For The Love Of God, Don’t Max Out Your 401(k)!

Oh dear readers, as I mentioned last week we are going to Peru for a week and a half. Now is as good a time as any for a blog break. The next post probably won’t be until mid-April. SAD FACE! But it will be our first Ridinkulous Quarterly Expense Report! Exciting! In the meantime, I hope this topic gets your blood boiling like it did mine. I’m going to need the next few weeks to recuperate.

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“Max out your 401(k)!”

So goes the typical Early Retirement maxim. Save every penny and “make mine tax-deferred, please!” Sounds good in theory, but after some recent discoveries, I see the flaw in this advice. Sometimes, you really, really shouldn’t max out your 401(k)!

Marge was finally able to start contributing to her company’s 401(k) retirement plan recently. Through some absurd reasoning, common at many private companies, I believe, you have to work at least one year before you can put your own money into their retirement account. It’s nonsense how companies hold out on benefits! But I have to admit, once she was finally eligible, I was excited to look at our new investment options!

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Exciting Day!

There it is! The newest “It’s Your Story” retirement fund guide! I felt like I’ve waited so long! The first bunch of pages, as usual, are for all the investment dummies out there. They make sure to hammer home how important saving for your retirement is, and give you quizzes to find out your risk tolerance.

But we know all that.  We want the good stuff. Show me the investment fund choices! What was there going to be inside? Target date retirement funds? Large cap stock indexes? International? Bonds?? Emerging markets!?? The suspense was killing me, and I tore into that prospectus!

You know how we do: We invest in broadly diversified index funds to reduce our risks and keep the fees to a minimum, so I was all keyed up to find what this 401(k) company had to offer…

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WHAT! YOU’VE GOT TO BE SHITTING ME, MAN! LOOK AT THOSE FEES!!

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I’M GONNA KILL YOU!

I CURSE THE HEAVENS ABOVE! WHY?? WHY GOD DO YOU ALLOW THIS TO EXIST! Oh Saint Bogle, deliver us from fees!!

I tell you, Ridinkuloids, I could not believe my eyes looking down the list of investment options. My eyes were literally burning! You’re gonna pay two percent for virtually any of them! SEE THE RAGE IN MY EYES AND FEEL MY WRATH!

I guess it’s been a while since I’ve looked at one of these 401(k) guides. Is this the norm now?? I’m lucky enough that my work’s plan offers a variety of low cost investment options. Half of them are even with Vanguard! So through my work, I am very accustomed to paying somewhere between 0.02% and 0.15% in annual fees.

So what’s the deal? Surely, if they’re charging so much, these funds must be better! Let’s have a look at them!

For whatever reason, this guide is from December 31, 2011. For comparison’s sake, let’s see who beats Vanguard’s Total Stock Market Index Fund (VTSAX), a very boring, very broadly invested fund that provides exposure to the entire stock market, and is not actively managed. In other words, no one is really in charge. This fund is a central part of our retirement portfolio.

For the five years ending 12/31/11, VTSAX returned 3.13%.  After a 0.05% fee, that is 3.08%. It was not a great five years for the stock market. But these funds are actively managed by investment professionals. This is what they do for a living! Surely, they must’ve all beaten boring VTSAX, where no one is managing anything.

OK, zoom in on that listing there and see. Alright… so scanning the 13 stock funds they have on offer, I see one that beat the Total Stock Market Index. OneONE.  Invesco Small Companies Fund.  Five others had returns that did beat VTSAX, but their exorbitant fees destroyed any benefit gained! As for the other seven funds that did worse than the index fund, I have no excuse for them. They bit the big fucking boner.

Look at Invesco’s Global Real Estate Fund. Even spread over a generous five years, their annualized return was -6.58%! You really have to try to bomb that hard!

Yes, on that listing, you might see all of the hash marks I made, instantly ruling out funds all over the place. They are just awful. But there is one fund I reserve a certain special level of stomach-burning bile for: Oppenheimer Cash Reserves.

Oppenheimer

 

YOU’VE GOT TO BE SHITTING ME! WHAT THE FUCK WHAT THE FUCK WHAT THE FUUUUUUCK!

If anyone finds me dead of a heart attack, please go break down the doors at Oppenheimer headquarters and demand justice, because they’re responsible for my death!

There are no words!! No words for the highway robbery they are committing! Why hasn’t anyone been thrown in prison! Why hasn’t a mob burned the building down!

You put your money in a “cash reserve” basically as a safe haven. It is free of any market fluctuations. It’s supposed to be a good place to save for short-term expenses. The fund simply invests in government securities and high-quality debt instruments. As such, the past five years have meant basically zero growth. The equivalent at Vanguard again is the Prime Money Market Mutual Fund.

But the difference is that Vanguard can leave your money alone for a 0.16% expense fee. Oppenheimer, doing the exact same thing, demands as 1.52% fee!! Not only are you paying them to do nothing, in the current environment, you are ensuring that you will lose money!  $10,000 in the first year will turn into $9,848 in the second year, $9,698 in the next year, and $9,551 year after that. Three years in, you’d have lost almost $500. Some safe haven!

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You’re destroying everyone’s lives!

Irresponsible 401(k) Operators: Destroyers of Retirement

What the hell is this 401(k) company thinking? What the fuck does Oppenheimer think they’re doing by ensuring a negative return and raping your retirement funds with fees. This is somebody’s retirement you’re screwing around with!

Not only are the fees outrageous, but the types of funds on offer are nothing that should be offered in your run-of-the-mill retirement plan. I would say these funds are even irresponsible to offer! The average worker doesn’t know the difference between a growth and a value fund, but here’s a 401(k) operator offering goddamn junk bonds and natural resources?

How is anybody supposed to make a respectably diversified plan out of shit like this? By asking for help. They are basically setting you up to be locked into needing their advice!  Unless you feel comfortable dealing with these esoteric investments (I don’t) this is one huge bad idea wrapped in a stinky old diaper.

On the bright side, this whole mess with the investment fees got me thinking in a broader sense about retirement accounts. How many different types there are, the pros and cons of each, and I came to realize, hmmmm, for the past few years, Marge and I had entered the 25% federal tax bracket. Maybe it was time to start thinking about tax deferred accounts?

Previously, I hadn’t paid this subject much mind, because we didn’t have much money to deal with. Well, now that the tax man is taking an additional 10% from us, maybe it’s a good time to visit this topic. So I am working on an analysis ranking all of the types of retirement accounts based on some variables. (And you might be surprised that a rape-based 401(k) plan like this is not always the worst choice!) Stay tuned for The Retirement Account Decision Tree!

Are you outraged? If not, then you’re not paying attention.

19 Comments

  1. If I were in Marge’s shoes, I would talk with HR and the finance officers at the company. Few people realize that when enrolling in a 401K, their employer becomes their fiduciary and the legal responsibility lies with the company to choose suitable investments for the 401K plan members (including present and past employees). If you truly don’t think there are suitable options in there for Marge’s retirement accounts (and if those were my options I would agree), make it known to the company!
    I let our CFO know that I wanted low cost Vanguard options in my 401K a few years back. It didn’t happen overnight, and they’re not quite as low cost as the ones I buy directly through Vanguard since we have a third party managing our 401K, but we got lower cost funds, some of which are Vanguard. It was a win for everyone.

    • Norm

      March 23, 2015 at 2:10 pm

      Glad you agree, Mrs. Pop! Here’s the crux of the problem: It’s a very small company (ten people!) and the boss uses this 401k because her friend works for them in some capacity. Margie isn’t the only one who thinks they’re overpriced. She can correct me, but I think even the HR person told her to rollover her old 401k into an IRA elsewhere, and not the company 401k, specifically because of the fees. Heck, maybe the boss thinks it’s overpriced too, but it’s up to her to switch companies and risk upsetting her friend, I guess. I think that’s the only reason they’re signed up with this company in the first place, since they supposedly only usually deal with “high wealth” individuals… who probably don’t care what the fees are. It’s never a good idea to go with a vendor just because your friend works there.

      Good on you for getting your company to change!

  2. I realize it’s a long shot, but is there any chance Marge could talk to HR about the insanely bad 401(k) options? My hubs politely complained, but apparently he wasn’t the first, and eventually several people from the company got together and convinced HR to switch to a better plan. Admittedly, his company is quite small (~35 people) which I think helped, but I would hope that Marge isn’t the first to take issue with their terrible, horrible options. Obviously, YMMV, but maybe some casual discussions with co-workers and HR could help? Plant some seeds of doubt?

    • Norm

      March 23, 2015 at 2:14 pm

      Hi Beth! Looks like you and Mrs. Pop agree. Maybe something will change, but it comes down to a personal relationship the boss has with someone at the 401k company. Other people there don’t like the funds either, so something might change. The HR person has said as much. There are only 10 or 11 people working there.

      Did you get that book yet?

      • Ugh, that sounds like a crappy situation. Hopefully the boss will wise up and do what’s right for the employees.

        I did get the book! Haven’t had a chance to read it yet, but it is next on my list.

      • With DH’s company they looked into Vanguard and Fidelity, but it’s a small company and the costs to the company were too high for the owner for cheaper plans. So the employees continue to pay for it via fees. They’re still looking into other companies but so far no winners.

  3. Wow… There is a case for the minimum investment to get the matching funds. Makes me appreciate the funds my employer (the US Government) offers us in our 401k-like (TSP) plan. Average fund cost is .03% and fairly close representation to the equivalent ETF tracking stock.

    • Norm

      June 2, 2015 at 6:55 am

      Absolutely. I make just that case in my latest post! Matching funds are always the best. Don’t look a gift horse in the mouth!

      Similar to yours, my retirement fund’s expense ratio now is 0.23%, and that’s even with a bit allocated to a 1.5% emerging markets fund!

  4. I was so happy when my company added Vanguard Institutional Funds. But this year they are introducing administrative fees of $15 per quarter, which adds up to $60 that will taken out o my earnings. All to be more transparent and make the funds have lower expense fees. But Vanguard funds are already as low as can be, so I’m losing money!!! $60 is $60 bucks. Sigh.

    • Norm

      August 16, 2015 at 7:28 am

      My employer does the same thing, but it’s $20 a year I think. Eh, what can you do. It’s worth the trade-off. Especially when the Vanguard Institutional Index fund Plus Shares expense ratio is 0.02%. Can’t get much lower than that!

  5. I lucked out, too. My CFO personally vets each 401K investment options. He even allows you to do a stock market option (for the crazies). Each year he leads the 401K seminar and harps on people to use the 401K. He goes so far as to give everyone that is active a $100 bonus (not even into your 401K, just a check).

    If he saw a company with these options, he would flip his lid.

    A 401K like this is a detriment to retirement. If the guy likes his employees, he will fix this.

    • Norm

      August 17, 2015 at 10:17 pm

      That CFO sounds awesome. I agree this type of plan is definitely a detriment to retirement savings! Luckily, Marge’s company is now exploring other options, a process that was started soon after this article posted. Coincidence?? … Probably.

  6. OMG, my blood is boiling about this!!! You can’t even participate for a year and then you’re offered a bunch of funds with rip off fees. Awful!

  7. Wow, that’s even worse than my husband’s. His lowest fee fund is 1.16 (their S&P 500 fund).

    We just maxed his out after only paying up to the match for a couple of years because honestly I didn’t know what else to do with the money (since we’re maxing my 403b and 457, our mortgage is almost done, we’re not eligible for tax-advantaged IRAs without doing a backdoor, we don’t have an HSA, and the kids have a lot in the 529 already) and presumably we’ll be able to roll it over some day.

    • Norm

      July 8, 2016 at 8:11 pm

      After so much hemming and hawing, my wife’s employer has finally decided where to switch plans to. They are going with Schwab, which seems to offer some fine, cheap index funds. I just hope they transfer over there fast enough that we can max out for this year!

  8. Great post! You’re missing one important potential variable – how long you plan to stay with the company. Once you leave the company, you can roll over your 401k into a low-fee Vanguard IRA, still using the pre-tax funds. If you are the type to stay at your job for many years, this doesn’t help you. However, if you change jobs every 1-4 years, you may pay high fees for the short term but be able to roll over as soon as you leave. It’s important for this reason not to leave money sitting in a high-fee 401k. But I do think it’s ridiculous how 401k funds are allowed to charge such high fees – it should be criminal!

    • Norm

      July 11, 2016 at 11:17 pm

      Agreed! I’ve thought about that too, and once Marge quits working permanently, I’m sure we’ll move all the funds into a Vanguard IRA. She already has one filled with 401(k) funds from a previous job or two. But since her current job is the closest she’s come to finding her “forever job,” we wanted to deal with the cards we’ve been dealt and try to get the higher-ups to bring on a better 401(k) provider.

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