What if I don’t invest in my 401(k)?
June 4, 2010
Will the cornerstone of Future Me’s Castle crumble to bits?
As excited as I was to start contributions to my new 401(k) as soon as I was eligible, the sad truth is that the plan carried by my company is less than ideal. By that I mean, the expense ratios start at .65% and go up, way up, from there. For any asset allocation, an investor would have to accept a hit of 10-20% of contributions along with the usual investing risks.
I’m a Vanguarder: no fees and low fees are my mantra! While we have an up-to-4% match with a 6% contribution, mediocre funds, outrageous fees and other additional fees I’ve not yet ferreted out are already eating up any possible gains. Is that now 2% or less worth it?
Certainly it’s 2% that I didn’t have to contribute but consider that my money won’t have the opportunity to perform in a stable fund like the ones I can find with Vanguard. There are 5 index funds and their online access is limited – witness the fine print disclaimer that access may be restricted and will be limited during peak times.
I’m not sure the pros [the match and the tax benefits] outweigh the cons [poor funds, many fees].
Alternatively, I could always take cash and dump it into a ROTH, which doesn’t actually give me any tax benefits right now, and also open up either a SIMPLE IRA or a SEP-IRA for the freelance income. It’s giving up the 4% match, but I can stick with Vanguard and not give up any of that match sacrificed to high fees.
It’s hard for me to say: I won’t invest in the 401(k) and will give up free money. But it’s harder to say I’m going to blindly follow conventional wisdom when I know it’s not the usual free money is great scheme.
If you are going to invest for retirement anyway then even if the fees are high you seem to win by investing in this 401k given before tax contributions plus the match. You probably won’t stay with this job forever and can then roll the money into a fund manager that you like better. The only question is whether taxes now (Roth) vs. taxes later 401k makes the 3% or so gain from the match minus additional fees not worth it.
Actually, there are more options in the freelance. If I were you, I would do a Fidelty solo K and put 100% of my freelance earnings in there.
If that isn’t going to get you there, your 401(k) might have a cash option. That might be good for a while. Once you leave your job (and it will be sooner than you think) you can just roll it into a Vanguard Roth. Easy.
i only put what i need to get my full company match and then i do the rest of my investing on my own in my roth ira (which i max out every year) and my non-retirement investment accounts
Sounds like a Roth is the better choice. Maxing it out each year will still put you well ahead of the game for retirement.
Our company doesn’t have a match with their 401(k) option, so I won’t be investing in one either. I’ll use a Roth IRA for my retirement savings.
I’m not sure how to do the math on this. Let’s say your 6%=$600. Would the 4% match then =$400? Total of $1000.
20% hit of expenses would reduce your investment to $800.
Is that how you decided the match was 2%?
You seem to be a fairly high earner, so I agree that a Roth would be the first thing to do. Then, I also agree that using your free lance income to fund Keoghs, SEPS, or whatever would be the way to go. Also agree with Dog above to see if you can do a GIC or other cash option.
@mOOm: True, if I contribute enough, the tax benefit mitigates the fees a bit.
@DogAteMyFinances: No cash option but perhaps the solo K.
@Carrie: That’d be a good 6% to get the full match.
@LMM: I can easily max the Roth now if I just back off on the emergency fund.
@Red: It’s a shame we can’t do better than the Roth but at least we have that much 🙂
@FS: It would reduce my match to $200 of the $400 … but I’m actually not really a high earner. At least I don’t think I am. I earn a moderate salary.
I don’t expect to earn a significantly greater amount in coming years. More, yes (I hope), but not so much as to disqualify myself for the Roth.
I too would go with the Roth all the way.
In addition, I love Vanguard funds too.
@Everyday Tips: Thanks for weighing in. If nothing else, I should be funding the ROTH since I’ve failed to do so for at least 2 years now.
[…] much as I hated the fees from this small company, we had a decent match so I contributed enough to get the full match. After 2 plus years, I have […]