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I'm in need of help choosing options for my 401k. Unfortunately, they are not very good. Nearly all of the expense costs are over 2%! But I have brought it up with my HR to see if there is any way to find a better 401k for the company. They say they are looking into it, but in the mean time....

Questions:

  1. My expense ratios are extremely high. Which options should I choose if I'm looking at 90% stock / 10 % bond? How much to Large/mid/small cap, specialty, etc? I'm currently thinking 10% in the lowest bond PIMCO TOTAL RETURN A (PTTAX) (2.10%) and 90% in the S&P 500 Index fund HARTFORD INDEX HLS IB (HBIDX) (1.84%) unless better suggestions are made.

  2. If my 401k doesn't change before I leave my job (not planned in the near future), I should roll it over into my Roth IRA after I leave due to these high expense ratios, correct?

  3. Should I still max contribute with these horrible expense ratios?

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  • I hate to tell you this, but as 401K plans go expenses that high are the norm. One of the reasons it isn't a good idea to leave your retirement money in a previous employer's 401K versus rolling it over to a self-directed IRA. – JohnFx♦ Aug 18 '11 at 16:21
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    This is by far the worst I've seen. – James Roth Aug 18 '11 at 20:54
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    I must agree that the bulk of this question is too localized and question #1 is asking for specific investment advice. Also, I am fairly certain that question #3 has been asked already. If someone finds it before we do, please make a note of it here. (Note that a duplicate may be acceptable if the difference in wording is useful to exposing the topic to a different audience.) Bryan, I suggest you generalize the question so that it useful to a larger audience and remove the question asking for specific investment advice. (On a side-note, many of us would suggest a cheap index fund here.) – George Marian Aug 19 '11 at 6:14
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    I am not certain that I have found the question(s) I had in mind (you know how fuzzy human memory is), but here are some possibilities. This question asks about the poor choice of funds in many 401k plans. This one asks what expenses are charged by 401k plans. (continued) – George Marian Aug 19 '11 at 6:36
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    If those numbers are right, that is one of the worst I've seen, and I've had like 5 different 401K plans (the one managed by vanguard is by far the best of the lot, the only one I didn't mind leaving there for a while after leaving the company. Do check that those fee's are accurate in some cases, because it's in a plan and very little 'selling' is involved, the loads and/or a portion of the fee's could be waived (I had one plan where that was the case) – Chuck van der Linden Aug 19 '11 at 8:54
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2%? I would put in just what it takes to share in the profit sharing, not a dime more. My S&P fund cost is .02% (edited, as it dropped to .02 since original post), 1/100 of the cost of most funds you list. Doesn't take too many years of this fee to negate the potential tax savings, and not many more to make this a real loser.

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    +1 This is the correct answer. Whoever setup this plan should be investigated -- this is a breach of fiduciary responsibility. – duffbeer703 Aug 19 '11 at 1:20
  • @duffbeer703 - Unfortunately that would most likely only result in higher costs to his fund taking more of his retirement savings away. – user4127 Aug 19 '11 at 16:17
  • Agreed. Go sign up with someone like Vanguard and manage your retirement with some cheap low-turnover index funds in a taxable account. (Also investigate whether you can contribute to a Roth IRA or similar instrument while contributing to the 401(k) for the profit-sharing.) – fennec Aug 19 '11 at 16:31
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    +1 I agree, but for what it's worth, fees on a 401k are only relevant for the expected time you will be at the job. If you save 10% overall on the investment through tax optimization then you can afford four years of bad fees if that's as long as you will still work there. I assume virtually everyone will flip it into an IRA as soon as they leave. – jprete Aug 19 '11 at 22:00
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    @jprete - thanks, yes, you are right. Only the individual asking this can know his chances for moving on. Maybe the rest of the compensation package is good and the job is rewarding. 4 years is pretty bad, though. In general, pretax money goes in at 25% and withdrawn at 10-15% on the margin. So the tax saving is 10-15%. To lose 8-10% of that to fees even after 4 years is tough. I'd only top off the 401(k) if I were already interviewing. – JoeTaxpayer♦ Aug 20 '11 at 0:06
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The first question is essentially asking for specific investment advice which is off-topic per the FAQ, but I'll take a stab at #2 and #3

(2) If my 401k doesn't change before I leave my job (not planned in the near future), I should roll it over into my Roth IRA after I leave due to these high expense ratios, correct?

My advice is that you should roll over a 401K into an IRA the first chance you get (usually when you leave the job). 401K plans are NOTORIOUS for high expense ratios and why leave your money in a plan where you have a limited choice of investments anyway versus a self-directed IRA where you can invest in anything you want?

(3) Should I still max contribute with these horrible expense ratios?

If they are providing a match, yes. Even with the expense ratios it is hard to beat the immediate return of an employer match.

If they aren't matching, the answer is still probably yes for a few reasons:

  • You already are maxing out your ability to contribute to sheltered accounts, so assuming you still want to sock away that money for retirement, the tax benefits are still valuable and probably offset the expense ratios.

  • Although you seem to be an exception, it is hard for most people to be disciplined enough to put money in a retirement account after they have it in their hands (versus auto-deduction from paychecks).

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  • Would rephrasing 1) as what break down of stocks I should have in my portfolio be better? E.g. would having all the stocks in one large cap index fund be fine or should I disperse it into a small/mid cap too? I don't need to know exactly which stocks (obviously the lowest expense ones), but how to balance it out. If this is still off-topic, that's fine. And the 401k is not employer matched, but is "profit sharing". In short, they dump some money into it at the end of the year if the company does well. – Bryan Denny Aug 18 '11 at 17:57
  • the only small benefit of the 401k is that it's harder for creditors to get at than an IRA, for example if you injure someone in a wreck and get sued. – Havoc P Aug 18 '11 at 18:34
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    Is the amount they dump in the account linked to your contribution level? – JohnFx♦ Aug 18 '11 at 19:18
  • @JohnFx No, it is not linked any contribution level. I can give 0% to the fund and will still receive the profit sharing. – Bryan Denny Aug 19 '11 at 3:56
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As to the rollover question. Only rollover to a ROTH if you have other funds you can use to pay the taxes you will be hit with if you do that. DO NOT pay the taxes out of the funds in the 401k. If you don't have a way to pay the taxes, then roll it to a traditional IRA. You never want to pay the government any taxes 'early' and you don't want to reduce the balance.

beyond that, A lot depends on how long you figure you will be with that company. If it's only a few years, or if you and other employees can make enough of a fuss that they move the fund to someplace decent (any of the big no-load companies such as Vanguard would be a better custodian), then I'd go ahead and max it out.

If you figure to be there for a long while, and it looks like someone is in bed with the custodian and there's no way it will be changed, then maybe look to max out a Roth IRA instead.

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