401K fee question


#1

I have a quick question on 401K fees. My employer has less than stellar fund options to choose from. They offer some index funds (which is what I’m contributing to) but the least expensive total stock market index still costs like .65%.

My question is: is it worth it to still try and max this out even with the relatively high fees? I know I can likely get the same fund in a taxable account for 1/10 the cost, but one of my reasons for considering maxing my 401K is for lowering my taxable income.

I get a 4% match so I would put at least that much in no matter what, but was curious to hear feedback as to what folks here would do. Max it out? Only put in to the company match? Do something else? I’m open to suggestions.

A little background: The only debt I’ve got is my mortgage and car, and I should have my car paid off in a couple of months.

Looking forward to any responses!

Thanks!


#2

The answer would depend highly on your tax bracket, other investment accounts, and investment strategy. A 401K defers your taxes to a potentially lower rate period in the future and shelters you from capital gains.

So from a tax perspective the more often you sell investments the more capital gains and the higher your income the more tax on that gain. Also the higher your income today the more likelihood it will be lower in the future. Finally the closer you are to one of the modified adjusted gross income cutoffs or phase outs the more valuable deferring income is.

I’d say for most people if the match is ok at minimum put in to the match. You can roll out of it when you change employers and chances are in the short run the match exceeds the er. Then for anything further evaluate versus ira, hsa , and other alternatives.

You also need to look at it holistically as well. So imagine you have a 401K with high expense ratio small cap and international funds. But it has a relatively low er rate for large cap stocks or bonds. Well then it might make sense to only invest this account in that one class and elsewhere use other options.


#3

Thanks so much for your feedback. To answer a couple of those questions: I do not (yet) have a taxable investment account. All investments are in pre-tax accounts (1 traditional IRA and a couple small 401Ks from previous employers). My investment strategy is buy/hold. Not trying to stock pick or beat the market. Gross household income is roughly $150K and I’m in my mid 30s.

Hopefully that’ll help!


#4

Some follow up questions: do you have an emergency fund? Not having one might drive you more to taxable. Are you doing an HSA? I might match and then find an HSA in this situation. Assuming of course you have access to an high deductible insurance plan. Without that plan and assuming your married I’d probably look at a Roth to diversify options since your mid tax band.

It goes without saying I am not a financial advisor nor your advisor. Any decisions are yours and any thoughts are based on what I personally would do.


#5

Totally understand, I’m just looking for a different opinion/perspective on what one would do. I’ve got a pretty good idea on what I’m going to do, just curious how others may approach things and am always eager to learn from folks who are more experienced (and wealthier) than myself.

I’ve got an emergency fund, but no HSA through my employer (I did through previous employer though). I’m leaning towards maxing 401K and opening a Roth IRA to spread out the tax liability so I’m not caught with the majority of my money in pretax accounts. Ideally somewhere down the road I’d like to start a Roth conversion ladder once I do a bit more homework on it and figure out the best timing.


#6

.65% isn’t really all that bad. I have some in the 1%+ range. I max out a 401k and usually contribute an additional 10k-15k (it varies depending if I need cash on hand) into a 457. What are you going to fret about .65% fee or not making an additional 3% to 4% return? My funds that have the higher rates usually return better. There the more premiere funds. Check your employers historical charts per fund and see returns.


#7

Agree with it depends on the fund.

I pay for a large cap blackrock fund with about a 90 bps management fee.

On the s&p index fund I think I pay 3 bps.


#8

I’d say you should still max out your 401k if you can. The thing that you should always remember is that your crappy 401k isn’t forever. My guess is that, over the course of your career, you’re probably going to change jobs a lot (indeed, you even mention you have small 401ks from other employers, which means you already have switched jobs before). I’m 32, have been in the workforce for six years, and have already had three different jobs during that span. And that’s not uncommon or odd at all for someone our age.

TLDR: Max out your crappy 401k if you can, because you can always move it out when you switch jobs. You’re probably not going to be with one employer for 30 years like our parents did.


#9

I ran the numbers on this exact question. Most people come out ahead as long as long as their 401k’s fees are less than 2.19%.

I wrote a big blog post about it here:


#10

Max out your 401k! Yes it sucks to pay 0.65% in fees but in the big picture it’s not too bad if you’re getting 7% return in the long run. Once you switch to a new job, you can roll it over to an IRA and have more options.


#11

Agree with @FinancialPanther – Assuming you’ll change jobs at some point, your 401k will go with you, and at that point, you won’t be bound by keeping it with your current employer. I had the same situation with my previous employer – The fees were very high, but when I changed jobs, I rolled it over into a traditional IRA and opted for low-fee ETFs. I re-balance once each year when I find my IRAs, and that suits me pretty well.

Currently, I am fortunate to have very low fee mutual funds to invest in through my employer, but my husband is in your situation. His lowest fund is 0.6%, which is pretty close to what you are facing. Regardless, he’s investing around 20% of his income in his employer’s plan because 1.) it gives us a tax break and 2.) he is planning to make a move in the next couple of years.

So that’s what we do. Everyone’s situation is different, but hopefully this helps.