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Taylor Larimore
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Joined: 27 Feb 2007
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Location: Miami Florida
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ziggy29
Joined: 10 Mar 2008
Posts: 905
Location: Texas Hill Country
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 Posted: Fri Nov 06, 2009 11:12 am Post subject: |
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"High cost indexing?"
Not an oxymoron, but still defeating the purpose. |
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Triple digit golfer
Joined: 18 May 2009
Posts: 800
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| Posted: Fri Nov 06, 2009 11:22 am Post subject: |
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| Many of us don't have a choice. I have exactly one fund in my 401(k) with an expense ratio below 1.00%: The S&P 500 index fund, at 0.93%. |
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Allan Roth
Joined: 11 Sep 2008
Posts: 39
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| Posted: Fri Nov 06, 2009 11:37 am Post subject: |
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Thanks for everyone's help in the poll.
Wanted to be fair -- better than most annuities or IUL. |
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Doc
Joined: 24 Feb 2007
Posts: 1299
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| Posted: Fri Nov 06, 2009 11:40 am Post subject: |
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| Triple digit golfer wrote: | | Many of us don't have a choice. I have exactly one fund in my 401(k) with an expense ratio below 1.00%: The S&P 500 index fund, at 0.93%. |
The effective LT capital gains tax for a ten year term at at 8% annual return is 11.29% based on a 15% statutory LTCG rate. That's 90 bps lost annually to taxes in a taxable account. (The effective rate drops to 6.52% for a thirty year term.) The e/r on your S&P index fund is 93 bps. I suggest you do have a choice and perhaps even a good one.
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Doc
"Share the Harvest" |
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Wagnerjb
Joined: 19 Feb 2007
Posts: 2975
Location: Houston, Texas
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| Posted: Fri Nov 06, 2009 2:04 pm Post subject: |
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| Doc wrote: | | Triple digit golfer wrote: | | Many of us don't have a choice. I have exactly one fund in my 401(k) with an expense ratio below 1.00%: The S&P 500 index fund, at 0.93%. |
The effective LT capital gains tax for a ten year term at at 8% annual return is 11.29% based on a 15% statutory LTCG rate. That's 90 bps lost annually to taxes in a taxable account. (The effective rate drops to 6.52% for a thirty year term.) The e/r on your S&P index fund is 93 bps. I suggest you do have a choice and perhaps even a good one. |
I agree with Doc. Get the company match, then place the rest of your desired savings in a taxable account...invested very tax efficiently.
Best wishes.
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Andy |
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Allan Roth
Joined: 11 Sep 2008
Posts: 39
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| Posted: Fri Nov 06, 2009 4:44 pm Post subject: |
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| Triple digit golfer wrote: |
I agree with Doc. Get the company match, then place the rest of your desired savings in a taxable account...invested very tax efficiently.
Best wishes. |
Unless you don't think you will become vested with that company match. Never give up free money, however. |
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bog
Joined: 06 Nov 2009
Posts: 47
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| Posted: Fri Nov 06, 2009 4:53 pm Post subject: |
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Edelman is at the very best a very bad overconfident self-serving advisor. Until he hooked up with DFA, he was selling front-end load funds and denigrating index funds to his clients.
I don't know what his educational and professional qualifications are, but he is a good talker all too capable of fooling the unsophisticated investor, and those are the ones paying him the high fees. |
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Trev H
Joined: 02 Mar 2007
Posts: 1450
Location: Tennessee
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| Posted: Fri Nov 06, 2009 5:20 pm Post subject: |
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Got you beat TDG...
The 500 index in my stinky company plan only cost .70 
The R2K index cost 1.0
My company puts in 3% (if I do nothing).
If I put in 3% they put in another 3% for a total of 9%
I put in that 3% to get their 6% and past that go to my Roth IRA at Vanguard.
Not able to save any more than that at this point.
===
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22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB
"As you can probably tell by now, my sympathies lie with the splitters"
Trev H |
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Triple digit golfer
Joined: 18 May 2009
Posts: 800
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| Posted: Fri Nov 06, 2009 5:23 pm Post subject: |
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| Doc wrote: | | Triple digit golfer wrote: | | Many of us don't have a choice. I have exactly one fund in my 401(k) with an expense ratio below 1.00%: The S&P 500 index fund, at 0.93%. |
The effective LT capital gains tax for a ten year term at at 8% annual return is 11.29% based on a 15% statutory LTCG rate. That's 90 bps lost annually to taxes in a taxable account. (The effective rate drops to 6.52% for a thirty year term.) The e/r on your S&P index fund is 93 bps. I suggest you do have a choice and perhaps even a good one. |
What are you talking about? It's a good choice just because it's in a 401(k) and tax-sheltered? |
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Triple digit golfer
Joined: 18 May 2009
Posts: 800
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| Posted: Fri Nov 06, 2009 5:24 pm Post subject: |
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| Wagnerjb wrote: | | Doc wrote: | | Triple digit golfer wrote: | | Many of us don't have a choice. I have exactly one fund in my 401(k) with an expense ratio below 1.00%: The S&P 500 index fund, at 0.93%. |
The effective LT capital gains tax for a ten year term at at 8% annual return is 11.29% based on a 15% statutory LTCG rate. That's 90 bps lost annually to taxes in a taxable account. (The effective rate drops to 6.52% for a thirty year term.) The e/r on your S&P index fund is 93 bps. I suggest you do have a choice and perhaps even a good one. |
I agree with Doc. Get the company match, then place the rest of your desired savings in a taxable account...invested very tax efficiently.
Best wishes. |
No Roth IRA? |
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Triple digit golfer
Joined: 18 May 2009
Posts: 800
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| Posted: Fri Nov 06, 2009 5:25 pm Post subject: |
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| Allan Roth wrote: | | Triple digit golfer wrote: |
I agree with Doc. Get the company match, then place the rest of your desired savings in a taxable account...invested very tax efficiently.
Best wishes. |
Unless you don't think you will become vested with that company match. Never give up free money, however. |
We only get the match once per year, but I think as soon as my money goes in, I'm owed the match and they have to give it. The literature is of course hard to decipher, but I think that's the case. It says that you are always 100% vested in the match. Maybe that means I'm vested AFTER they contribute it??? Who knows? |
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Taylor Larimore
Moderator
Joined: 27 Feb 2007
Posts: 7148
Location: Miami Florida
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| Posted: Fri Nov 06, 2009 5:47 pm Post subject: High Cost retirement plans ? |
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| Quote: | | Get the company match, then place the rest of your desired savings in a taxable account...invested very tax efficiently. |
Bogleheads need to be very careful about following this advice. Each case is different as these articles demonstrate:
Alternatives to a High Cost 401k Or 403b Plan
Frugal Dad
Does Your 401(k) Cost Too Much?
Someone on this forum did calculations and found that the 401K is nearly always better than a low-cost fund in a taxable account if the 401K expense ratio and Administrative costs totaled less than 2%.
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Best wishes
Taylor
The Majesty of Simplicity |
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Wagnerjb
Joined: 19 Feb 2007
Posts: 2975
Location: Houston, Texas
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| Posted: Fri Nov 06, 2009 6:16 pm Post subject: |
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| Triple digit golfer wrote: |
No Roth IRA? |
Of course. I assumed he was already maxing out his Roth.
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Andy |
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baw703916
Joined: 01 Apr 2007
Posts: 1829
Location: Northern Virginia
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| Posted: Fri Nov 06, 2009 6:30 pm Post subject: Re: High Cost retirement plans ? |
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| Taylor Larimore wrote: | | Quote: | | Get the company match, then place the rest of your desired savings in a taxable account...invested very tax efficiently. |
Bogleheads need to be very careful about following this advice. Each case is different as these articles demonstrate:
Alternatives to a High Cost 401k Or 403b Plan
Frugal Dad
Does Your 401(k) Cost Too Much?
Someone on this forum did calculations and found that the 401K is nearly always better than a low-cost fund in a taxable account if the 401K expense ratio and Administrative costs totaled less than 2%. |
But if triple digit golfer's statement that his only 401(k) option with an E/R under 1% is the S&P 500 index at 0.93% is to be taken literally, then there's a big problem when it comes to bonds. The normal principles of tax-efficient fund placement favor bonds in tax-deferred, as has been discussed in many places. But buying a bond fund with an E/R over 1%, I would argue, is insane. Either you lose about 30% of the return in E/R, or the fund is taking on so much risk/leverage that owning it defeats the whole purpose of adding bonds to one's portfolio.
I guess the only option for someone in that situation is to hope that muni yields stay abnormally high relative to taxable yields...
Brad
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I don't foresee any Black Swans appearing in the future |
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Triple digit golfer
Joined: 18 May 2009
Posts: 800
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| Posted: Fri Nov 06, 2009 6:37 pm Post subject: |
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Brad,
Or just buy bonds in a Roth IRA.
Am I missing something? |
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baw703916
Joined: 01 Apr 2007
Posts: 1829
Location: Northern Virginia
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| Posted: Fri Nov 06, 2009 6:51 pm Post subject: |
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| Triple digit golfer wrote: | Brad,
Or just buy bonds in a Roth IRA.
Am I missing something? |
Yes, you would want to put bonds in your Roth. The problem is that the annual contribution limits for a Roth are much lower than for a 401(k), so a Roth won't have enough space, particularly as the bond % of your portfolio increases over time. Since the bonds most appropriate for taxable are munis, which don't hedge inflation risk, you probably would want to devote the Roth to TIPS, and have munis in taxable. You could also do some I-Bonds in taxable if/when they have a decent return in the future (lately they have been set to keep up with inflation, and hardly anything more).
Brad
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I don't foresee any Black Swans appearing in the future |
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MahoningValley
Joined: 01 Dec 2007
Posts: 132
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| Posted: Sat Nov 07, 2009 4:24 pm Post subject: |
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| Nobody mentioned that the purpose of the 401k, 403b, as I see it, is to create tax deferred space for your later years. If you don't take that space when you're young, you will never catch up. Don't ask me how I know. |
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stratton
Joined: 04 Mar 2007
Posts: 6216
Location: Puget Sound
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| Posted: Sat Nov 07, 2009 7:24 pm Post subject: |
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High fees add risk:
With 2.x% fees an 80/20 stock/bond portfolio has approximately the same return as a 40/60 stock/bond portfolio with 0.x% fees.
Paul |
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jsnbrnd
Joined: 11 Dec 2007
Posts: 224
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| Posted: Sun Nov 08, 2009 12:59 am Post subject: |
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| bog wrote: | Edelman is at the very best a very bad overconfident self-serving advisor. Until he hooked up with DFA, he was selling front-end load funds and denigrating index funds to his clients.
I don't know what his educational and professional qualifications are, but he is a good talker all too capable of fooling the unsophisticated investor, and those are the ones paying him the high fees. |
Feeling charitable today, I see.
I prefer another "char..." word: charlatan. |
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grabiner
Joined: 20 Feb 2007
Posts: 2796
Location: Columbia, MD
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| Posted: Sun Nov 08, 2009 6:03 pm Post subject: |
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| Doc wrote: | | Triple digit golfer wrote: | | Many of us don't have a choice. I have exactly one fund in my 401(k) with an expense ratio below 1.00%: The S&P 500 index fund, at 0.93%. |
The effective LT capital gains tax for a ten year term at at 8% annual return is 11.29% based on a 15% statutory LTCG rate. That's 90 bps lost annually to taxes in a taxable account. (The effective rate drops to 6.52% for a thirty year term.) The e/r on your S&P index fund is 93 bps. I suggest you do have a choice and perhaps even a good one. |
If you make a taxable investment, you must pay taxes on the dividends every year. In addition, when you leave your employer, you can roll over the 401(k) to a traditional IRA which will continue to grow tax-deferred (or tax-free if you convert to a Roth); if you have a taxable account, you lose that benefit. Therefore, it's still worth investing in the 1%-cost funds once you have maxed out your Roth IRA.
My rule of thumb is that the product of the extra costs and the number of years you will stay with the employer needs to exceed 30% before taxable investments are better than unmatched 401(k) investments.
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David Grabiner |
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grabiner
Joined: 20 Feb 2007
Posts: 2796
Location: Columbia, MD
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| Posted: Sun Nov 08, 2009 6:09 pm Post subject: Re: High Cost retirement plans ? |
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| baw703916 wrote: | | [But if triple digit golfer's statement that his only 401(k) option with an E/R under 1% is the S&P 500 index at 0.93% is to be taken literally, then there's a big problem when it comes to bonds. The normal principles of tax-efficient fund placement favor bonds in tax-deferred, as has been discussed in many places. But buying a bond fund with an E/R over 1%, I would argue, is insane. Either you lose about 30% of the return in E/R, or the fund is taking on so much risk/leverage that owning it defeats the whole purpose of adding bonds to one's portfolio. |
You lose the same amount either way; what matters is the relative cost. If your 401(k) has an S&P 500 index with an 0.20% expense and a bond fund with a 1% expense ratio, then it is better to hold bonds in your taxable account once you have put all your international holdings there. But if it has both stock funds and bond funds with a 1% expense ratio, then you can just pretend that the expenses are already gone, and you shouldn't change your stock/bond preference.
In neither case should you invest in a taxable bond fund in preference to the 401(k); the extra taxes for your entire lifetime (or the loss from holding municipal rather than corporate bonds) are worse than the cost difference.
David
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David Grabiner |
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