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My company has a 401(k) with high expense ratios (I recall 0.84% for an S&P 500 index, but I'd have to double-check) and no company match, so I opted to open a Roth IRA, which I'm maxing out. However, I still want to save more money for retirement.

I already have an emergency fund that I'm comfortable with. Where should I invest additional retirement contributions? Should I take advantage of the subpar 401(k) plan under the logic that saving something at a suboptimal rate is better than nothing? Should I open my own brokerage account and invest there (I'd be making monthly/semimonthly contributions, so any trading fees would eat into my return)? Something else?

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  • Just wondering what the other answers to the other question don't give you? If you're worried about trading fees, look at newer brokers like Robinhood.
    – Peter K.
    Commented Feb 20, 2015 at 17:29
  • I'm concerned about the tax implications and any "gotchas" that might be disadvantageous.
    – Bigbio2002
    Commented Feb 20, 2015 at 17:31
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    You might want to run some numbers based on how long you end up working there, and see what happens if you roll it over from the 401(k) into something with lower expenses. You may not pay that .84% for very long (obnoxious as it is).
    – psr
    Commented Feb 20, 2015 at 18:56
  • Another factor is how long you are going to work at the company. Because once you stop working at the company, you are free to rollover the 401(k) funds to IRAs and/or 401(k)s at future companies. So if you are not expecting to work very long at this company, than the badness of the funds is not really important.
    – user102008
    Commented Feb 21, 2015 at 0:04

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The math works out so that the 401k is still a better deal in the long term over a taxable account because of the tax-deferred growth. Let's assume you invest in an S&P 500 index fund in either a taxable investment account or a 401k and the difference in fees is .5%.

I used an online calculator and a hypothetical 1k/year investment over 30 years with 4.5% tax-deferred growth vs 5% taxable and a 25% tax bracket. After 30 years the tax-deferred 401k account will have $67k and the taxable account will have $58k.

The math isn't perfect -- I'm sure I'm missing some intricacies with dividends/capital gains distributions and that you'll then pay income tax on the 401k upon retirement as you drawn down, but it still seems pretty clear that the 401k will win in the long run, especially if you invest more than the 1k/year used in my example.

But yeah, .84% expenses on an index fund is robbery. Can you bring that to the attention of the HR department? Maybe they'll want to look for a lower-fee provider and it's in their best interest too, if they also participate.

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    Agree. 0.84% net expenses for an index fund is criminal; definitely bring this up to H.R. Also, you should consider HSA and FSA accounts if your employer offers them.
    – user19035
    Commented Feb 20, 2015 at 18:33
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    I think you can assume even lower expenses for the taxable account. Take an S&P 500 index ETF like SCHX, which has a 0.04% expense ratio, or 0.8% less than the fund in the OP's plan. Using that calculator, at a return of 4.2%, the tax-deferred account ends the 30-year period with $60.4k ($52.8k after taxes), while a taxable account at a 5% return for 30 years ends up with $55.8k. Moral of the story: if your plan's funds are as expensive as the OP's, even a taxable account could end up being better.
    – Jason R
    Commented Feb 20, 2015 at 19:25
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    @JasonR - agreed. But even more so depending on the tax rate used for the 401(k) withdrawal vs the 0 or 15% cap gain rate on long term gains. Curious what numbers you used.
    – JTP - Apologise to Monica ♦
    Commented Feb 20, 2015 at 19:56
  • @JoeTaxpayer: I simply used the calculator that Rocky linked in his answer. I'm not sure what assumptions are being made by the calculator, so if I were serious about this scenario, I would create my own spreadsheet.
    – Jason R
    Commented Feb 20, 2015 at 20:10
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    Amazing to me that the 401k fees are so bad there's a valid argument to be make that the employees are better off without it. Who picks these plans? Sales reps wine and dine the executives for a fat commission, I bet.
    – Rocky
    Commented Feb 20, 2015 at 23:40
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Do you have a spouse? You can contribute to a spouse's IRA if you guys are filling a joint tax return

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