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What Do You Do When Your Company’s 401(k) Fees Are High?
By JLP | July 14, 2007
I received this email from a reader:
JLP,
I am starting a new job with a small firm that offers a 401k through Principal Financial Group. The company matches dollar for dollar up to $5000 per year. There are 17 funds in the plan including lifetime funds and funds covering all the major asset classes. The problem is that the fees for the funds are exorbitant, averaging about 2.3% for the active funds and 1.6% for the two index funds. What’s more, the performance of the active funds is poor for the respective asset class across nearly all funds.
I read your post from April 3, 2007 about 401k fees (How Much is Your 401(k) Costing You?), as well as the comments, but I still wonder what to do here. Should I a) forget the 401k and invest in the IRA ($8000 max for wife and me), b) invest in the 401k up to the matching, then supplement with the IRA, or c) forget about the fees and invest in the 401k as much as I can afford.
My company is small, so I imagine they are getting a raw deal from 401k providers. I used to work for a different small firm that used a simple IRA through Fidelity that let me invest in anything I want via Fidelity. Maybe I’ll see if my new company could be persuaded to go that route.
Any advice or comments on this topic?
Thanks!
Those fees are high. My guess is that the fees are high because it is a small firm and they either went with an annuity or they are spreading the costs of the plan among the employees. Administration of a 401(k) plan is not cheap and providers would much rather service large plans than small plans. In any case, those fees are high and I think you should bring it up with your employer. Hopefully it’s not a political issue (like the boss’ brother is a broker or something like that). Be careful though. As the “new guy,” you don’t want to cause any problems.
Under these circumstances I would put in just enough to get the company match and use Roth IRAs for the rest. Even with the high fees, it is hard to walk away from free money. Even at 1.6% (wow, 1.6% for an INDEX fund!), I would stick with the index funds and use the Roth IRAs for diversification.
Good luck!
Topics: 401(k), IRAs, Retirement Planning, Roth IRA |