Today, I ‘d like to talk about 401(k) fees. Some time back, I saw an interview with John Bogle and read the transcript regarding the high expenses within 401(k) accounts. When this came up in a financial news group, I was told that the data was old, that the fees had come down from the levels John suggested.
In Forbes’ 2007 investment guide was an article titled “Retirement Ripoff” which discusses the same issue, high fees that negate the value of investing in a 401(k) vs a post tax account.
A Business week article which quoted HR Investment Consultants of Baltimore’s “401k Averages Book” said that for plans of 5,000 participants, the average cost was 1.12% (and it went up from there, to 1.4% for 50 participants). If 1.12% is the average, there are certainly some plans charging more and some less.
My next question was this: “How much higher must the fees be (on the 401(k) vs post tax account) to negate the tax savings of the 401(k) and therefore advise a client to put her money in either an IRA or post tax account?” Simple question, and after spending some time with Excel, found the answer to be 0.79-0.86% as the range for concern. To try to avoid any bias, I first assume that money is going in to the 401(k) and coming out in the same tax bracket. Of course, an individual’s situation will vary, some extreme savers will find they have saved themselves into a higher tax rate. I also chose to look at a 20 year period since this is a reasonable time horizon for this exercise. For the post tax account, I assume 15% rate on dividends and on capital gains upon the sale of the assets. Using a growth rate of 10%/yr, I find that 0.86% in higher fees within the 401(k) is enough to make the post tax account have the same final value. If we assume a lower growth rate of 8%, the break even is 0.79%.
If your employer provides any matching, then you should still contribute enough to capture that match even with the high fees. If there is no match, look at the fees very carefully. Keep in mind there are many good index funds which offer a low 0.10% – 0.20% expense ratio. If your 401(k) annual expenses are 1% or higher, consider instead an ordinary taxable account holding index funds.
History has shown that tax rates for earned income, dividends, and capital gains have changed, and are likely to change again before you retire. Diversifying among pre-tax and post tax accounts can help you avoid the tax trap of over loading the wrong type of account.
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This disaster will haunt us for some time, I’m sure. This cartoon caught my eye, as it wasn’t too far back that “Drill, Baby, Drill” was the mantra.
Joe
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A few weeks back, my weekly roundup contained a link to a post titled Greed Is Good – Or Is It? What Jesus Would Say to Gordon Gekko. I recalled a passage I had once read that seemed applicable to this question, and I found it:
“And God saw everything that He had made, and behold, it was very good” (Gen 1:31)
Rav Nahman said in the name of Rav Shmuel:
“Behold, it was very good”–that is the will to evil. But is the will to evil good? That is astonishing!
Yet were it not for the will to evil, men would not build homes, or take wives, or propagate, or engage in business.
And Solomon said the same:
“I considered all labor and all excelling in work,
that it is a man’s rivalry with his neighbor” (Eccles. 4:4)
… They said:
This being a time of good will, let us pray and ask for the will to evil.
They prayed and the will to evil was delivered to them.
The prophet said to them:
Know, if you destroy this one, the world will come to an end.
They imprisoned it for three days:
then they sought a new-laid egg in all the land of Israel,
and not one could be found.
(Gen Rabbah, 9:9; BT Yoma 69b–Glatzer trans.)
Note, this is a quote from the Talmud, and without opening up too deep a religious debate, let’s just look at what’s proposed by this passage. Solomon suggests that all labor is a form of rivalry with one’s neighbor. Taken in its entirety, this reading tells us that without (the word that translates to) Evil the world would quickly end, that even another egg would not be laid. I’ll surmise that translation instead of “evil” might be “Human nature” or “ambition,” but I find it interesting that even that long ago, there was a debate going on about man’s motivation and whether one could separate his dark side from that which makes him have a will to survive.
Joe
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Nicole at Rainy Day Saver talked about stocking her pantry at Stocking Up Your Pantry: Yea or Nay? I’m with her, I like the pantry for two reasons, the savings when you make the purchase, and then the not rushing out last minute to grab some off item you just ran out of. Have to use first-in first out method to keep items from getting old, but that’s not too tough.
One of my tax tweeps Kelly Phillips Erb, guest posted 5 things you can do now to get ready for huge tax hikes in 2011. My favorite suggestion of hers? “Die.” Which just goes to show you how tough it is for the average person to manage their taxes. When Uncle Sam starts raising rates, watch out.
It appears that one of Kelly’s readers took her advice, and the New York Times wrote about Legacy for One Billionaire: Death, but No Taxes. Dan L. Duncan was the first billionaire to die in 2010 while the estate tax rules had a one year “no estate tax” provision. On the other hand, his heirs did not get a stepped up basis, but now have to track their basis from the time Dan acquired any of his posessions. A paperwork nightmare, but for a Billion Dollars, I’ll take that headache.
In contrast to the estate issues mentioned above, Bob at ChristianPF wrote about how Buffett & Gates Ask Rich To Give 50% Of Their Wealth.
This past week my fellow Money Maven Network member, Neal Frankle posted a review of You Need a Budget, a personal budget software package.An excellent overview of the program. While I like to handle my finances via spreadsheets, I understand that many people simply do not, preferring a professionally written software package, and Neal’s review is a good read if you’re looking to get your budget under control.
Happy Father’s Day,
Joe
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I know this political cartoon is meant as satire, but I think the artist is misguided. Many inventions are created not with people encouraging each other, but by people who believe they do something despite what others tell them. As I discussed some time back, in More Thoughts on Solar, nearly 6000 times the energy we currently use hits the Earth each day in the form of solar energy. It will take a bit more than wishful thinking, I know, but I believe that investing in solar as an alternate energy has the potential to change the world for the better. Avoiding just one disaster as we’ve just seen in the gulf will be return enough.
Joe
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