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I have a retirement plan 401K from work. The employer does NOT contribute anything. I just enrolled into account and got to know that there are fees associated with the account. The fees is ridiculous! It is $10.90 for every $1000 per year. Are you kidding me!!!

Also for a certain mutual fund you see the following stats:

FUND X
1 year return 3% 3 year return 6% 10 year return 5%

What does that exactly mean?

Does that mean that if I hold my mutual funds for 10 years I will get 5% return on it. So lets say in 10 years I have 100K in the mutual funds account then

100000 * 5% = $5000

Does that mean I only made $5000 in 10 years on my balance of 100K?

Question 2:

Since my 401K plan stinks what are my options. If I put my money in a traditional IRA then I lose my pre tax benefits right!

What can I do?

UPDATE 1:

Just clearing up the question. My current employer has a 401K. Most of the funds have the expense ratio of 1.20%. There is NO MATCHING CONTRIBUTIONS.

I already have a ROTH IRA (Individual) and I contribute MAX. I also have a 401K from my old company in which I DO NOT CONTRIBUTE.

Should I convert the 401K of my old company to Traditional IRA and start investing in that instead of investing in the new employer 401K plan with high fees.

UPDATE 2:

For the expense ratio the document says something like this: 

Heading: Total Annual Investment Choice Operating Expenses 
As % = 1.09% 
Per $1000 = $10.90

The above is for one of the funds. There ar funds with 1.28% and $12.80 per $1000. 

THE LIMIT OF CONTRIBUTING TO THE 401K is $17000 (17K).

FINAL UPDATE:

First of all thanks to everyone for all your help!

I think I will invest 6%-10% of every paycheck to the 401K for the tax benefits. Also, I am planning to move my ROTH IRA and old employer 401K from the TRowe account to Vanguard since Vanguard have very low expense ratio.

After that I will open another ROTH IRA for my wife where we will contribute small amounts monthly.

I think having investments in many different buckets will payoff in the future!

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@DilipSarwate check out this link where it says that it does not matter where the money come from. fairmark.com/rothira/spousal.htm –  azamsharp Aug 30 '12 at 20:59
    
It is not where the money that goes into the IRA comes from that is the issue. US law allows spouses to give each other arbitrary amounts of money (without any gift tax consequence) to do whatever the other person likes. The issue is whether a person must have earned income in order to contribute to an IRA, or is it enough that Spouse A has earned income, and that Spouse B (with no earned income) can contribute to his/her IRA based on the fact that Spouse A has earned income. –  Dilip Sarwate Aug 31 '12 at 1:48
    
OK, I withdraw (and have deleted) my previous comments. Yes, Spouse B with no earned income can contribute to an IRA using the fact that Spouse A has earned income, subject to phase-out rules for high-income earners, pension plan coverage etc, as long as the tax filing status is MFJ. –  Dilip Sarwate Aug 31 '12 at 2:01
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2 Answers 2

$10.90 for every $1000 per year. Are you kidding me!!!

These are usually hidden within the expense ratio of the plan funds, but >1% seems to be quite a lot regardless.

FUND X 1 year return 3% 3 year return 6% 10 year return 5% What does that exactly mean?

This is the average annual rate of return. If measured for the last 3 years, the average annual rate of return is 6%, if measured for 1 year - it's 3%. What it means is that out of the last 3 years, the last year return was not the best, the previous two were much better.

Does that mean that if I hold my mutual funds for 10 years I will get 5% return on it.

Definitely not. Past performance doesn't promise anything for the future. It is merely a guidance for you, a comparison measure between the funds. You can assume that if in the past the fund performed certain way, then given the same conditions in the future, it will perform the same again. But it is in no way a promise or a guarantee of anything.

Since my 401K plan stinks what are my options. If I put my money in a traditional IRA then I lose my pre tax benefits right!

Wrong, IRA is pre-tax as well. But the pre-tax deduction limits for IRA are much lower than for 401k. You can consider investing in the 401k, and then rolling over to a IRA which will allow better investment options.


After your update:

Just clearing up the question. My current employer has a 401K. Most of the funds have the expense ratio of 1.20%. There is NO MATCHING CONTRIBUTIONS.

Ouch.

Should I convert the 401K of my old company to Traditional IRA and start investing in that instead of investing in the new employer 401K plan with high fees.

You should probably consider rolling over the old company 401k to a traditional IRA. However, it is unrelated to the current employer's 401k.

If you're contributing up to the max to the Roth IRA, you can't add any additional contributions to traditional IRA on top of that - the $5000 limit is for both, and the AGI limitations for Roth are higher, so you're likely not able to contribute anything at all to the traditional IRA. You can contribute to the employer's 401k. You have to consider if the rather high expenses are worth the tax deferral for you.

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Careful, if he has a 401(k) available to him, his IRA deductability is limited. For a single, the phaseout of deductibility begins at $58K AGI. The 401(k) to IRA rollover can only be done after a job change. In my humble opinion, one should never invest in an unmatched 401(k) with a fee of 1%+. –  JoeTaxpayer Aug 29 '12 at 21:48
    
@JoeTaxpayer the destructibility limits don't affect rollover, though, does it? Re the timing of the rollover, I believe its per plan, but generally you're right. –  littleadv Aug 29 '12 at 21:50
    
I'm confused, sorry. He's asking for advice on the new plan. Agree 100% if there's any old plan money it should not go to the new 401(k). –  JoeTaxpayer Aug 29 '12 at 21:57
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@littleadv 's response is near-perfect. I'd just kindly stress that 1.2% means a 10% hit over 8 years. 10% is the benefit from depositing pretax at 25% but withdrawing at 15%. So the potential tax benefit is quickly lost. I'd stay far away from this plan, and not let any friend join, either. For comparison, my company just disclosed their fees. The S&P fund is .07%, total cost. It would take me 17 years to pay an accumulated 1.2%. Just save in the IRA and in a taxable account for the long term. –  JoeTaxpayer Aug 29 '12 at 23:08
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The S&P fund that says .58% (if I am seeing this correctly, sorry, the eyes are going) isn't too bad. If you are in a high bracket now, it may be worth doing. It's about as high as I'd go and stay in the 401(k). (I once wrote that for the average time at a job, the highest one should consider paying is about .8%, but of course that was an average. If you stay a long time, even the .58 may not be great. –  JoeTaxpayer Aug 30 '12 at 3:07
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Should I convert the 401K of my old company to Traditional IRA and start investing in that instead of investing in the new employer 401K plan with high fees?

Regarding the 401K funds from the previous employer, you can:

  • Keep the funds in the old 401K. You can't add to the funds, but you can move them around withing the different investment options in the plan. You can also rollover any dividends / interest within the plan.
  • Move the funds to the new 401K plan, if the new employer allows this. Make sure the funds are directly transferred so you can avoid tax implications. Only do this if the new plan is better than the old plan, or you want to combine the funds to reduce the paperwork you get each month.
  • Transfer the funds to a regular IRA. There are thousands to pick from. You can then also convert the IRA to a Roth-IRA, but make sure you understand the rules before doing this.

Future investments:

  • 401K. Can be pre- or post- tax. In your case the expenses are so high it might not make sense to invest in this manner. In many cases the matching funds make this a winner.
  • Roth IRA. Limits are lower than the the 401K.
  • Regular IRA. The maximum deduction is based on adjusted gross income, and if you have a 401K available to you at work.

Roll overs don't have limits, but new investments do.

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