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Given the following situation:

  • an employer-offered "Simple IRA" run by a major brokerage with 1% gross pay matching;
  • No near-future feasible opportunity to invest the Simple IRA contribution in a no-load index fund because of high minimums;
  • the option of buying A or C shares of virtually any mutual fund available, so long as it isn't no-load;
  • a transaction fee of $50 per ten shares on stocks, including ETFs; and no option to go somewhere other than the specific brokerage without forgoing the 1% matching,

What is the optimal strategy in this situation for someone who ideally would invest in a passive index fund like Vanguard's VFINX with minimal frictional costs?

  • ETFs, even though they have the relatively high transaction fee? If so, how should the transactions be spaced so as to minimize the frictional costs?
  • A mutual fund with a load of some sort, even though they will have fees of their own and (AFAIK) have poorer performance than an index fund and generally are not passive?
  • Forgo the matching and just save a certain percentage of income in an index fund privately?
  • Some other strategy altogether?

Edit: generalized the question, took out the explanation of A and C shares (someone please let me know if they are not standardized and thus the brokerage might have a unique fee structure for them that would change the optimal strategy). Not looking for specific buy/sell recommendations, e.g. I just want something as close to index funds like VFINX or VOO as possible. If it turns out the best strategy is a brokerage-exclusive discount on iShares' IVV, that works just as well. Thanks for all the responses so far.

  • are you sure you have to pay the loads? My Mom had a ML 401k and the load was waived inside the 401k (as it should be since there's no salesperson to get the commission), even though it was a bunch of load funds. The funds still had high expenses of course. – Havoc P Apr 27 '11 at 21:27
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    I commend you on writing a very detailed question. Please note, though, that specific buy/sell recommendations are off-topic for this site. Please consult the FAQ using the link to the left of the search box at the top of the page. – George Marian Apr 27 '11 at 21:37
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    @Jordan Can you make your question a bit more generic so it might help other people in similar situations? – Michael Pryor Apr 27 '11 at 22:33
  • Complete side note: Only 1%? More. – C. Ross Apr 28 '11 at 12:23
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    @C. Ross: If 1% is what it takes to get the full company match, do not put any more money than you have to into what sounds like a plan with excessive fees. Much better to put extra money into an outside/independent IRA where there aren't such crazy fees. – bstpierre Apr 28 '11 at 14:44
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The $50 fee is crazy. I'd not miss the match, despite the load fund fees. If you put in $500 and get $500 match, a 5% fee won't kill you. But that's all I'd put in. Invest outside that IRA, as much as you can. Sorry, 1% is pretty low, sorry they don't have a low cost 401(k).

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