High Fee 401k with no match vs VTSAX in a taxable account?

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rezadu
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High Fee 401k with no match vs VTSAX in a taxable account?

Post by rezadu » Thu Mar 14, 2019 10:39 am

Its always been an easy decision for me to max out my 401k when there has been an employee match. Ever since I've moved to my current employer with no match it has been difficult for me to understand which is best.

I am already maxing out my Roth IRA. My current 401k with no match has "Plan expense fees of 1.17% of each participants account balance". This scared me so I decided to put my $18,500/yr into VTSAX in a taxable account.

So what is better? Lower my taxable income but pay very high fees, or go with VTSAX in a taxable account?

EDIT: Sorry for the noob questions. And really appreciate the assistance. Additional info below.
I'm 29 years old. 24% tax bracket. Live in Texas, so no State tax.
I've been with this current employer for about 2.5 years now, and don't expect to stay with this employer for longer than 5 years. I'm in IT so I could move to another employer quite quickly.
My asset allocation between my taxable account and IRAs are 70% VTSAX, 20% VTIAX, and 10% US and INTL Bonds.
Last edited by rezadu on Thu Mar 14, 2019 1:09 pm, edited 1 time in total.

DarkHelmetII
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by DarkHelmetII » Thu Mar 14, 2019 11:42 am

I ran some quick numbers in Excel. Unless there is a good chance you will be at this employer for decades, I would still use the 401k. The tax-deferral benefits plus the tax deductibility of contributions today are still substantial (make sure you are investing "the difference"). Those fees are high and when you are getting into the > 1% range definitely worth asking the question, but I still think the tax benefits outweigh this high expense load. Realizing I do not know your personal situation, just statistically, I would say there's a good chance you will be with a different employer at some point in the future at which point you can roll over into an IRA or into new employer's 401k.
Last edited by DarkHelmetII on Thu Mar 14, 2019 12:02 pm, edited 1 time in total.

stan1
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by stan1 » Thu Mar 14, 2019 11:43 am

What is your federal and state marginal tax rate? Are there any index funds choices available or are all the funds active? How long are you planning to stay at this employer with the assumption you would roll out as soon as you could?

Agree a plan such as yours would cause me to think carefully about participating in it (out of principal as well as whether it is to my benefit).

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ruralavalon
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by ruralavalon » Thu Mar 14, 2019 11:48 am

Welcome to the forum :) .

rezadu wrote:
Thu Mar 14, 2019 10:39 am
Its always been an easy decision for me to max out my 401k when there has been an employee match. Ever since I've moved to my current employer with no match it has been difficult for me to understand which is best.

I am already maxing out my Roth IRA. My current 401k with no match has "Plan expense fees of 1.17% of each participants account balance". This scared me so I decided to put my $18,500/yr into VTSAX in a taxable account.

So what is better? Lower my taxable income but pay very high fees, or go with VTSAX in a taxable account?
Some additional information is needed.

What is your tax bracket, both federal and state?

What is your age?

About how long do you believe that you might be with this employer?

Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
rezadu
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by rezadu » Thu Mar 14, 2019 1:13 pm

stan1 wrote:
Thu Mar 14, 2019 11:43 am
What is your federal and state marginal tax rate? Are there any index funds choices available or are all the funds active? How long are you planning to stay at this employer with the assumption you would roll out as soon as you could?
I edited OP. And all the choices available are active funds.

stan1
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by stan1 » Thu Mar 14, 2019 1:34 pm

If you are only planning to stay there a few more years I'd go ahead and put money into it (with great pain). I'm guessing this is a small company? It surely would help motivate me to look for another employer or if possible I'd talk to the owner or CEO about how they could better serve employees with a different 401K plan. You might find out the owner or CEO has a brother in law, fraternity brother, or golfing buddy who is administering the 401K. High expense 401Ks like this are ways the costs of plan administration are transferred back to employees. Most bigger companies have seen the handwriting on the wall with settlements in 401K lawsuits (such as Lockheed Martin case).

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ruralavalon
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by ruralavalon » Thu Mar 14, 2019 1:35 pm

rezadu wrote:
Thu Mar 14, 2019 10:39 am
Its always been an easy decision for me to max out my 401k when there has been an employee match. Ever since I've moved to my current employer with no match it has been difficult for me to understand which is best.

I am already maxing out my Roth IRA. My current 401k with no match has "Plan expense fees of 1.17% of each participants account balance". This scared me so I decided to put my $18,500/yr into VTSAX in a taxable account.

So what is better? Lower my taxable income but pay very high fees, or go with VTSAX in a taxable account?

EDIT: Sorry for the noob questions. And really appreciate the assistance. Additional info below.
I'm 29 years old. 24% tax bracket. Live in Texas, so no State tax.
I've been with this current employer for about 2.5 years now, and don't expect to stay with this employer for longer than 5 years. I'm in IT so I could move to another employer quite quickly.
My asset allocation between my taxable account and IRAs are 70% VTSAX, 20% VTIAX, and 10% US and INTL Bonds.
In spite of it all, it's better to contribute to your 401k plan. You won't be stuck with the high fees very long.

When you leave the company rollover to an IRA at a low cost provider like Vanguard or Fidelity.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

bradpevans
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by bradpevans » Thu Mar 14, 2019 1:58 pm

Although I have contributed to (pre-tax) 401K for 20 years, I've never viewed it as "a way to lower my taxes"

I view it as "money i never made" or "money to be taxed later". I say this because while it does in fact lower my annual tax bill now, it also lowers my cash flow now...

To me the question is simply comparing:
A) known tax rate now (avoid fees) + future LTCG (if you go the taxable route)
vs
B) (basis + gains - fees) * tax rate when you withdraw the money (if you go 401k)

At a high level, A) is income tax now + LTCG later while B) is no income tax now just income tax later

Its hard to beat a 401K

megabad
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by megabad » Thu Mar 14, 2019 6:11 pm

rezadu wrote:
Thu Mar 14, 2019 10:39 am
don't expect to stay with this employer for longer than 5 years.
If only at this company for 5 years, I would do the 401k if you expect to have a long and lucrative career elsewhere with a better 401k. With a bunch of assumptions in rough terms you are paying a few thousand in fees over the next 5 years to gain the benefit of 30+ years of zero capital gains tax. I might guess you are going to pay $4k in fees for $20k in tax benefit (todays dollars). However, if you intend to retire early or retire in a very low tax bracket, the taxable account would be a better bet.

Topic Author
rezadu
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by rezadu » Thu Mar 21, 2019 4:52 pm

So I took everyone's advise that it still would make sense to contribute to the 401k over the taxable account since I don't plan to stay here for the long haul. I started looking into our 401k options more and the 1.17% is the base plan fee. There are also expense fee's depending on the fund you choose. The "default" fund chosen by my company is a pre-built portfolio based on my age with an expense of 0.84%. The fund with the lowest expense is a fund designed to mirror the S&P 500 with an expense fee of 0.41% which I think would be the one I would choose. Just want to be sure because this pains me, but even with the 1.58% total expense fee, it still makes sense to contribute to this 401k over my current taxable account at Vanguard?

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ruralavalon
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by ruralavalon » Thu Mar 21, 2019 5:42 pm

rezadu wrote:
Thu Mar 21, 2019 4:52 pm
So I took everyone's advise that it still would make sense to contribute to the 401k over the taxable account since I don't plan to stay here for the long haul. I started looking into our 401k options more and the 1.17% is the base plan fee. There are also expense fee's depending on the fund you choose. The "default" fund chosen by my company is a pre-built portfolio based on my age with an expense of 0.84%. The fund with the lowest expense is a fund designed to mirror the S&P 500 with an expense fee of 0.41% which I think would be the one I would choose. Just want to be sure because this pains me, but even with the 1.58% total expense fee, it still makes sense to contribute to this 401k over my current taxable account at Vanguard?
I suggest using "the S&P 500 with an expense fee of 0.41%". That's high for a S&P 500 index fund, but still useable even with the extra 1.17% since you will be leaving in 5 years or so.

I suggest also using a bond fund, if a intermediate-term bond with with a modest expense ratio is offered. What bond funds are offered in your plan? Please give fund names, tickers if any, and expense ratios.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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rezadu
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by rezadu » Thu Mar 21, 2019 7:47 pm

ruralavalon wrote:
Thu Mar 21, 2019 5:42 pm
rezadu wrote:
Thu Mar 21, 2019 4:52 pm
So I took everyone's advise that it still would make sense to contribute to the 401k over the taxable account since I don't plan to stay here for the long haul. I started looking into our 401k options more and the 1.17% is the base plan fee. There are also expense fee's depending on the fund you choose. The "default" fund chosen by my company is a pre-built portfolio based on my age with an expense of 0.84%. The fund with the lowest expense is a fund designed to mirror the S&P 500 with an expense fee of 0.41% which I think would be the one I would choose. Just want to be sure because this pains me, but even with the 1.58% total expense fee, it still makes sense to contribute to this 401k over my current taxable account at Vanguard?
I suggest using "the S&P 500 with an expense fee of 0.41%". That's high for a S&P 500 index fund, but still useable even with the extra 1.17% since you will be leaving in 5 years or so.

I suggest also using a bond fund, if a intermediate-term bond with with a modest expense ratio is offered. What bond funds are offered in your plan? Please give fund names, tickers if any, and expense ratios.

I hope this works. I've uploaded the funds available to a pdf file on my Google Drive. The far right column with "Total Inv. Expense Net" are the expense ratios I would be responsible for.

https://drive.google.com/open?id=1gSNnc ... dT8RZcGbHQ
Last edited by rezadu on Fri Mar 22, 2019 12:01 am, edited 1 time in total.

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grabiner
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by grabiner » Thu Mar 21, 2019 7:48 pm

rezadu wrote:
Thu Mar 21, 2019 4:52 pm
So I took everyone's advise that it still would make sense to contribute to the 401k over the taxable account since I don't plan to stay here for the long haul. I started looking into our 401k options more and the 1.17% is the base plan fee. There are also expense fee's depending on the fund you choose. The "default" fund chosen by my company is a pre-built portfolio based on my age with an expense of 0.84%. The fund with the lowest expense is a fund designed to mirror the S&P 500 with an expense fee of 0.41% which I think would be the one I would choose. Just want to be sure because this pains me, but even with the 1.58% total expense fee, it still makes sense to contribute to this 401k over my current taxable account at Vanguard?
My rule of thumb is that the extra expenses, multiplied by the number of years you will be with the plan, need to be double your tax rate on qualified dividends for taxable investing to be worthwhile. Thus, if you pay the usual 15% on dividends and capital gains, and you are paying an extra 1.5% in expenses, you will probably come out ahead with the 401(k) unless you stay 20 years with the employer.

The reason is that you can roll the high-cost 401(k) into an IRA when you leave, getting the benefit of low-cost investments for the rest of your life, and keeping the tax deferral.
Wiki David Grabiner

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ruralavalon
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Re: High Fee 401k with no match vs VTSAX in a taxable account?

Post by ruralavalon » Fri Mar 22, 2019 8:10 am

In your 401k you could also consider some Mellon Bond Market Index Separate Account, ER 0.52%.

At age 29 perhaps 80% S&P 500 index and 20% bond market index.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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