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%.
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.
As always, the short answer is it depends.
Do the returns justify the higher expense? I know it's highly unlikely that they do, so let's assume they don't. Here's what I would do personally: contribute the matching amount, then contribute the maximum to my IRA (or Roth IRA, depending on the tax analysis). If I still had some saving capacity, I would top-off the 401k. If I still had more saving capacity and all my income was W-2 income, I would save in a taxable investment account or start a small business.
That's complex and inconvenient though and it's likely that the tax benefits of saving in your 401k will outweigh the "high" expenses. When you leave that business, you can roll it into your IRA.
Here's another idea: If you work at a small business where you may be able to affect change, go into HR and explain that those expense ratios are high. With ratios like that it's common that the business has been told that this 401(k) is "free" and they aren't being charged any "fees" to have it managed. If that is the case, of course it's not free - the business doesn't pay the advisor, but the employees are frequently paying the advisor twice what the business could be paying with another plan. Additionally, when a business pays the advisor for the plan, it may get a tax deduction, while you as an investor do not.
Pro-tip: if you are paying those high fees, so is your boss, her boss, and the owner, etc.
As far as changing your asset allocation, diversification and risk tolerance should drive that decision.
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.
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!