Analyzing Expense Ratios

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COHastiin
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Joined: Wed Dec 06, 2017 3:23 pm

Analyzing Expense Ratios

Post by COHastiin » Wed Dec 06, 2017 3:52 pm

First time post.

This year, I opened a Roth-IRA with Vanguard and began contributing to it. I am currently putting funds into the Target Retirement 2055 fund.

At my work (and previous jobs I've had), I have been told that a company match is "free money". Before putting my money into Vanguard's Target Retirement 2055 fund, I've spent time reading various Bogle books, reading posts on this forum, learning about my taxes and my income, understanding expense ratio's, current market trends, learning about my company's 401K plan. I'm trying to figure out what happens with "free money" when used with high cost funds versus low cost funds.

My work offers a 3% match within their 401K pension plan. The plan has a mix of Oppenheimer, Prudential, and Invesco funds (Class R) available to select from. In my review of these funds the expense ratio is expensive, 1.08% to 1.66% (every one have sub-transfer fee's, front end loads, and 12B fee's). As the new year approaches, I am reviewing the funds available to see if going after the employee match is beneficial. I've run various scenarios with expense ratio costs through Vanguards website, reviewed my families tax status (married filing jointly, three children), and the maximum amount of money we would have available each month to invest.

When I compare a Vanguard mutual fund expense ratio (mine currently at 0.16%, could get into admiral shares this year and drop to 0.08%) with a similar expense ratio for a fund in my employer's fund list (for example 1.36%), is their an break even percentage to determine whether a fund's expense ratio is too much? When I look at investing an amount only equal to obtain the employer match it makes sense to start going after this "free money". What I think I'm seeing is when my family increases the amount of money to invest above the 3% match amount, I see low cost funds slowly catch up and then move ahead. I assumed similar return's are achieved in my comparison's over the same time period.

Based on my current family status, it makes sense to me to invest with post tax monies (my Roth-IRA). With a high cost employee match, I'm wondering if I should enroll now, or open another Roth-IRA for my wife and put monies to max out both account and then after that opening a Traditional 401K account (possibly enroll in my employer's 401K plan to obtain the match only).

JW-Retired
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Joined: Sun Dec 16, 2007 12:25 pm

Re: Analyzing Expense Ratios

Post by JW-Retired » Wed Dec 06, 2017 6:23 pm

A personal Roth IRA and a Roth 401k account are independent. You can open a personal IRA with Vanguard or some other low cost fund company and that adds to what you can contribute the 401k. If you are under age 50, a Roth 401k has a $18k/year contribution limit and the Roth IRA adds another $5.5k. Of course also open one for your wife.

We would always say contribute to the high cost 401k up to the match amount first, if can afford to save more than that do the outside tIRAs or Roths next, if you still have more to save hold your nose and invest in more of the lowest cost options in the 401k.
JW
Retired at Last

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Wed Dec 06, 2017 6:32 pm

JW-Retired wrote:
Wed Dec 06, 2017 6:23 pm
We would always say contribute up to the 401k match amount first, if can afford to save more than that do the outside tIRAs or Roths next, if you still have more to save more hold your nose and invest in more of the lowest cost options in the 401k.
JW
From my original post, am I seeing a break point where contributing to the 401K match amount doesn't work for me because the cost of the funds is so high, and my tax situation [15% tax bracket] and total investment amount [being much higher than my 3% match amount] I can make each year?
Last edited by COHastiin on Wed Dec 06, 2017 9:56 pm, edited 1 time in total.

Silk McCue
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Re: Analyzing Expense Ratios

Post by Silk McCue » Wed Dec 06, 2017 7:29 pm

Your best bet would be to build a spreadsheet that modeled your specific circumstances to determine where and if a benefit exists. If it exists I expect it will be optimum at the full match. You would of course compare the performance of that secenario against just a straight investment at Vanguard with the same amount that you would have needed to obtain the full match with your company. Identifying the least expensive investment with your company investment options will allow you to maximize the potential returns as you can simply hold less of that type of investment in your Vanguard acccount. I hope this helps.

surfstar
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Re: Analyzing Expense Ratios

Post by surfstar » Wed Dec 06, 2017 7:42 pm

Employer match is "free" money. 100% return. To skip out on that to save on ER doesn't make financial/mathematical sense.

alex_686
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Re: Analyzing Expense Ratios

Post by alex_686 » Wed Dec 06, 2017 7:46 pm

To calculate the break even point you must count the employee match. So in year zero you get a 100% bonus.

Then you need to estimate expected market returns less the expense ratio.

Then it is just an exercise in algebra.

Because of the match, the break even point is normally decades out. Probablity has it that you will leave your job or your employer will switch plans - either option allowing you to roll over your funds into a trad IRA and invest in low cost index funds. So do it.

Plus I am willing to be that part of those expense ratios are reimbursing your employer for running the 401(k). So not the best but understandable.

Lou354
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Re: Analyzing Expense Ratios

Post by Lou354 » Wed Dec 06, 2017 7:49 pm

Additional factors to consider are how many years you’ll be with this employer and what the vesting schedule is for the employer match. If and when you switch jobs you can roll the 401k over into a low-cost IRA. It almost always pays to contribute enough to a 401k to get the full employer match.

ENT Doc
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Re: Analyzing Expense Ratios

Post by ENT Doc » Wed Dec 06, 2017 7:59 pm

surfstar wrote:
Wed Dec 06, 2017 7:42 pm
Employer match is "free" money. 100% return. To skip out on that to save on ER doesn't make financial/mathematical sense.
I disagree, at least in theory. As the expense ratio increases, regardless of the match, the portfolio degrades. There is absolutely an expense ratio whereby it is a superior decision to not utilitize the employer plan at all and just put the money in taxable (which in a 15% bracket is equivalent to a Roth, provided it's invested in something like VTSAX).

JW-Retired
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Re: Analyzing Expense Ratios

Post by JW-Retired » Wed Dec 06, 2017 8:08 pm

COHastiin wrote:
Wed Dec 06, 2017 3:52 pm
My work offers a 3% match within their 401K pension plan. The plan has a mix of Oppenheimer, Prudential, and Invesco funds (Class R) available to select from. In my review of these funds the expense ratio is expensive, 1.08% to 1.66% (every one have sub-transfer fee's, front end loads, and 12B fee's).
Did you get the fee information from the 401k literature? 401k plans don't usually have the same fees as retail versions of the same funds that you can look up on the internet. Often they are higher due to admin expenses, but on the other hand front end loads and 12B-1 fees are supposed to pay the salesman for peddling the crappy investments. Is there a salesman involved here? If not maybe these fees are waived?

I just advise checking that you are using the right expense ratios.
JW
Retired at Last

COHastiin
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Joined: Wed Dec 06, 2017 3:23 pm

Re: Analyzing Expense Ratios

Post by COHastiin » Wed Dec 06, 2017 9:12 pm

JW-Retired wrote:
Wed Dec 06, 2017 8:08 pm
COHastiin wrote:
Wed Dec 06, 2017 3:52 pm
My work offers a 3% match within their 401K pension plan. The plan has a mix of Oppenheimer, Prudential, and Invesco funds (Class R) available to select from. In my review of these funds the expense ratio is expensive, 1.08% to 1.66% (every one have sub-transfer fee's, front end loads, and 12B fee's).
Did you get the fee information from the 401k literature? 401k plans don't usually have the same fees as retail versions of the same funds that you can look up on the internet. Often they are higher due to admin expenses, but on the other hand front end loads and 12B-1 fees are supposed to pay the salesman for peddling the crappy investments. Is there a salesman involved here? If not maybe these fees are waived?

I just advise checking that you are using the right expense ratios.
JW
The fee's I put in this thread come from my employers fee disclosure document. The plan administrator is based out of New York City.

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Wed Dec 06, 2017 10:06 pm

Lou354 wrote:
Wed Dec 06, 2017 7:49 pm
Additional factors to consider are how many years you’ll be with this employer and what the vesting schedule is for the employer match. If and when you switch jobs you can roll the 401k over into a low-cost IRA. It almost always pays to contribute enough to a 401k to get the full employer match.
I understand that when I looking at a short period of time, less than 5 years or maybe 10 years, at this "free money" it makes sense to enroll. When using Vanguard's mutual fund comparison calculator, it shows an opportunity cost that is incurred by using a high cost fund that drags/slows down an efficient investment plan. Also, the mutual fund comparison calculator showed me that the higher cost fund needs to have a return of 1.5% more than the Vanguard fund I currently have.

I don't foresee myself leaving this job soon. Another component to add to my situation, I am a share holder of my company (less than 15 employees total). I want to share with others that if our current funds are costly we should consider other types of plans. It is possible my companies plan could change, in which I could understand a rollover being an option if I enrolled today.

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Wed Dec 06, 2017 10:33 pm

For me to enroll in my employer's plan it should be obvious. When I run scenario's for my person situation, for a long period of time, it does appear that I should keep the money on the table.

In my current outlook on my job any rollover possibilities would be related to our plan changing, not me leaving.

It appears if I leave my job or my company changes my plan within 10 years, assuming rates of return are same for the employer 401K plan vs my Roth-IRA, I should enroll for the "free money" for the match and then place the rest in my Roth-IRA. This is obvious to me to roll this over during this change.

If I remain with my company for 5-15 years and I enroll for the "free money", then this period of time is not obvious in terms of taking the "free money" and it being efficient. For this time period I would need select low cost funds and have a return higher than "average" funds compared to a low cost fund with "average" returns. If the expense ratio increases in my employer's 401K plan during this time period, I feel it would not benefit me vs staying with my Roth-IRA. I also feel if the return of the 401K plan is less than a similar low cost fund then that would also not benefit me long term.

If I remain with my company for 15 years plus, it seems obvious to me the "free money" is not efficient. I say this because the E/R of current funds is on the order of 1.3-1.5% and I would expect these types of high cost funds to be offered during my employment. If my employers 401K plan currently offered funds in the range of 0.75% to 1.00% then its possible this time period would fall into not being an obvious decision.

This all assumes low cost funds will be available in the next 20-30 years. When my children leave the home, I would re-evaluate all this as well.

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Wed Dec 06, 2017 10:34 pm

Lou354 wrote:
Wed Dec 06, 2017 7:49 pm
Additional factors to consider are how many years you’ll be with this employer and what the vesting schedule is for the employer match. If and when you switch jobs you can roll the 401k over into a low-cost IRA. It almost always pays to contribute enough to a 401k to get the full employer match.
This makes sense to me but I don't plan on leaving my job in the next 5 years, 10 years, 15 years.

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Wed Dec 06, 2017 10:39 pm

alex_686 wrote:
Wed Dec 06, 2017 7:46 pm
Because of the match, the break even point is normally decades out. Probablity has it that you will leave your job or your employer will switch plans - either option allowing you to roll over your funds into a trad IRA and invest in low cost index funds. So do it.
What is the probability a small company (less than 20 employee's) will change their 401K plan? For me I don't plan on leaving this current job. The 401K plan that is currently in place is about 7 years old'ish?

Silk McCue
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Re: Analyzing Expense Ratios

Post by Silk McCue » Wed Dec 06, 2017 11:15 pm

I just built a simple spreadsheet that I proposed earlier and find the following.

Assuming annual 3k invested with 3k match with return of 4% annual for 20 years you end up with $185,815.

Assuming annual 3k invested without a match with return of 7% for 20 years you end up with $131,596.

Company match with far inferior return wins.

With a 0% return on 3k investment with a 3k match you end up with $120k at 20 years just barely being beaten at year 18 by the 7% return unmatched scenario.

The 100% match trumps all.

The 7% return unmatched doesn't surpass the 4% return matched total until year 37. $514,683 to 509,822.

It's late, hoping I didn't screw up the calcs using Excel on my iPad.

venkman
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Re: Analyzing Expense Ratios

Post by venkman » Thu Dec 07, 2017 1:32 am

COHastiin wrote:
Wed Dec 06, 2017 10:39 pm
What is the probability a small company (less than 20 employee's) will change their 401K plan? For me I don't plan on leaving this current job. The 401K plan that is currently in place is about 7 years old'ish?
It can't hurt to ask. With that small of a company, it seems very possible no one there is an investment expert, and they just randomly picked a firm to implement their 401k plan. (Or, perhaps more likely, they picked a 401k firm that told them they could implement the plan at no cost to the company. The part about letting the employees pay for all of it was hidden in the fine print.)

Lou354
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Re: Analyzing Expense Ratios

Post by Lou354 » Thu Dec 07, 2017 6:27 am

Have you seen the wiki on how to campaign for 401k changes? https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan You don’t need them to completely switch plans. All you need is to get the plan to offer one lower-ER option and your break even point will change.

alex_686
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Re: Analyzing Expense Ratios

Post by alex_686 » Thu Dec 07, 2017 9:07 am

COHastiin wrote:
Wed Dec 06, 2017 10:39 pm
What is the probability a small company (less than 20 employee's) will change their 401K plan? For me I don't plan on leaving this current job. The 401K plan that is currently in place is about 7 years old'ish?
I would say decent. The break even point is probably 20+ years. What is the chance that you will switch jobs, the firm goes under, or the firm gets bought. Even if you stay with the same firm for 20+ years, what is the chance that your employer will keep the same 401(k) plan - never needing to update their documents - for those 20 years?

dbr
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Re: Analyzing Expense Ratios

Post by dbr » Thu Dec 07, 2017 9:23 am

The obvious answer is that you find a job with a company that offers a similar match and a low cost plan. The employer I worked for would be one such, and there are many others. The simple case on the face of it is that your money is being stolen because your employer is allowing that to happen instead of the employees getting the full benefit of the employer's cost of compensation and benefits. I hope they aren't making the same bad deals in procurement and operating costs. A mitigating factor is the difficulty of running a 401k plan at a small company.

From a more practical point of view it is typical these days that people don't stay employed by the same company for a lifetime, and it is possible the plan would improve. For that reason contributing up to the match makes sense to me.

retiredjg
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Re: Analyzing Expense Ratios

Post by retiredjg » Thu Dec 07, 2017 9:23 am

I think you are coming to the wrong conclusion that it is better not to use the 401k up to the match. I would agree that using Roth IRA (especially in the 15% bracket) is the right choice after that.

The expense ratios you mention are high, but not nearly high enough for most people not to get a long term benefit from using tax-deferral, even without a match. The fact that you are in the 15% bracket may make that less true for you than for people in a higher tax bracket.

In your case there is free money involved and that argues for using the 401k at least some. You have to remember that this free money will actually make money for you for the next 15 to 30 years. So not only do you get (let's make up a number...) $300 a year free, you also get the earnings from this $300 a year on a continuing and building basis. Yes, a small portion of that is lost to the higher expense ratio.


I like to look at the match like this. Let's say I will pay 1.08% in the 401k and .16% in Roth IRA. If I put $10,000 into the 401k, I pay an extra .92% on it. That's about $92 dollars a year. If the match is $300 free dollars, that covers the extra $92 by A LOT.

Another thing to remember is that you can put $1,000 into the 401k for every $850 you put into Roth IRA.


A comment on your first post - it is very unlikely, but maybe not impossible, that you are paying front end loads in a 401k even if they are listed. Also, the other fees you mention are already included in the ERs.

Part of the answer to your question depends on how much money you plan to save and we don't know that yet. We also don't know how much you would have to put into the 401k to get the entire match and how much the match actually is. Knowing those numbers might make it easier to visualize your situation.

goingup
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Re: Analyzing Expense Ratios

Post by goingup » Thu Dec 07, 2017 9:24 am

Choose pre-tax or post-tax contributing, but do participate. The automatic payroll deduction (forced savings) is the chief reason people are able to accrue large retirement nest-eggs in 401Ks.

The fees you've mentioned aren't great. It is unusual to pay loads in a 401K, but you said you took the info from the plan documents. Getting the 3% match helps take the sting out of those fees. Funding Roths for you and your wife with lower cost funds is ideal, but it takes more discipline and planning than simply having your paycheck debited!

deltaneutral83
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Re: Analyzing Expense Ratios

Post by deltaneutral83 » Thu Dec 07, 2017 9:34 am

In the 15% tax bracket, it's usually advisable to find the cheapest Tot US index (you mentioned some hefty ER's and loads??) and roll with that up to the 3% match. At this early stage in the game, I wouldn't be worried with AA as it appears you are in the 15% tax bracket. Any left overs should go to Roth.

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Thu Dec 07, 2017 12:29 pm

retiredjg wrote:
Thu Dec 07, 2017 9:23 am
Part of the answer to your question depends on how much money you plan to save and we don't know that yet. We also don't know how much you would have to put into the 401k to get the entire match and how much the match actually is. Knowing those numbers might make it easier to visualize your situation.
As 2018 is nearing, I'd like to sit down with my wife to discuss our retirement plan. To share with everyone here, my wife and I look at our budget every month to determine how to spend our money. We have a percentage of what I bring home every month to commit to towards retirement (so far we've been looking at post tax monies).

My research is based on the following:
- Vanguard Target Retirement 2055 retirement fund - VFFVX, E/R 0.16%
- Oppenheimer Conservative Investor R - ONCIX E/R 1.32%
- looking at 30 years
- assumed rate of return 8%
- 3% company match amount is $2,100
- 15% tax bracket
- I am the sole income provider

Scenario 1
2018 - We budget to contribute only $2,100/year, total, to retirement [$2,100 to company 401K for the match]
This scenario indicates I take the match as it provides more money in retirement. This scenario is obvious to me.

Scenario 2
2018 - We budget to contribute only $7,600/year, total, to retirement [$2,100 to company 401K and then the rest into Roth-IRA vs. all $7,600 into Roth-IRA's]
This scenario is not obvious to me on whether or not to take the match. By knowing the expense ratio up front, assuming a rate of return, reviewing my tax status now versus retirement, the comparison is close. I find if I do take the company match then performance of each funds, or any changes to expense ratios, employer changing a plan, me leaving my job, all factor into whether this was a good decision. For this scenario if a fund could be provided on the order of 0.5-0.75% it would be obvious to me to enroll.

Scenario 3
2018 - We budget to contribute $11,000/year, total, to retirement [$2,100 to company 401k and then the rest into Roth-IRA vs. all $11,000/year into Roth-IRA's]
My family is currently not in a position to invest $13,100 (beyond $11,000) which would be the company match and then maxing out two Roth-IRA's. This scenario starts to become obvious that leaving the match on the table would be a good idea.

What is changing between Scenarios 1, 2, and 3 is the amount of money to invest. If the E/R's stay the same, the rate of return is the same. If my wife and I sit down and evaluate these scenario's for 2018, it seems like we should not enroll in my company's 401K plan. I haven't been enrolled in the last three years of employment.
Last edited by COHastiin on Thu Dec 07, 2017 1:32 pm, edited 3 times in total.

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Thu Dec 07, 2017 12:33 pm

dbr wrote:
Thu Dec 07, 2017 9:23 am
The obvious answer is that you find a job with a company that offers a similar match and a low cost plan. The employer I worked for would be one such, and there are many others. The simple case on the face of it is that your money is being stolen because your employer is allowing that to happen instead of the employees getting the full benefit of the employer's cost of compensation and benefits. I hope they aren't making the same bad deals in procurement and operating costs. A mitigating factor is the difficulty of running a 401k plan at a small company.

From a more practical point of view it is typical these days that people don't stay employed by the same company for a lifetime, and it is possible the plan would improve. For that reason contributing up to the match makes sense to me.
Since I am a shareholder, from my perspective, of a for pro-fit company the 401K match benefit we say is for our employee's (me in reality) ends up being a "partial" benefit due to fund fee's being high. If the fund fee's were lower, not even Vanguard low, a benefit does exist. If I do leave the money on the table, I believe I do see a small percentage of it back.

COHastiin
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Joined: Wed Dec 06, 2017 3:23 pm

Re: Analyzing Expense Ratios

Post by COHastiin » Thu Dec 07, 2017 12:36 pm

alex_686 wrote:
Thu Dec 07, 2017 9:07 am
COHastiin wrote:
Wed Dec 06, 2017 10:39 pm
What is the probability a small company (less than 20 employee's) will change their 401K plan? For me I don't plan on leaving this current job. The 401K plan that is currently in place is about 7 years old'ish?
I would say decent. The break even point is probably 20+ years. What is the chance that you will switch jobs, the firm goes under, or the firm gets bought. Even if you stay with the same firm for 20+ years, what is the chance that your employer will keep the same 401(k) plan - never needing to update their documents - for those 20 years?
Not sure what happens during 401K plan changes, or updates, I have never experienced that. If the 401K plan documents change or need updating, this would enable me to utilize a rollover path instead of "rolling over" into the updated plan?

COHastiin
Posts: 14
Joined: Wed Dec 06, 2017 3:23 pm

Re: Analyzing Expense Ratios

Post by COHastiin » Thu Dec 07, 2017 12:37 pm

Lou354 wrote:
Thu Dec 07, 2017 6:27 am
Have you seen the wiki on how to campaign for 401k changes? https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan You don’t need them to completely switch plans. All you need is to get the plan to offer one lower-ER option and your break even point will change.
Thank you for sharing this link. I will read. I do agree that by offering just one lower-ER option makes my decision obvious.

krow36
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Location: WA

Re: Analyzing Expense Ratios

Post by krow36 » Thu Dec 07, 2017 1:42 pm

OP, have you read this thread on an expensive 401k vs an inexpensive taxable? viewtopic.php?t=123826

Silk McCue
Posts: 375
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Re: Analyzing Expense Ratios

Post by Silk McCue » Thu Dec 07, 2017 2:05 pm

COHastiin wrote:
Thu Dec 07, 2017 12:29 pm
retiredjg wrote:
Thu Dec 07, 2017 9:23 am
Part of the answer to your question depends on how much money you plan to save and we don't know that yet. We also don't know how much you would have to put into the 401k to get the entire match and how much the match actually is. Knowing those numbers might make it easier to visualize your situation.
As 2018 is nearing, I'd like to sit down with my wife to discuss our retirement plan. To share with everyone here, my wife and I look at our budget every month to determine how to spend our money. We have a percentage of what I bring home every month to commit to towards retirement (so far we've been looking at post tax monies).

My research is based on the following:
- Vanguard Target Retirement 2055 retirement fund - VFFVX, E/R 0.16%
- Oppenheimer Conservative Investor R - ONCIX E/R 1.32%
- looking at 30 years
- assumed rate of return 8%
- 3% company match amount is $2,100
- 15% tax bracket
- I am the sole income provider

Scenario 1
2018 - We budget to contribute only $2,100/year, total, to retirement [$2,100 to company 401K for the match]
This scenario indicates I take the match as it provides more money in retirement. This scenario is obvious to me.

Scenario 2
2018 - We budget to contribute only $7,600/year, total, to retirement [$2,100 to company 401K and then the rest into Roth-IRA vs. all $7,600 into Roth-IRA's]
This scenario is not obvious to me on whether or not to take the match. By knowing the expense ratio up front, assuming a rate of return, reviewing my tax status now versus retirement, the comparison is close. I find if I do take the company match then performance of each funds, or any changes to expense ratios, employer changing a plan, me leaving my job, all factor into whether this was a good decision. For this scenario if a fund could be provided on the order of 0.5-0.75% it would be obvious to me to enroll.

Scenario 3
2018 - We budget to contribute $11,000/year, total, to retirement [$2,100 to company 401k and then the rest into Roth-IRA vs. all $11,000/year into Roth-IRA's]
My family is currently not in a position to invest $13,100 (beyond $11,000) which would be the company match and then maxing out two Roth-IRA's. This scenario starts to become obvious that leaving the match on the table would be a good idea.

What is changing between Scenarios 1, 2, and 3 is the amount of money to invest. If the E/R's stay the same, the rate of return is the same. If my wife and I sit down and evaluate these scenario's for 2018, it seems like we should not enroll in my company's 401K plan. I haven't been enrolled in the last three years of employment.
Using your Investment Return of 8%, the respective ERs for the two funds, and the $2100 match ($4200 total) contribution I updated the Excel spreadsheet I worked on last night to reflect these figures. Please find the comparison of the two investing approaches. I can not identify any of your Scenarios where you would not be best served by first investing up to the company match. This is my 3rd post attempting to provide value to this conversation and would appreciate your feedback.

Code: Select all

                    401k Oppenheimer   Roth Vanguard Target 2055
Annual Contrib      $4,200             $2,100
Return Net of ER           1.0668          1.0784
                1           4,481           2,265
                2           9,260           4,707
                3          14,360           7,340
                4          19,799          10,181
                5          25,603          13,243
                6          31,793          16,546
                7          38,398          20,108
                8          45,443          23,949
                9          52,959          28,092
               10          60,978          32,559
               11          69,531          37,376
               12          78,657          42,571
               13          88,392          48,173
               14          98,777          54,214
               15         109,856          60,729
               16         121,674          67,755
               17         134,283          75,332
               18         147,734          83,503
               19         162,083          92,314
               20         177,390         101,816
               21         193,721         112,063
               22         211,142         123,113
               23         229,727         135,030
               24         249,553         147,881
               25         270,703         161,739
               26         293,267         176,684
               27         317,338         192,801
               28         343,017         210,181
               29         370,411         228,924
               30         399,635         249,136

likegarden
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Re: Analyzing Expense Ratios

Post by likegarden » Thu Dec 07, 2017 2:57 pm

How long do you have to keep the money in that 401k to keep your employer's contribution? In the 401k I was in until 2002 we only had to keep in the money for 3 years, thereafter could use the money on other things like moving it into a rollover- IRA at Vanguard.

surfstar
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Re: Analyzing Expense Ratios

Post by surfstar » Thu Dec 07, 2017 4:21 pm

Silk McCue wrote:
Thu Dec 07, 2017 2:05 pm
I can not identify any of your Scenarios where you would not be best served by first investing up to the company match. This is my 3rd post attempting to provide value to this conversation and would appreciate your feedback.
You have provided the data to end this thread. There is no longer a question about what it better, it is very obvious. I hope they take it to heart.

100% match is "free money" and should never be passed on. It would be very hard to make it not worthwhile.

retiredjg
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Re: Analyzing Expense Ratios

Post by retiredjg » Fri Dec 08, 2017 9:35 am

COHastiin, it appears you are definitely missing one thing in your calculations - you don't seem to include the difference between putting money into Roth vs into tax deferral.

For every $1,000 you put into the 401k, you only get to put $850 into the Roth IRA. The other $150 goes to federal taxes. This ignores state tax and assumes you are not in some kind of phase out making your marginal rate higher than 15%.

But I think there is something else missing as well. I don't know what it is, but I feel like something is not right with your math. Like maybe you are forgetting that if you put $2,100 into the 401k means that you actually get $4,200 put in the 401k. Even with a higher ER, I can't see how getting over $2k a year in free money is not worth it a little higher ER.

Even once the 401k gets larger - say $210k - in that case, the higher ER will be eating up the $2,100 match but you have to remember that only $100k of that $210k came from your pocket. The rest was given to you. How is that not still a benefit?

Nobody here is suggesting that you should completely fill the 401k, but using it up to the match seems like a no-brainer to me.

I'm not a math geek and maybe you are and maybe I'm wrong.....but something sure does not feel right to me.

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Fri Dec 08, 2017 10:26 am

Silk McCue wrote:
Thu Dec 07, 2017 2:05 pm
Using your Investment Return of 8%, the respective ERs for the two funds, and the $2100 match ($4200 total) contribution I updated the Excel spreadsheet I worked on last night to reflect these figures. Please find the comparison of the two investing approaches. I can not identify any of your Scenarios where you would not be best served by first investing up to the company match. This is my 3rd post attempting to provide value to this conversation and would appreciate your feedback.

Code: Select all

                    401k Oppenheimer   Roth Vanguard Target 2055
Annual Contrib      $4,200             $2,100
Return Net of ER           1.0668          1.0784
                1           4,481           2,265
                2           9,260           4,707
                3          14,360           7,340
                4          19,799          10,181
                5          25,603          13,243
                6          31,793          16,546
                7          38,398          20,108
                8          45,443          23,949
                9          52,959          28,092
               10          60,978          32,559
               11          69,531          37,376
               12          78,657          42,571
               13          88,392          48,173
               14          98,777          54,214
               15         109,856          60,729
               16         121,674          67,755
               17         134,283          75,332
               18         147,734          83,503
               19         162,083          92,314
               20         177,390         101,816
               21         193,721         112,063
               22         211,142         123,113
               23         229,727         135,030
               24         249,553         147,881
               25         270,703         161,739
               26         293,267         176,684
               27         317,338         192,801
               28         343,017         210,181
               29         370,411         228,924
               30         399,635         249,136
Sorry for not getting back to you . I looked at your first post and was trying to understand the quantities you provided. This post helps me understand your numbers.

Taking a look at your spreadsheet:
Year 1 with Oppenheimer $4,200*(1.0668%) = $4480.56, amount of full return $4,200*(1.08%)=$4,536.00, the difference being $55.44 which is paid to fee's. When looking at Vanguard's fund comparison calculator, the potential amount that can be generated from mutual fund is slowed down by two things: firstly the amount paid in fee's ($55.34), secondly an "opportunity" amount that could have been invested (in other words the year 1 fee's $55.44 is not invested in the year 2 amount).

Year 2 with Oppenheimer, ($4,200+$4,480.35)*(1.0668%)=$9,260.42, amount of full return ($4,200+$4,536.00)*(1.08%)=$9,434.88, the difference being $174.46 which is paid to fee's in year 2. Separately, $55.44 could have been invested in year 2 at 8%, $55.44*(1.08%) = $59.87. After year two the amount loss to fee's total is $59.87+174.46=$234.33. Not sure about how to track the opportunity cost.

Vanguard's fund comparison tool shows the effects of opportunity cost on fees. It slows down growth on the order of two times the fund fee's at 30 years. Is tracking of opportunity amounts to be considered when looking at the effects of fund fee's?
Last edited by COHastiin on Fri Dec 08, 2017 10:34 am, edited 1 time in total.

COHastiin
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Re: Analyzing Expense Ratios

Post by COHastiin » Fri Dec 08, 2017 10:30 am

likegarden wrote:
Thu Dec 07, 2017 2:57 pm
How long do you have to keep the money in that 401k to keep your employer's contribution? In the 401k I was in until 2002 we only had to keep in the money for 3 years, thereafter could use the money on other things like moving it into a rollover- IRA at Vanguard.
I didn't know this was something that was included in the plan information. I will have to look into this.

Silk McCue
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Re: Analyzing Expense Ratios

Post by Silk McCue » Fri Dec 08, 2017 10:48 am

COHastiin wrote:
Fri Dec 08, 2017 10:26 am

Taking a look at your spreadsheet:
Year 1 with Oppenheimer $4,200*(1.0668%) = $4480.56, amount of full return $4,200*(1.08%)=$4,536.00, the difference being $55.44 which is paid to fee's. When looking at Vanguard's fund comparison calculator, the potential amount that can be generated from mutual fund is slowed down by two things: firstly the amount paid in fee's ($55.34), secondly an "opportunity" amount that could have been invested (in other words the year 1 fee's $55.44 is not invested in the year 2 amount).

Year 2 with Oppenheimer, ($4,200+$4,480.35)*(1.0668%)=$9,260.42, amount of full return ($4,200+$4,536.00)*(1.08%)=$9,434.88, the difference being $174.46 which is paid to fee's in year 2. Separately, $55.44 could have been invested in year 2 at 8%, $55.44*(1.08%) = $59.87. After year two the amount loss to fee's total is $59.87+174.46=$234.33. Not sure about how to track the opportunity cost.

Vanguard's fund comparison tool shows the effects of opportunity cost on fees. It slows down growth on the order of two times the fund fee's at 30 years. Is tracking of opportunity amounts to be considered when looking at the effects of fund fee's?
If you are comparing two identical contribution amounts ($2100) against two investments with expected identical returns but with different expense ratios then the analysis provided by the Vanguard calculator would apply. However, you are not comparing two identical contributions because the 401k has a 100% match in this scenario. Your first $2100 invested is doubled to $4200 in the 401k without any additional cost out of your pocket. You cannot get that additional $2100 without cost by investing into any other vehicle available to you. Therefore you must perform a separate analysis that considers both the contribution amounts, the expected returns and the difference expense ratios. That is exactly what has been done in the spreadsheet that I provided. This demonstrates unequivocally that investing up to the company match is supremely optimal. Subsequent dollars can be invested optimally outside of the 401k due to the expense ratios.

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Re: Analyzing Expense Ratios

Post by dbr » Fri Dec 08, 2017 10:54 am

Silk McCue wrote:
Fri Dec 08, 2017 10:48 am
COHastiin wrote:
Fri Dec 08, 2017 10:26 am

Taking a look at your spreadsheet:
Year 1 with Oppenheimer $4,200*(1.0668%) = $4480.56, amount of full return $4,200*(1.08%)=$4,536.00, the difference being $55.44 which is paid to fee's. When looking at Vanguard's fund comparison calculator, the potential amount that can be generated from mutual fund is slowed down by two things: firstly the amount paid in fee's ($55.34), secondly an "opportunity" amount that could have been invested (in other words the year 1 fee's $55.44 is not invested in the year 2 amount).

Year 2 with Oppenheimer, ($4,200+$4,480.35)*(1.0668%)=$9,260.42, amount of full return ($4,200+$4,536.00)*(1.08%)=$9,434.88, the difference being $174.46 which is paid to fee's in year 2. Separately, $55.44 could have been invested in year 2 at 8%, $55.44*(1.08%) = $59.87. After year two the amount loss to fee's total is $59.87+174.46=$234.33. Not sure about how to track the opportunity cost.

Vanguard's fund comparison tool shows the effects of opportunity cost on fees. It slows down growth on the order of two times the fund fee's at 30 years. Is tracking of opportunity amounts to be considered when looking at the effects of fund fee's?
If you are comparing two identical contribution amounts ($2100) against two investments with expected identical returns but with different expense ratios then the analysis provided by the Vanguard calculator would apply. However, you are not comparing two identical contributions because the 401k has a 100% match in this scenario. Your first $2100 invested is doubled to $4200 in the 401k without any additional cost out of your pocket. You cannot get that additional $2100 without cost by investing into any other vehicle available to you. Therefore you must perform a separate analysis than considers both the contribution amounts, the expected returns and the difference expense ratios. That is exactly what has been done in the spreadsheet that I provided. This demonstrates unequivocally that the investing up to the company match is supremely optimal. Subsequent dollars can be invested optimally outside of the 401k due to the expense ratios.
That would be typical even for some pretty expensive plans. The problem with this is that it aids and abets theft by overcharge even if the investor himself comes out ahead. These are supposed to be retirement benefit plans under the auspices of Federal law which should not allow citizens to be exploited by special interests. Of course, what else is new? The right thing is for the plan not to be expensive and the employer to provide a match.

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Ged
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Re: Analyzing Expense Ratios

Post by Ged » Fri Dec 08, 2017 11:02 am

COHastiin wrote:
Wed Dec 06, 2017 10:34 pm
Lou354 wrote:
Wed Dec 06, 2017 7:49 pm
Additional factors to consider are how many years you’ll be with this employer and what the vesting schedule is for the employer match. If and when you switch jobs you can roll the 401k over into a low-cost IRA. It almost always pays to contribute enough to a 401k to get the full employer match.
This makes sense to me but I don't plan on leaving my job in the next 5 years, 10 years, 15 years.
Usually the advice to take advantage of a 401K plan that offers a match is based on an assumption that an employee will not spend their entire career at a single employer. I've seen 10 years given as a break even point. You have to decide yourself how long it is likely you will stay longer than this at your employer. The fact that you currently don't plan to leave for at least 15 years is only part of this assessment.

You may not plan on leaving at present, but such plans are often overtaken by events.

What is the experience of your coworkers?

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Re: Analyzing Expense Ratios

Post by COHastiin » Fri Dec 08, 2017 11:12 am

dbr wrote:
Fri Dec 08, 2017 10:54 am
That would be typical even for some pretty expensive plans. The problem with this is that it aids and abets theft by overcharge even if the investor himself comes out ahead. These are supposed to be retirement benefit plans under the auspices of Federal law which should not allow citizens to be exploited by special interests. Of course, what else is new? The right thing is for the plan not to be expensive and the employer to provide a match.
Being facetious here.

There's now an ethical factor to this decision? Aiding theft?

dbr
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Re: Analyzing Expense Ratios

Post by dbr » Fri Dec 08, 2017 11:28 am

COHastiin wrote:
Fri Dec 08, 2017 11:12 am
dbr wrote:
Fri Dec 08, 2017 10:54 am
That would be typical even for some pretty expensive plans. The problem with this is that it aids and abets theft by overcharge even if the investor himself comes out ahead. These are supposed to be retirement benefit plans under the auspices of Federal law which should not allow citizens to be exploited by special interests. Of course, what else is new? The right thing is for the plan not to be expensive and the employer to provide a match.
Being facetious here.

There's now an ethical factor to this decision? Aiding theft?
Yes, there absolutely is an ethical factor here in the responsibility and behavior of employers. It is not the employee that is doing anything wrong. The employee is between a rock and a hard place. That is why one suggestion that is not facetious is the possibility of seeking employment elsewhere. That is a decision that balances many factors of which retirement plan expenses may be very, very small.

crumbone
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Re: Analyzing Expense Ratios

Post by crumbone » Fri Dec 08, 2017 3:31 pm

COHastiin wrote:
Fri Dec 08, 2017 10:30 am
likegarden wrote:
Thu Dec 07, 2017 2:57 pm
How long do you have to keep the money in that 401k to keep your employer's contribution? In the 401k I was in until 2002 we only had to keep in the money for 3 years, thereafter could use the money on other things like moving it into a rollover- IRA at Vanguard.
I didn't know this was something that was included in the plan information. I will have to look into this.
Yes, learning your vesting schedule is very important. Learning whether your plan allows in-service transfers/rollovers may also be important. You may be able to roll the funds into a traditional IRA or even an individual 401k with better fund choices.

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Re: Analyzing Expense Ratios

Post by grabiner » Fri Dec 08, 2017 10:30 pm

COHastiin wrote:
Wed Dec 06, 2017 3:52 pm
At my work (and previous jobs I've had), I have been told that a company match is "free money". Before putting my money into Vanguard's Target Retirement 2055 fund, I've spent time reading various Bogle books, reading posts on this forum, learning about my taxes and my income, understanding expense ratio's, current market trends, learning about my company's 401K plan. I'm trying to figure out what happens with "free money" when used with high cost funds versus low cost funds.
Free money gets eroded by the costs in high-cost funds, but it's still better to get it than to invest anywhere else.

Suppose that you get a 50% match, then spend ten years with an employer plan charging 1% extra expenses, then leave the employer and roll the plan into an IRA. You will have lost 10% to the expenses, but you will still come out 36% ahead of investing an equal dollar amount directly into an IRA/unmatched plan/529/etc. It would take 40 years of 1% extra expenses to wipe out the value of the 50% match.
David Grabiner

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