Crapple writes:
I’m 27, looking to start planning for retirement. My company has an arrangement through The Hartford group for our 401K and I read your article on Fund Level Expenses and how the broker will be earning compound interest on MY compound interest. I also ran across this article while researching:(and it also links to a Mutual Fund Expense Analyzer that might be handy for other Consumerist readers). The article is talking about getting yourself involved in an Index Fund that would have fee’s of around .19% or so and going it alone.Most of the 16 investment options I have through The Hartford have a fee of over 1% (many over 1.25%)…
But to undertake the medium-high risk plan I’ve devised, I am able to keep my fee’s around .91%. I’m about 30-35 years from retirement, and of course I’d like to get the most bang-for-my-buck. But I’m really REALLY green in this area. Now, my company DOES offering matching up to 3% of my wage, and will then match HALF of what I contribute up to 5%…so for every 5% I invest, they’ll match 4%.
I don’t know how to calculate all this, but I need to know if I’m better off sticking with my matching plan in my company, or if I should go it alone with something that has a much smaller fee? I don’t have a lot of up front capital to invest, so maybe that means I wouldn’t even HAVE the option of going it alone. But I’m also hoping to move in about 4-5 years from where I live, and I would have to change companies to do so…so I doubt I’d be fully vested by then, but I figure that starting something now is better than nothing.
If you don’t feel able to point me in the right direction, I’ve read a lot of comments about other investors on the site and was hoping you could pose this to them as well so I could get some feedback.
Thank you!
Crapple,
Matching policies vary by plan so you’ll have to read the plan documents very carefully to figure out what’s up. UPDATE: But you should probably take the match while you work there, then roll it over into a 401k after you leave and invest it in whichever low-fee fund you like. I’m going to go ahead and assume that your employer won’t continue to match after you don’t work for them. Since you think you’ll only be around there for 4-5 years, you’re probably better off going with a low-fee fund. While the employer won’t keep matching your investment, the fund will still keep chomping away at your capital through its compounding fees.
For more information on how seemingly innocuous fund fees can devour most of your retirement fund, read our previous post, “How Your 401(k) Is Ripping You Off.”
(Photo: Getty)
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@smythe: Actually he’d only have to put in 5% to take full advantage of his company’s matching.
@Boberto:
The vesting policy is not clear from the initial request. No assumptions please.
All fees for 401(k) management are enumerated in the Prospectus. Look again.
@ADismalScience:
I should say, the specific fund’s management fees.
cant tell you how many times people I work with will say I can’t afford to have more than 2% of my income going into my 401k..Our company matches to 4%. I tell them the tax savings will make up for most of it and you’ll barely notice the difference in your paycheck. Would you say no to someone handing you a $20 with no strings attached? I immediately made my contributions equal what they would match and have raised the percentage every year. I completely agree
company match = free money, and I’m all for that
@Corydon:
You should ideally look for a “fee-only” financial advisor. (See wiki: [en.wikipedia.org]).
I personally work with LPL Financial (www.lpl.com), an independent broker/dealer and financial service company. They don’t sell proprietary products, nor do I make money through commissions. I represent the client first.
WOW! Thank you all so much! I didn’t get to see the posting until I got into work this AM. There is so much information that you have all left and I wanted to thank you all. I knew I wanted to find a planner, but I didn’t know about Fee-Only Advisors and was nervous of getting “taken”.
I’ll definitely be taking the company up on the matching to it’s fullest extent. Whenever I leave, roll-over to an IRA without cashing it out (thank you for that specific tid-bit!). I’d love to get in on the Vanguard 500, that seems to be a great investment, but I think I’ll have to wait until I get a new employer and I’ll diversify my investments. Once my wife and I each get our 401Ks setup (different employers), we’ll find a Fee-Only Advisor to get our finances in order and get a firm budget in place.
Again – thank you thank you THANK YOU!!
The trick to easily rolling over a 401(k) when you leave a job is to call up your preferred semi-cheap broker (e.g. Schwab, Fidelity) and say “I’ve got a 401(k) I’d like rolled into an IRA. Can you help me with that?”
Then, watch them fall all over themselves helping you.
I like Schwab because they have lots of zero transaction fee mutual funds. For regular contributions I use these, then every year or so I can make a big transaction into a very low cost index fund. No sense in paying $8.95 every month to buy into the low cost fund.
So, for a year or so I’m paying .35% or .75%, then I pay $8.95 and transfer it over to a .19% expense fund where it will sit for 25 years.
the wall street journal guide to personal finance is an excellent resource for these types of questions. index funds and target retirement funds are certainly easy and cost-effective, but they might not be an option in your plan.
bear in mind that the financial rep (from John Hancock, whatever) handling your 401k options is not likely to provide the best, lowest-cost funds for you simply because they don’t earn as much commission for him.
@timsgm1418: people are retarded when it comes to thinking long-term. (see: current credit crisis)
To address the primary question, you should first maximize your matching contributions. This will more than cover the additional expense.
Another thing to consider is if your 401k plan is not offering a variety of investments and/or some low-cost investments, then send a friendly e-mail to the plan administrator. This is typically a mid-to-upper level manager in the HR or Benefits department.
Why will they listen to you? They have a great reason to listen to you, they have a personal fiduciary responsibility to you and the other participants in the plan. That is a fancy way of saying that they are, at a personal level, legally responsible. Therefore, it is in their best interest to note your concern and raise the subject the next time the investment line-up is reviewed which is typically each quarter.
Right now, “fiduciary risk” and “plan expenses” are red-hot topics. At the same time, the 401k provider industry in the US is becoming extremely competitive. I think that most plan administrators would seriously listen to your input.
Also, when judging fees keep in mind that you should expect to have a higher expense ratio on in a mutual fund that invests in some sectors (technology, overseas, emerging markets) as these funds require more research. You should also expect lower a low expense ratio on a mutual fund that invests in domestic equities, bonds, money markets, and index funds. The point is, that a funds expense is an important aspect, but shouldn’t be your only aspect you consider. The potential for greater return, for instance in an emerging market, may outweigh the added expense.