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I contribute a maximum (18k) to my employers 401k. They give 5% match. It is a target fund ISJIX.

When I look at the performance of ISJIX compared to the VTIVX (over last 10 years) I see a huge difference.

My question is: Can I have 2 active 401k?

  1. Employee sponsored 5% only to get advantage of the match.
  2. Open 401k account with Vanguard and contribute the rest to VTIVX.

If that is possible. Will Vanguard have access to my payroll somehow to withdraw before tax? Or would I need to contribute after tax and then somehow claim deduction?

Also, there is yearly and some changes to paycheck. So the employer knows how much is contributed and stops withdrawal automatically when I reach the limit. I assume that with two accounts, it will become my responsibility to see that I don't over contribute across the two accounts.

Thanks,

P.S. I don't have a side job (so I guess I don't qualify for solo 401k)

  • Typically a 401K lets you choose one of several funds to put your money in. You are choosing ISTIX for some reason, and apparently, you don't even realize you chose it, nor understand 401ks well enough to realize you chose it and can choose others. Get John Bogle's book and learn about mutual funds. I agree it's a horrible performer but this sounds more like a bad asset mix moreso than a ripoff fund, the expense ratio is only .22% higher than Vanguard which would only account for 2.2% poorer performance in 10 years. – Harper - Reinstate Monica Aug 24 '17 at 2:41
  • Fund are offered from Voya Financial. All of the funds that offered by through my employer are less then ideal (performance and fees). Target was chosen for simplicity. – varm Aug 24 '17 at 21:23
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You wouldn't open your own separate 401(k). A 401(k) is a highly regulated employer sponsored arrangement. You could, however, open your own Traditional IRA or Roth IRA. It requires a little more administration on your part, but apart from the different contribution limits there isn't much difference.

If your employer has a match, it generally makes sense to maximize the match before looking for investment options outside the 401(k). If you're getting a 50% match up to X% of your payroll, that's an immediate 50% gain on your money which will beat an incremental change in expense ratio or marginal performance differences over the long haul. Match funds have the additional benefit of exemption from Medicare and Social Security taxes.

It's worth periodically reevaluating your 401(k) allocations. Expense ratios on the "lifecycle" funds are horrible (>1%) under my employer's plan, so for me it makes a lot of sense to manage the split between low cost broad market indexes and high quality bond funds. The annual manual adjustment isn't nearly enough of a hassle to pay twice as much in expense ratio.

  • Thanks, I figured as much. Unfortunately, I don't qualify for either Traditional or Roth IRA. – varm Aug 23 '17 at 18:57
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    @varm, because of income? You should look up back-door Roth IRA. The income limit on Traditional IRA contributions doesn't prohibit you from contributing, it prohibits you from deducting the contribution. You then convert your Traditional IRA to a Roth IRA to enjoy the tax benefits of a Roth IRA. – quid Aug 23 '17 at 19:06
  • Yes, affirming a back door Roth IRA is totally worth looking into! – Harper - Reinstate Monica Aug 24 '17 at 2:25
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Your 401(k) plan is sponsored by your employer and must use the funds chosen for the plan by your employer. In practice, what happens is that various companies offer services such as being the plan administrator to employers together with different packages of mutual funds that the employees can invest in. Thus, you are locked into the choices offered in whatever package deal your employer chose. In other words, you cannot invest in VTIVX in your 401(k) plan unless your employer's 401(k) plan has VTIVX as an investment option, and Vanguard has no mechanism to access your 401(k) contributions off your employer's payroll unless Vanguard itself is the administrator of your employer's 401(k) plan and its package deal includes VTIVX as an option. If you invest in VTIVX outside the 401(k) plan, it will have to be in a taxable account or in an IRA account, and the latter has limitations on how much money you can invest annually.

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