401K high fees, no match - don't use it? Backdoor Roth instead...

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AA3
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401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Thu Jan 11, 2018 5:22 pm

Hello:

My employer 401k has an annual asset based management fee of 1% that is assessed every quarter. i.e. $100k in account = paying $250 a quarter, $1000 a year. If the balance goes up, so does the fee. No match on offer. I am not enrolled in it.

Myself and my wife combined are now over the Roth income limit, not by a great deal but we're over. I have an existing Roth with Vanguard, and from reading the great advice on this website, it seems that I can legally do a backdoor Roth and still continue contributing $5,500 per year to that account.

My other retirement account is an employer profit sharing account which has basically the same fees and investment options as the 401k plan. I cannot contribute to this account, but my employer contributes every year.

My question: Is my best option to use the backdoor Roth rather than the 401k? I understand that the 401k offers pre-tax benefits, but considering the high fees and no match, it feels like this may not be a good option for me.

Input would be appreciated. Thanks.

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FiveK
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by FiveK » Thu Jan 11, 2018 7:35 pm

Depends on how long you expect to stay with the company.

See Expensive or mediocre choices.

See also How to campaign for a better 401(k) plan - Bogleheads - good luck!

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Thu Jan 11, 2018 7:38 pm

FiveK wrote:
Thu Jan 11, 2018 7:35 pm
Depends on how long you expect to stay with the company.

See Expensive or mediocre choices.

See also How to campaign for a better 401(k) plan - Bogleheads - good luck!
Thanks for the response. I have been with the company 12 years and anticipate being there long-term.

I should have added in my original post, the amount I was looking to invest in the backdoor Roth or 401k would be around the $5500 mark per year.

Do you think the backdoor Roth or 401k would be a better option for this money?

Thanks.

pkcrafter
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by pkcrafter » Thu Jan 11, 2018 7:50 pm

Most 401k have significant fees, One percent is not unusual, if that's all there is! Are there any low cost funds in the 401k? Are you able to transfer funds out of the 401k while employed?

High cost of 401k plans

https://www.kiplinger.com/article/savin ... payin.html

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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FiveK
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by FiveK » Thu Jan 11, 2018 7:53 pm

AA3 wrote:
Thu Jan 11, 2018 7:38 pm
Do you think the backdoor Roth or 401k would be a better option for this money?
By that you mean "backdoor Roth or traditional 401k", correct?

That adds another facet: your marginal rate now vs. your expected marginal rate in retirement.

See the '401k vs Taxable' tab in the personal finance toolbox spreadsheet (or The Finance Buff's spreadsheet referenced on that tab) to enter your personal situation.

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Thu Jan 11, 2018 7:56 pm

pkcrafter wrote:
Thu Jan 11, 2018 7:50 pm
Most 401k have significant fees, One percent is not unusual, if that's all there is! Are there any low cost funds in the 401k? Are you able to transfer funds out of the 401k while employed?

High cost of 401k plans

https://www.kiplinger.com/article/savin ... payin.html

Paul
Thanks for the response. I do not believe funds can be transferred out of the 401k while employed, except for loans. The 401k options are largely expensive John Hancock actively managed or target date funds, but there are 2 good options (and I hold both of these in my employer profit sharing plan):

Vanguard Total World Stock ETF - 0.17% ER
Fidelity Advisor® Total Bond Fund - 0.25% ER

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Thu Jan 11, 2018 7:57 pm

FiveK wrote:
Thu Jan 11, 2018 7:53 pm
AA3 wrote:
Thu Jan 11, 2018 7:38 pm
Do you think the backdoor Roth or 401k would be a better option for this money?
By that you mean "backdoor Roth or traditional 401k", correct?

That adds another facet: your marginal rate now vs. your expected marginal rate in retirement.

See the '401k vs Taxable' tab in the personal finance toolbox spreadsheet (or The Finance Buff's spreadsheet referenced on that tab) to enter your personal situation.
Yes, that's correct. In essence, my question is where should I be sending my $5500 retirement contribution to:

1. Existing Roth IRA at Vanguard (via a backdoor Roth); or
2. Employer traditional 401k as mentioned above

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FiveK
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by FiveK » Thu Jan 11, 2018 8:04 pm

AA3 wrote:
Thu Jan 11, 2018 7:57 pm
Yes, that's correct. In essence, my question is where should I be sending my $5500 retirement contribution to:

1. Existing Roth IRA at Vanguard (via a backdoor Roth); or
2. Employer traditional 401k as mentioned above
Try filling in the numbers in one or both of the spreadsheets mentioned and see what you get.

The answer may be "obvious", in which case do that. If it is a close call, find a handy coin and flip away.

JW-Retired
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by JW-Retired » Thu Jan 11, 2018 9:19 pm

AA3 wrote:
Thu Jan 11, 2018 7:56 pm
The 401k options are largely expensive John Hancock actively managed or target date funds, but there are 2 good options (and I hold both of these in my employer profit sharing plan):

Vanguard Total World Stock ETF - 0.17% ER
Fidelity Advisor® Total Bond Fund - 0.25% ER
What high fees are you talking about??? These are are fine and all you need! Invest to the $18k/year max.
JW
Retired at Last

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FiveK
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by FiveK » Thu Jan 11, 2018 9:28 pm

JW-Retired wrote:
Thu Jan 11, 2018 9:19 pm
AA3 wrote:
Thu Jan 11, 2018 7:56 pm
The 401k options are largely expensive John Hancock actively managed or target date funds, but there are 2 good options (and I hold both of these in my employer profit sharing plan):

Vanguard Total World Stock ETF - 0.17% ER
Fidelity Advisor® Total Bond Fund - 0.25% ER
What high fees are you talking about??? These are are fine and all you need! Invest to the $18k/year max.
JW
Agreed if those are the total fees. From the OP it seems an additional 1% is charged...?

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Thu Jan 11, 2018 10:38 pm

FiveK wrote:
Thu Jan 11, 2018 9:28 pm
JW-Retired wrote:
Thu Jan 11, 2018 9:19 pm
AA3 wrote:
Thu Jan 11, 2018 7:56 pm
The 401k options are largely expensive John Hancock actively managed or target date funds, but there are 2 good options (and I hold both of these in my employer profit sharing plan):

Vanguard Total World Stock ETF - 0.17% ER
Fidelity Advisor® Total Bond Fund - 0.25% ER
What high fees are you talking about??? These are are fine and all you need! Invest to the $18k/year max.
JW
Agreed if those are the total fees. From the OP it seems an additional 1% is charged...?
Correct. An additional 1% fee is charged for "account management." I realize this may be an "industry standard" for 401k's but to me it seems like a potential waste of money. Hence my question on whether using backdoor roth contributions to my existing low cost vanguard Roth would be a better option for me?

RRAAYY3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by RRAAYY3 » Thu Jan 11, 2018 10:54 pm

My employer has a plan with approximately 2% in fees (ER + management bs) but a 3% match

Should I be contributing up until the match and the rest in my taxable or is it still worth it to max out 401Ks

JW-Retired
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by JW-Retired » Thu Jan 11, 2018 10:55 pm

AA3 wrote:
Thu Jan 11, 2018 10:38 pm
Correct. An additional 1% fee is charged for "account management." I realize this may be an "industry standard" for 401k's but to me it seems like a potential waste of money. Hence my question on whether using backdoor roth contributions to my existing low cost vanguard Roth would be a better option for me?
It's certainly not "industry standard" for 401k's to charge 1% of your account for admin. My 401k charges perhaps a couple of hundredths of 1% for that.
JW
Retired at Last

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FiveK
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by FiveK » Thu Jan 11, 2018 11:06 pm

RRAAYY3 wrote:
Thu Jan 11, 2018 10:54 pm
My employer has a plan with approximately 2% in fees (ER + management bs) but a 3% match

Should I be contributing up until the match
Yes.
and the rest in my taxable or is it still worth it to max out 401Ks
Depends on how long you plan to stay with that employer. See references to the wiki article and spreadsheet tools in previous posts.

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Thu Jan 11, 2018 11:12 pm

JW-Retired wrote:
Thu Jan 11, 2018 10:55 pm
AA3 wrote:
Thu Jan 11, 2018 10:38 pm
Correct. An additional 1% fee is charged for "account management." I realize this may be an "industry standard" for 401k's but to me it seems like a potential waste of money. Hence my question on whether using backdoor roth contributions to my existing low cost vanguard Roth would be a better option for me?
It's certainly not "industry standard" for 401k's to charge 1% of your account for admin. My 401k charges perhaps a couple of hundredths of 1% for that.
JW
Ok, so that sort of reinforces my feeling that despite the tax benefits of the 401k, paying 1% in management fees is a bad thing. No match on 401k either. And maybe the backdoor roth contribution to a low cost vanguard IRA might make more sense?

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FiveK
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by FiveK » Thu Jan 11, 2018 11:18 pm

AA3 wrote:
Thu Jan 11, 2018 11:12 pm
Ok, so that sort of reinforces my feeling that despite the tax benefits of the 401k, paying 1% in management fees is a bad thing. No match on 401k either. And maybe the backdoor roth contribution to a low cost vanguard IRA might make more sense?
Maybe it might, maybe it might not. Someone - preferably you ;) - would need to look at your specific numbers to tell.

If you have questions about either of the spreadsheet tools, there is a good chance someone here could answer them.

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Thu Jan 11, 2018 11:22 pm

Got it. Thanks for the link to the spreadsheet tools. I'll run the numbers now.

CnC
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by CnC » Fri Jan 12, 2018 8:32 am

AA3 wrote:
Thu Jan 11, 2018 7:57 pm
FiveK wrote:
Thu Jan 11, 2018 7:53 pm
AA3 wrote:
Thu Jan 11, 2018 7:38 pm
Do you think the backdoor Roth or 401k would be a better option for this money?
By that you mean "backdoor Roth or traditional 401k", correct?

That adds another facet: your marginal rate now vs. your expected marginal rate in retirement.

See the '401k vs Taxable' tab in the personal finance toolbox spreadsheet (or The Finance Buff's spreadsheet referenced on that tab) to enter your personal situation.
Yes, that's correct. In essence, my question is where should I be sending my $5500 retirement contribution to:

1. Existing Roth IRA at Vanguard (via a backdoor Roth); or
2. Employer traditional 401k as mentioned above
I'll throw this out simply because someone e needs to say it.

5500 is not a reasonable retirement contribution per year for someone who makes too much money to contribute to a Roth IRA via non backdoor method.

I'll assume you are single, that's $133k after deductions which minimum deduction is 12k for a single.

So saving 5500 out of $145,000 minimum. That's under a 4% savings rate which will not put you on the path to retirement.

Edit: Nevermind I just saw you were married. That puts you in a worse boat. 5500/200,000 minimum is close to a 2% savings rate.


Instead of worrying about fees I suggest you focus on saving more. Without the 18k+5500 tax deferred headroom of both 401k and Roth IRA's you are not going to break the recommend 10% minimum savings rate.

noco-hawkeye
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by noco-hawkeye » Fri Jan 12, 2018 8:53 am

I agree with CnC that your total savings rate seems concerning. You should be averaging around 15% (or more), unless you have some special circumstances.

The other aspect is that you said you were right at the limit for a backdoor. If you max out your 401k, I thought that would decrease your income by 18k? Not that a backdoor roth is that difficult to use anyways, but maybe the extra steps are of some concern.

I'd max out both at this income level, and it might be most comfortable to you if you started by funding the IRA first and then seeing if you can max the 401k. Yes the fees are a hassle and something you should advocate change for, but right now you want a tax break and to get time in the market.

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Fri Jan 12, 2018 12:17 pm

CnC wrote:
Fri Jan 12, 2018 8:32 am
AA3 wrote:
Thu Jan 11, 2018 7:57 pm
FiveK wrote:
Thu Jan 11, 2018 7:53 pm
AA3 wrote:
Thu Jan 11, 2018 7:38 pm
Do you think the backdoor Roth or 401k would be a better option for this money?
By that you mean "backdoor Roth or traditional 401k", correct?

That adds another facet: your marginal rate now vs. your expected marginal rate in retirement.

See the '401k vs Taxable' tab in the personal finance toolbox spreadsheet (or The Finance Buff's spreadsheet referenced on that tab) to enter your personal situation.
Yes, that's correct. In essence, my question is where should I be sending my $5500 retirement contribution to:

1. Existing Roth IRA at Vanguard (via a backdoor Roth); or
2. Employer traditional 401k as mentioned above
I'll throw this out simply because someone e needs to say it.

5500 is not a reasonable retirement contribution per year for someone who makes too much money to contribute to a Roth IRA via non backdoor method.

I'll assume you are single, that's $133k after deductions which minimum deduction is 12k for a single.

So saving 5500 out of $145,000 minimum. That's under a 4% savings rate which will not put you on the path to retirement.

Edit: Nevermind I just saw you were married. That puts you in a worse boat. 5500/200,000 minimum is close to a 2% savings rate.


Instead of worrying about fees I suggest you focus on saving more. Without the 18k+5500 tax deferred headroom of both 401k and Roth IRA's you are not going to break the recommend 10% minimum savings rate.

Sorry for not being clear in my original post where I mentioned that I receive profit sharing contributions every year in my employer profit sharing retirement plan. I receive around $15k per year from my employer. I can't contribute to this plan. This plan has the same investment options and fees as the 401k plan I mentioned above. Up until recently, I have been contributing to my Roth IRA the $5500 max, so I've been saving around $20k per year for retirement.

Now that we are over the Roth income limit, I've been trying to work out what to do with the $5500 I've been sending to my Roth IRA. Hence my question, whether I should 1) use a backdoor Roth, or 2) use my firm's 401k that has no match and high fees.

My wife works for the government and contributes around $12k per year to her retirement plan.

Thanks.

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Fri Jan 12, 2018 12:24 pm

noco-hawkeye wrote:
Fri Jan 12, 2018 8:53 am
I agree with CnC that your total savings rate seems concerning. You should be averaging around 15% (or more), unless you have some special circumstances.

The other aspect is that you said you were right at the limit for a backdoor. If you max out your 401k, I thought that would decrease your income by 18k? Not that a backdoor roth is that difficult to use anyways, but maybe the extra steps are of some concern.

I'd max out both at this income level, and it might be most comfortable to you if you started by funding the IRA first and then seeing if you can max the 401k. Yes the fees are a hassle and something you should advocate change for, but right now you want a tax break and to get time in the market.
Thanks for the response. As mentioned above, I receive about $15k a year in my employer profit sharing plan. Adding my Roth contributions, I've been contributing around $20k per year. My wife contributes around $12k to her government retirement plan. The $15k I receive in my employer profit sharing plan does not help reduce my income for Roth income cut-off calculation purposes.

CnC
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by CnC » Fri Jan 12, 2018 2:31 pm

AA3 wrote:
Fri Jan 12, 2018 12:17 pm


Sorry for not being clear in my original post where I mentioned that I receive profit sharing contributions every year in my employer profit sharing retirement plan. I receive around $15k per year from my employer. I can't contribute to this plan. This plan has the same investment options and fees as the 401k plan I mentioned above. Up until recently, I have been contributing to my Roth IRA the $5500 max, so I've been saving around $20k per year for retirement.

Now that we are over the Roth income limit, I've been trying to work out what to do with the $5500 I've been sending to my Roth IRA. Hence my question, whether I should 1) use a backdoor Roth, or 2) use my firm's 401k that has no match and high fees.

My wife works for the government and contributes around $12k per year to her retirement plan.

Thanks.

Ok well you are in a better position than I first assumed. I am relieved to hear that.

My suggestion is since you have a relatively poor 401k option to max your Roth IRA first. But, I would still explore putting some money into your 401k. Because every dime you can save in a 401k will lower your Taxable income. It will also greatly improve your quality of life at retirement if you plan to stop working before 70.

As the other poster mentioned, if you were to contribute a few thousand to your 401k it may make you eligible for regular Roth Contributions.



Take a look at this calculator. To look at savings rate and retirement eligibility.
https://networthify.com/calculator/earl ... awalRate=4

AA3
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by AA3 » Fri Jan 12, 2018 3:37 pm

CnC wrote:
Fri Jan 12, 2018 2:31 pm
AA3 wrote:
Fri Jan 12, 2018 12:17 pm


Sorry for not being clear in my original post where I mentioned that I receive profit sharing contributions every year in my employer profit sharing retirement plan. I receive around $15k per year from my employer. I can't contribute to this plan. This plan has the same investment options and fees as the 401k plan I mentioned above. Up until recently, I have been contributing to my Roth IRA the $5500 max, so I've been saving around $20k per year for retirement.

Now that we are over the Roth income limit, I've been trying to work out what to do with the $5500 I've been sending to my Roth IRA. Hence my question, whether I should 1) use a backdoor Roth, or 2) use my firm's 401k that has no match and high fees.

My wife works for the government and contributes around $12k per year to her retirement plan.

Thanks.

Ok well you are in a better position than I first assumed. I am relieved to hear that.

My suggestion is since you have a relatively poor 401k option to max your Roth IRA first. But, I would still explore putting some money into your 401k. Because every dime you can save in a 401k will lower your Taxable income. It will also greatly improve your quality of life at retirement if you plan to stop working before 70.

As the other poster mentioned, if you were to contribute a few thousand to your 401k it may make you eligible for regular Roth Contributions.



Take a look at this calculator. To look at savings rate and retirement eligibility.
https://networthify.com/calculator/earl ... awalRate=4
Thanks for the advice and for providing the link. I will use the backdoor Roth first, and then try and send money to the 401k too.

CnC
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by CnC » Fri Jan 12, 2018 4:19 pm

AA3 wrote:
Fri Jan 12, 2018 3:37 pm
CnC wrote:
Fri Jan 12, 2018 2:31 pm
AA3 wrote:
Fri Jan 12, 2018 12:17 pm


Sorry for not being clear in my original post where I mentioned that I receive profit sharing contributions every year in my employer profit sharing retirement plan. I receive around $15k per year from my employer. I can't contribute to this plan. This plan has the same investment options and fees as the 401k plan I mentioned above. Up until recently, I have been contributing to my Roth IRA the $5500 max, so I've been saving around $20k per year for retirement.

Now that we are over the Roth income limit, I've been trying to work out what to do with the $5500 I've been sending to my Roth IRA. Hence my question, whether I should 1) use a backdoor Roth, or 2) use my firm's 401k that has no match and high fees.

My wife works for the government and contributes around $12k per year to her retirement plan.

Thanks.

Ok well you are in a better position than I first assumed. I am relieved to hear that.

My suggestion is since you have a relatively poor 401k option to max your Roth IRA first. But, I would still explore putting some money into your 401k. Because every dime you can save in a 401k will lower your Taxable income. It will also greatly improve your quality of life at retirement if you plan to stop working before 70.

As the other poster mentioned, if you were to contribute a few thousand to your 401k it may make you eligible for regular Roth Contributions.



Take a look at this calculator. To look at savings rate and retirement eligibility.
https://networthify.com/calculator/earl ... awalRate=4
Thanks for the advice and for providing the link. I will use the backdoor Roth first, and then try and send money to the 401k too.
:thumbsup sounds good.

mariezzz
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Re: 401K high fees, no match - don't use it? Backdoor Roth instead...

Post by mariezzz » Fri Jan 12, 2018 6:19 pm

AA3 wrote:
Thu Jan 11, 2018 11:12 pm
JW-Retired wrote:
Thu Jan 11, 2018 10:55 pm
AA3 wrote:
Thu Jan 11, 2018 10:38 pm
Correct. An additional 1% fee is charged for "account management." I realize this may be an "industry standard" for 401k's but to me it seems like a potential waste of money. Hence my question on whether using backdoor roth contributions to my existing low cost vanguard Roth would be a better option for me?
It's certainly not "industry standard" for 401k's to charge 1% of your account for admin. My 401k charges perhaps a couple of hundredths of 1% for that.
JW
Ok, so that sort of reinforces my feeling that despite the tax benefits of the 401k, paying 1% in management fees is a bad thing. No match on 401k either. And maybe the backdoor roth contribution to a low cost vanguard IRA might make more sense?
It sounds like the employer may be passing administrative costs onto employees. Some employer pay them. Why don't you ask the employer to consider lower cost options? Smaller employers likely are more limited to how low a cost they can get.

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