My 401k kinda sucks

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JaySayms
Posts: 242
Joined: Mon Feb 09, 2015 6:59 pm

My 401k kinda sucks

Post by JaySayms » Tue Dec 27, 2016 4:40 pm

I have a kinda sucky 401k, but a good match. Up to 6.2% Obviously contributing the 6.2% is a no brainer. But what about after that? The 401k is a trust, meaning I have zero control over which funds I invest in. It's a moderate portfolio at about 60% stocks, 40% bonds. Stocks are 80-20 split Domestic vs international. The bonds are a hodge podge of Pimco, high yield, and liquid alternatives that I could never figure out. Most underlying funds are actively managed. I believe the management fee is 35 basis points.

It has consistently under performed its bench mark, a balanced fund index by at least 1%.

I have the money and have been maxing it out at $18,000 per year because its tax advantaged space.

Should I keep doing it or put the extra money in a taxable account? I'm at least 20 years away from making any withdrawals.

Thanks a bunch

BogleMelon
Posts: 1379
Joined: Mon Feb 01, 2016 11:49 am

Re: My 401k kinda sucks

Post by BogleMelon » Tue Dec 27, 2016 4:48 pm

1- Contribute up to 6.2% to get the match. No matter what, that is equal to 100% rate on investment, even if you pay too much fees and even if your investment is too bad, it is still worth it.
2- Open an IRA (or Roth IRA) account. Depends on your tax situation and eligibility. Max it out. Invest in a low cost index fund(s)- See the 3-fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio
3- Go back to the 401K and contribute the remaining that you can contribute.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

JaySayms
Posts: 242
Joined: Mon Feb 09, 2015 6:59 pm

Re: My 401k kinda sucks

Post by JaySayms » Tue Dec 27, 2016 4:53 pm

BogleMelon wrote:1- Contribute up to 6.2% to get the match. No matter what, that is equal to 100% rate on investment, even if you pay too much fees and even if your investment is too bad, it is still worth it.
2- Open an IRA (or Roth IRA) account. Depends on your tax situation and eligibility. Max it out. Invest in a low cost index fund(s)- See the 3-fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio
3- Go back to the 401K and contribute the remaining that you can contribute.
Thanks for the reply. Steps 1,2 and three is exactly what I have been doing thus far so I appreciate the vote of confidence there.

But just to be clear, your reply indicates that you feel the quality and routine under performance against its benchmark are less important than investing in tax advantaged space?

livesoft
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Re: My 401k kinda sucks

Post by livesoft » Tue Dec 27, 2016 4:55 pm

I think you should always max it out, that is all $18K and later $24K or whatever the statutory limit is.

The tax deferral is worth it and the match is just a bonus.
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JaySayms
Posts: 242
Joined: Mon Feb 09, 2015 6:59 pm

Re: My 401k kinda sucks

Post by JaySayms » Tue Dec 27, 2016 4:59 pm

livesoft wrote:I think you should always max it out, that is all $18K and later $24K or whatever the statutory limit is.

The tax deferral is worth it and the match is just a bonus.

Awesome, thank you. I'll continue on into 2017.

BogleMelon
Posts: 1379
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Re: My 401k kinda sucks

Post by BogleMelon » Tue Dec 27, 2016 5:00 pm

JaySayms wrote:
BogleMelon wrote:
But just to be clear, your reply indicates that you feel the quality and routine under performance against its benchmark are less important than investing in tax advantaged space?
You are welcome. I have been through this dilemma myself. Folks here are advising: Yes. Tax advantage account is still better than good funds in a taxable account (unless the expense ratio is over 3% or something like that). I don't remember the exact math behind it, they can answer this part better than me. But I remember that the final conclusion was in favor of the 401K.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

BlackStrat
Posts: 263
Joined: Wed Apr 29, 2015 9:20 am

Re: My 401k kinda sucks

Post by BlackStrat » Tue Dec 27, 2016 5:40 pm

You should also consider bringing up the poor choices with your HR department. You could discuss it with your coworkers as well to get them involved in petitioning for a possibly a better program.

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Watty
Posts: 13457
Joined: Wed Oct 10, 2007 3:55 pm

Re: My 401k kinda sucks

Post by Watty » Tue Dec 27, 2016 5:55 pm

Part of the wiki on 401k is about what to do when there are poor funds.

401(k) - Expensive or mediocre choices

Be sure to go through the fund list to double check to make sure that there are not any acceptable choices. Often they will bury one S&P 500 index fund in it under some obscure name to help them if they are ever sued for having bad choices. Before I retired my 401k had about 30 funds and all of then had medicore to bad expenses except for three index fund but that worked out fine for me. If you can find just one acceptable fund then you can work around it.

If you could give some more details about the funds expenses, your tax brackets, your martial status, your age, and how long you might stay in that job you might get better responses.

If you are in the 25% federal tax bracket I would not be quick to use a Roth after you get the employer match unless the the options are truly awful and not just mediocre. That is a huge tax break and most middle class couples will not be anywhere near the 25% tax bracket in retirement much less above it. An over 65 couple can have almost $100K in taxable income and still be in the 15% tax bracket.

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MorningstarFan
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Joined: Tue Dec 06, 2016 2:53 am

Re: My 401k kinda sucks

Post by MorningstarFan » Tue Dec 27, 2016 6:43 pm

Does your 401k offer after-tax? If so, you can also convert the money in after-tax to Roth IRA. This way you can take your money from 401k and invest in what ever you want. You may still contribute to your 401k and it should not affect your employer's match.

However, note that there might be a huge tax implication when you convert from after-tax bucket to Roth IRA. All earnings in your after-tax bucket will be taxed.

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