Are the fees in this unmatched 401(k) too high?

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Abbey
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Location: Texas

Are the fees in this unmatched 401(k) too high?

Post by Abbey » Thu Apr 21, 2011 1:15 am

DH has a new job (and new 401(k) plan). The plan summary states there is no match but the official plan documents detail how matching & profit sharing will occur so they may match in the future.

Reason to fund this: If we both max our 401s we may be able to contribute to an IRA. Otherwise only DH can utilize the backdoor Roth.

Reason against: Fees seem very high. The bond fees in particular eat up half the return.

His NEW 401(k) - All with American Funds

Code: Select all

New World            RNWCX 1.38
Small Cap             RSLCX  1.44
EuroPacific           RERCX  1.15
AMCAP                RAFCX  1.08
New Perspective      RNPCX  1.12
Growth Fund            RGACX  0.97
Capital Wld Gwth & Inc RWICX  1.10
Investment Co of Amer RICCX   0.97
Washington Mutual     RWMCX 1.03
Income Fund            RIDCX  0.99
Balanced Fund         RLBCX  0.94
High Income           RITCX  1.05
Bond Fund             RBFCX  0.93
US Govt Securities   RGVCX  1.01
Money Mkt			No info yet
1. Should DH even establish this 401(k)?

2. Which fund would you suggest? I recall Amcap is 100% US stock but don't know much about the others.

Previous post here: Portfolio We just simplified his 401s to the choices bolded (2 Spartan funds, the Blackrock S&P & Spartan Tot Mkt.) Previous 401s have much lower fees than new plan.

If he opens this new 401(k) we will rebalance to our AA in her accounts at Vanguard.

Thanks for any suggestions or advice.
Abbey

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kenyan
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Post by kenyan » Thu Apr 21, 2011 1:27 am

1% is not that bad as far as a lot of plans go. It's definitely not enough to make investing in taxable (in low-cost funds) preferable. If you're mathematically inclined, make a spreadsheet to convince yourself of this - compare taxable investing with a low expense ratio vs. funds in this plan, and vary the rate of return and various tax rates. Subtract the excess expenses from your return in your 401(k).

Obviously, there are a few variables, but when I ran some scenarios, it wasn't worth it to invest in taxable until the expense ratio difference was 2+%.

Abbey
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Location: Texas

Post by Abbey » Thu Apr 21, 2011 8:37 am

Kenyan,
1% is not that bad as far as a lot of plans go. It's definitely not enough to make investing in taxable (in low-cost funds) preferable. If you're mathematically inclined, make a spreadsheet to convince yourself of this - compare taxable investing with a low expense ratio vs. funds in this plan, and vary the rate of return and various tax rates. Subtract the excess expenses from your return in your 401(k).
Thanks for a quick, helpful response. I created a spreadsheet and see what you mean.

So the only remaining problem is choosing a fund. Previously there's been at least one index fund with a significantly lower ER. None of these are indexes (well, maybe closet ones) and all the ERs are similar. I am inclined to exclude the bond, gov't and income funds since their ERs are half of the yield. But I am puzzled whether to consider the small cap here. We can use some small cap but this ER is the highest.

When I checked M*, Amcap, Growth and Investment Co of America fit in as US large (i.e., S&P 500). Does choosing one of these means we add small cap at Vanguard to balance our AA? Do we add mid-cap or extended market?

I've learned so much from the bogleheads here, think I've cleaned up our portfolio very well and don't want to backslide. Thanks for the help with questions that should probably be obvious.
Abbey

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Kenkat
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Post by Kenkat » Thu Apr 21, 2011 8:57 am

Just as an FYI, but the bond fund yields are net of expenses already, so you are not losing any of the quoted bond fund yield to expenses. In other words, the expenses are already taken out before the net yield is reported.

Abbey
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Location: Texas

Post by Abbey » Thu Apr 21, 2011 9:06 am

kenschmidt,
Thank you. I forgot mf yields are net of expenses. :oops:
Abbey

fcirullo
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Re: Are the fees in this unmatched 401(k) too high?

Post by fcirullo » Thu Apr 21, 2011 10:38 am

Abbey wrote:Reason against: Fees seem very high.
Are the fees in this unmatched 401(k) too high? First, you need to know which fees and costs YOU pay.

For instance, you showed us how much the plan's mutual funds cost--the plan's investment adviser is probably paid a commission on the plan's mutual funds--but do you also pay for other services such as recordkeeping and administration? And does the plan have a consultant that you pay for?

Ask your employer for a list of ALL of the costs that YOU pay. That way you will make better decisions regarding the plan. Also, who gets the revenue sharing that is paid by the mutual funds? The plan? The consultant? The investment adviser? The recordkeeper and administrator?

Note: For a benchmark to compare your plan's cost, a truly low cost plan has a core mix of index funds that cost not more than 0.07% to 0.25% per year--the lower the cost the more money you keep in your account. And recordkeeping and administration costs not more than $30.00, per year, per eligible employee. Also, there are NO hidden or camouflaged costs.
Frank R. Cirullo | | "It isn't what we don't know that gives us trouble, it's what we know that ain't so." -- | Will Rogers

lawman3966
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Ask about wrap fee

Post by lawman3966 » Thu Apr 21, 2011 10:51 am

To partially echo some of the sentiments above, the quoted fees are not great, but better than those in many 401K plans.

The more important issue is what other fees you're paying. I can't believe those are the only fees. For one thing, there is nearly always a wrap fee if the provider is an entity other than Vanguard or Fidelity. This fee is typically about 1% of assets under management. Be sure to ask about that before drawing any conclusions about the desirability of participating in the plan.

skibbi9
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Post by skibbi9 » Thu Apr 21, 2011 10:52 am

i've seen DH used a few times, what does it stand for exactly? (i'm assuming H is for husband)

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Jay69
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Post by Jay69 » Thu Apr 21, 2011 11:05 am

skibbi9 wrote:i've seen DH used a few times, what does it stand for exactly? (i'm assuming H is for husband)
Im not sure about this site but on some other fourms I read its

Darling Husband

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Watty
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Post by Watty » Thu Apr 21, 2011 11:28 am

Reason to fund this: If we both max our 401s we may be able to contribute to an IRA. Otherwise only DH can utilize the backdoor Roth.

If you have not done it already a good way to check to see how well this will work is to copy last years tax return to make dummy tax return in tax software like turbo tax and enter your proposed numbers for next year. There will of course be some differences next year with tax law changes but at least this would give you a starting point.

If your husband is 59.5 years old then some, but not all, plans allow what is called an "in-service non-hardship withdrawal" (Google this) to roll the 401k money out to an IRA while still working there.

Greg

Abbey
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Location: Texas

Post by Abbey » Thu Apr 21, 2011 3:59 pm

cirullo and lawman3966,
There are some $50-100 fees to apply for a loan, close/transfer the account and establish the RMD. There is no reference to a wrap fee. In 2009 all other fees were paid by the company. However, the plan says we will pay a pro rata share if/when the company chooses not to do that. So, I'm checking again on the amounts.
Thanks for the advice. I'll let you know what I learn.

Watty,
I ran TurboTax but the scenarios were very close to the cut offs. Small changes move us under or over. So it seems prudent to maximize the possibility tax-wise but not expect it. He could start a Roth 401 but this year the regular 401 looks like the better choice. Thanks for the reminder to keep checking in with TurboTax as the year goes on.
Abbey

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