop unning and start punning. :oops:

That's a good rule of thumb and makes me feel better about staying in my plan (though I'm not 50 yet!).

- Porcupine
porcupine
 
Posts: 1267
Joined: Thu Nov 04, 2010 11:05 am

Re: Why not contribute to the 401(k)?

Postby mhc » Fri Jan 25, 2013 9:46 am

bUU wrote:since we're in the process of being gobbled up by someone else


Do you know who this someone else is? If so, try to find out what their plan looks like. They may have a better plan. If so, it makes it even more compelling for you to contribute to your 401k.
User avatar
mhc
 
Posts: 2539
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: Why not contribute to the 401(k)?

Postby bUU » Fri Jan 25, 2013 9:54 am

They do have a better plan, with some match, but I recently was told it would be at least two years before they assume us as employees, if ever.
User avatar
bUU
 
Posts: 557
Joined: Sun Nov 25, 2012 11:41 am

Re: Why not contribute to the 401(k)?

Postby Hub » Fri Jan 25, 2013 10:09 am

I'm sure you've checked, but are in-service roll overs allowed? Man I wish that was common or even required of plan providers.
User avatar
Hub
 
Posts: 303
Joined: Fri Jul 13, 2012 8:56 am

Re: Why not contribute to the 401(k)?

Postby porcupine » Fri Jan 25, 2013 10:32 am

Hub wrote:I'm sure you've checked, but are in-service roll overs allowed? Man I wish that was common or even required of plan providers.

+ 1
porcupine
 
Posts: 1267
Joined: Thu Nov 04, 2010 11:05 am

Re: Why not contribute to the 401(k)?

Postby lawman3966 » Fri Jan 25, 2013 11:10 pm

mhc wrote:
bUU wrote:since we're in the process of being gobbled up by someone else


Do you know who this someone else is? If so, try to find out what their plan looks like. They may have a better plan. If so, it makes it even more compelling for you to contribute to your 401k.


Even more important would be to determine whether this someone else will continue the current plan, or start a new one. If the new employer starts a new plan (which would happen if a new corporate entity is formed), you should be free to roll your 401K assets into an IRA. You could then start contributing to the new plan without having your entire accumulated balance subject to any undesirable fees.
lawman3966
 
Posts: 920
Joined: Sun Aug 10, 2008 12:09 pm

Re: Why not contribute to the 401(k)?

Postby Default User BR » Sat Jan 26, 2013 11:37 am

lawman3966 wrote:Even more important would be to determine whether this someone else will continue the current plan, or start a new one. If the new employer starts a new plan (which would happen if a new corporate entity is formed), you should be free to roll your 401K assets into an IRA. You could then start contributing to the new plan without having your entire accumulated balance subject to any undesirable fees.

I don't think that is true. When my original company merged with another to form MyMegaCorp, our plan was terminated, a blackout period announced, and all the existing choices mapped as best they could to ones in the new plan. There was no opportunity for rollover.


Brian
Default User BR
 
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Why not contribute to the 401(k)?

Postby lawman3966 » Sat Jan 26, 2013 5:38 pm

Default User BR wrote:
lawman3966 wrote:Even more important would be to determine whether this someone else will continue the current plan, or start a new one. If the new employer starts a new plan (which would happen if a new corporate entity is formed), you should be free to roll your 401K assets into an IRA. You could then start contributing to the new plan without having your entire accumulated balance subject to any undesirable fees.

I don't think that is true. When my original company merged with another to form MyMegaCorp, our plan was terminated, a blackout period announced, and all the existing choices mapped as best they could to ones in the new plan. There was no opportunity for rollover.
Brian


There may be a semantic difference here that is confusing the issue. In the case of a merger, it's possible that the plan is maintained, but that the provider is changed. The plan identity and provider entity are not necessarily bound to one another. To my knowledge, an employer can maintain a single plan, but change providers. This may be what happened in your case. More importantly, it sounds as though, in your merger, there was continuity of corporate identity between the old and new entities that you worked for.

However, if the transition from old to new plan/employer would normally require completion and signature of a Rollover form, the employer cannot do it without the employee's signature on the pertinent form, and to my knowledge cannot force an employee sign such a form. At my current employer, the participants in the former plan (at a predecessor firm) are not required to roll their money from the old plan to the new one, and several have indicated that they would not do so, as they could get lower fees by rolling the money from the old plan to an IRA instread.

I'm not an expert on corporate forms and structures, but I believe that the difference resides in the fact that our situation involved the creation of a new law firm, rather than a merger per se. In sum, the situation appears to be case-specific. It's possible that the OP's situation is closer to yours, and that the money can't be rolled out of the plan, but it's work making sure.
lawman3966
 
Posts: 920
Joined: Sun Aug 10, 2008 12:09 pm

Re: Why not contribute to the 401(k)?

Postby bUU » Sun Jan 27, 2013 4:19 am

And I'm not really sure why my situation would be more similar to Brian's... he was talking about a merger. My situation is more like an itty-bitty piece of seaweed being gobbled up by whale. While it seems very likely, to me, that our 401(k) plan would be shut down, there wouldn't be a new plan created, but rather we've be invited to join an existing plan. Wouldn't that require a rollover form signed?
User avatar
bUU
 
Posts: 557
Joined: Sun Nov 25, 2012 11:41 am

Re: Why not contribute to the 401(k)?

Postby peppers » Sun Jan 27, 2013 8:52 am

In my case it was one very large whale swallowing another large whale. Think Ma and one of the spin offs. The existing 401k money was transferred over to Fidelity. Whatever investments you had were placed into similar funds. For example, if you had a large cap fund, it was placed in the S&P 500 index fund. Stable value went into Interest Income fund and so on. There was a 6 week blackout period where the only activity allowed was contributions. No exchanges, loans, etc. There was nothing to sign or request. You just went along for the ride. We did end up with more choices and lower ER's.

When the time comes, prior to the transfer, I would strongly suggest that you keep a detailed record of your account. Everything. Things have a way of falling through the cracks.
"..the cavalry ain't comin' kid, you're on your own..."
peppers
 
Posts: 957
Joined: Tue Oct 25, 2011 7:05 pm

Re: Why not contribute to the 401(k)?

Postby Default User BR » Sun Jan 27, 2013 2:24 pm

peppers wrote:In my case it was one very large whale swallowing another large whale. Think Ma and one of the spin offs. The existing 401k money was transferred over to Fidelity. Whatever investments you had were placed into similar funds. For example, if you had a large cap fund, it was placed in the S&P 500 index fund. Stable value went into Interest Income fund and so on. There was a 6 week blackout period where the only activity allowed was contributions. No exchanges, loans, etc. There was nothing to sign or request. You just went along for the ride. We did end up with more choices and lower ER's.

That's pretty similar to when MyMegaCorp was formed. Some people really regarded it as a purchase of MyOriginalCorp, but in fact a lot of changes to management and such took place at the time. MyOriginalCorp had about 65,000 employees at the time, the new MyMegaCorp had about 200,000.


Brian
Default User BR
 
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Why not contribute to the 401(k)?

Postby jsl11 » Sun Jan 27, 2013 3:48 pm

I worked for a company that was a division of a larger corp. The large corp was sold, and my division was spun off separately. Our participation in the old plan clearly ended, because we all lost our matching money for the year (you had to be employed on Dec 31 to qualify for the match). Management made up the matching money to us with a taxable check. We started an entirely new 401k plan for our new spun off company (new provider, new administrator, and new rules). The old plan remained in operation at the sold-off corp. Nevertheless, we were all switched from the old plan to the new one. Rollovers were not permitted.
Jeff
jsl11
 
Posts: 3243
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: BL, cpthammer, john94549, kenyan, Novine, rcn, sunnywindy, Watty and 78 guests