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  • Crappy 401k

    I'm about to become a profit sharing member of a large multispecialty clinic and will become eligible for their 401k.  The service is run by Prudential. Looking through the prospectus on their relatively limited investments, they have essentially zero low-cost options.  The lowest cost option is 0.32% for thee Dryden S&P 500 Index Fund. Everything else is up around 1% or even up to 2.5%.  I feel like this is absolutely ridiculous but nobody else seems to think it is a big deal. When asked if they think the 401k is good, they typically say they think so because they are getting between 5-8% annual growth.  I just want to grab them and shake them.

    What options do I have as a W2 employee with no 1099 income?

  • #2




    I’m about to become a profit sharing member of a large multispecialty clinic and will become eligible for their 401k.  The service is run by Prudential. Looking through the prospectus on their relatively limited investments, they have essentially zero low-cost options.  The lowest cost option is 0.32% for thee Dryden S&P 500 Index Fund. Everything else is up around 1% or even up to 2.5%.  I feel like this is absolutely ridiculous but nobody else seems to think it is a big deal. When asked if they think the 401k is good, they typically say they think so because they are getting between 5-8% annual growth.  I just want to grab them and shake them.

    What options do I have as a W2 employee with no 1099 income?
    Click to expand...


    Back-door Roth and a taxable account. You'll probably want to begin lobbying for a change but this could take a few years. In the meantime, you'll want to max out your tax-advantaged account. By contributing to the Roth and the taxable, you'll be able to compare results and show your partners when you're ready to make your case.

    Don't be surprised if the difference is not as large as you expect - I realize expense ratios are a hot topic on this forum, but they are not the only factor in optimal long-term returns and often not the main factor.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      0.3% for the S&P 500 fund is not that terrible.  My employer's plan has a similar S&P fund for 0.5% which I use.  Some places are much worse.  Obviously I would love lower fees but you should still contribute to the 401k for the tax benefits.  Then also do the roth and taxable accounts..

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      • #4




        I’m about to become a profit sharing member of a large multispecialty clinic and will become eligible for their 401k.  The service is run by Prudential. Looking through the prospectus on their relatively limited investments, they have essentially zero low-cost options.  The lowest cost option is 0.32% for thee Dryden S&P 500 Index Fund. Everything else is up around 1% or even up to 2.5%.  I feel like this is absolutely ridiculous but nobody else seems to think it is a big deal. When asked if they think the 401k is good, they typically say they think so because they are getting between 5-8% annual growth.  I just want to grab them and shake them.

        What options do I have as a W2 employee with no 1099 income?
        Click to expand...


        Do they have a brokerage option?  Many 401k plans have this, but the users don't know it.

        Yeah, I don't want to pay fees like anyone else and want lowest possible ERs, but returns are reported as post-expenses.  So a fund with 10% reported return and 2% ER has a better return than a fund with 9% reported return and 0.1% ER.

        The basis of choosing index funds with low ERs is rooted in the concept that an "active" fund has a manager is trying to beat the index, and those funds carry the expense ratio because you're paying them to try, but many funds do not routinely beat their index because of turnover and because markets are inherently not 100% predictable: that means you could quite possibly be paying more for the same or less.  This does not sit well with many passive investors, esp this crown and the Bogleheads, myself included.  It's a very reasonable opinion (which I do indeed hold).

        However, if you are faced in a particular scenario in which you do not have access to lower-cost funds, such as your 401k options, or if you want a particular niche in your portfolio, like certain international small caps, then paying a higher ER is not the end of the world, especially if the fund in question is routinely kicking out net returns better than or similar to the low-cost index funds (yeah, gambler's fallacy etc, maybe so).  It is very possible that, despite the higher ERs, those funds may do as well or better than good ol' VTSAX/VTIAX/VBTLX, etc.

        So, tell us what other funds are in your 401k options, and let's see if they *might* possibly be acceptable.  It's still a reasonable assumption that, despite those fees, it's probably still superior to take the tax advantage to use your 401k than it would be to place them in a taxable brokerage account instead (though taxables def don't suck per se).

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        • #5




          I’m about to become a profit sharing member of a large multispecialty clinic and will become eligible for their 401k.  The service is run by Prudential. Looking through the prospectus on their relatively limited investments, they have essentially zero low-cost options.  The lowest cost option is 0.32% for thee Dryden S&P 500 Index Fund. Everything else is up around 1% or even up to 2.5%.  I feel like this is absolutely ridiculous but nobody else seems to think it is a big deal. When asked if they think the 401k is good, they typically say they think so because they are getting between 5-8% annual growth.  I just want to grab them and shake them.

          What options do I have as a W2 employee with no 1099 income?
          Click to expand...


          While 0.32% is not great for a S&P 500 compared to your options in a taxable account (typically 0.05% ER), I'd still contribute to the 401K compared to putting that money in a taxable account.  The tax benefits of a 401K is worth the extra 0.27% in annual ER costs.

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          • #6
            https://www.whitecoatinvestor.com/what-to-do-with-a-crummy-401k/
            Helping those who wear the white coat get a fair shake on Wall Street since 2011

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            • #7
              Invest in the s&p fund and find another account to get your fixed income allocation.

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              • #8




                I’m about to become a profit sharing member of a large multispecialty clinic and will become eligible for their 401k.  The service is run by Prudential. Looking through the prospectus on their relatively limited investments, they have essentially zero low-cost options.  The lowest cost option is 0.32% for thee Dryden S&P 500 Index Fund. Everything else is up around 1% or even up to 2.5%.  I feel like this is absolutely ridiculous but nobody else seems to think it is a big deal. When asked if they think the 401k is good, they typically say they think so because they are getting between 5-8% annual growth.  I just want to grab them and shake them.

                What options do I have as a W2 employee with no 1099 income?
                Click to expand...


                There is no reason to just take it.  Find out who the fiduciary is, and if there is nobody in charge, get together with like-minded docs and agitate to have the clinic to hire an ERISA 3(38) fiduciary to improve your plan investment menu.  There was recently a lawsuit involving a plan that had 30 bps S&P fund.  This is ridiculously overpriced, and whoever is making these decisions is asleep at the switch.

                http://www.napa-net.org/news/technical-competence/erisa/provider-sued-for-using-its-funds-as-default-in-401k-plan/

                It is really easy to convince them to make changes.  Just say that having an S&P500 fund with 5bps vs. one with 30bps will save participants significant amount of money over the long term, and the same goes for actively managed vs. passive funds.  Passive funds can also deliver 6%-8% return, so why pay an extra 1% or more in fees that will cost millions for the plan participants?  This is definitely a lawsuit waiting to happen, and these types of lawsuits are happening as we speak, so those who don't know about it will be caught unaware (and will end up having to pay for it).

                 

                 
                Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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