Should I raise my 401(k) contributions even if fees are too high?
I currently contribute 5% to my 401(k) while my employer gives me a 4% match. I am 37 years old and in the 25% tax bracket. Unfortunately, my employer uses a poor brokerage as its 401(k) provider. I would like to start contributing 15% to my 401(k), but the fees are too high. The growth fund that I am currently in has an expense ratio of 1.33 and I would have to rebalance over time. Does it make sense to raise my contribution to 15%? If not, would it be better to change my investment fund to a retirement target date fund with a 1.25 expense ratio? All of the firm's funds are too high but I would like to contribute 15%.
The difference in expense fees between the two funds would need to be weighed against what the actual and anticipated returns of the funds are. For example-if the growth fund is anticipated to return 10% and the target date fund is 8% then I'd advise staying the course if those are your only investment options and if your risk tolerance allowed for it. It's not what you pay but it is what you make that is important and how the investments fit into your overall portfolio diversification strategy. Don't miss looking at the forest because of a couple of trees.
With an estimated 25-30 years before you reach retirement that is more than sufficent enough time to really use the advantage of tax deferred gains in your account to your benefit and maxing out your 401K contribution is probably prudent. Plus, you'd continue to shelter some of your current income from taxes now.
As to your employers choice of 401K provider, while there are many factors for them to consider, investment fees just being one thing you may want to ask them when is the last time they looked at other providers. They need to be made aware that more and more companies are being sued for not performing their fiduciary duties. For example, Boeing in November 2015 agreed to pay $57 million to resolve plaintiffs’ claims that it selected and retained mutual funds with excessive management fees in their 401K and even smaller companies are now being sued.
As a Participant, don’t get too hung up on the expense details regarding 401k plans. Investment fees are but one part of the fee structure to pay for the administration of an employer sponsored retirement plan. Often revenue sharing from those fees are paid to recordkeepers, administrators, custodians, etc., to provide services to the plan. Talk with your firm’s management about when they last reviewed other plan providers, it might be time....
I think you have a decent idea of using lower cost funds that are available in the plan, if you can augment that investment with outside investments that give you a well-rounded overall portfolio. At 37 years of age and a 25% tax bracket, contribute as much as you can, and if your plan offers a Roth 401k contribution option you should seriously consider it. Money you put away now has a long, long time to grow!
Hope this helps.
I know it sucks to have to get stuck with higher than needed fees, but don't let that deter you from saving for retirement. A few pieces to this answer.
1) 100% you need to contribute enough to get the full company match. The employer contribution will be more valuable than lower fees. (at least while you work here.)
2) Consider a ROTH IRA or Traditional IRA that you manage directly. This of course is dependend on your income and eligibility to contribute. This will allow you to find cheaper investments on the open market.
3) Not sure of your income but at 15% you very well may need to save more info the 401k beyond the money you are putting in to get the company match and a Traditional IRA (Contribution limit of $5500). Put the remainder into the 401(K) plan. I think saving the money versus spending it, and getting a tax deduction will put you ahead even if the fees are higher than average in the 401k plan.
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DAVID RAE, CFP®, AIF® is a Los Angeles-based fiduciary financial planner with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, Investopedia not to mention numerous TV appearances. He helps smart people across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com or the Financial Planner LA blog.
This is an extremely smart question to be asking! I'll lay out my thoughts in order:
1. I'm guessing the answer is no, but do you have any index funds in your 401k plan?
2. If the answer is no, I would approach your employer or HR and express your disappointment with the high fees in your plan. This may not fix the problem immediately, but from the limited information I have, it appears that you have been given poor choices to work with.
3. If it were me, for the time being, I would not raise my contributions. If you qualify, in addition to taking advantage of the match, I would max out contributions to Roth IRA.
4. When the time comes that you have better 401k fund choices, then increasing contributions there would be a great move.
Best of success to you!
If your employer does a 4% match, then only put in 4%. Maximize your Roth contributions for yourself and for your spouse, 5500 each or 11 thousand combined (your wife doesn't have to work to contribute). Also contribute the family maximum to an HSA each year which is currently 8750 and might be increased by Congress, since those funds can be subtracted from your income and unlike a 401(k) you get tax-free withdrawals once you reach age 65
Also try to convince your employer to switch to a lower-cost provider.
Avoid target-date funds and stock funds since the U.S. market is too dangerous. Stick with very conservative choices.