I have a horrible 401k plan, with high expenses. Should I stay with it or move my money elsewhere?

Question

I'm in need of help choosing options for my 401k. Unfortunately, they are not very good. Nearly all of the expense costs are over 2%! But I have brought it up with my HR to see if there is any way to find a better 401k for the company. They say they are looking into it, but in the mean time....

Questions:

1. My expense ratios are extremely high. Which options should I choose if I'm looking at 90% stock / 10 % bond? How much to Large/mid/small cap, specialty, etc? I'm currently thinking 10% in the lowest bond PIMCO TOTAL RETURN A (PTTAX) (2.10%) and 90% in the S&P 500 Index fund HARTFORD INDEX HLS IB (HBIDX) (1.84%) unless better suggestions are made.

2. If my 401k doesn't change before I leave my job (not planned in the near future), I should roll it over into my Roth IRA after I leave due to these high expense ratios, correct?

3. Should I still max contribute with these horrible expense ratios?

Answer 1

2%? I would put in just what it takes to share in the profit sharing, not a dime more. My S&P fund cost is .02% (edited, as it dropped to .02 since original post), 1/100 of the cost of most funds you list. Doesn't take too many years of this fee to negate the potential tax savings, and not many more to make this a real loser.

Answer 2

The first question is essentially asking for specific investment advice which is off-topic per the FAQ, but I'll take a stab at #2 and #3

(2) If my 401k doesn't change before I leave my job (not planned in the near future), I should roll it over into my Roth IRA after I leave due to these high expense ratios, correct?

My advice is that you should roll over a 401K into an IRA the first chance you get (usually when you leave the job). 401K plans are NOTORIOUS for high expense ratios and why leave your money in a plan where you have a limited choice of investments anyway versus a self-directed IRA where you can invest in anything you want?

(3) Should I still max contribute with these horrible expense ratios?

If they are providing a match, yes. Even with the expense ratios it is hard to beat the immediate return of an employer match.

If they aren't matching, the answer is still probably yes for a few reasons:

• You already are maxing out your ability to contribute to sheltered accounts, so assuming you still want to sock away that money for retirement, the tax benefits are still valuable and probably offset the expense ratios.

• Although you seem to be an exception, it is hard for most people to be disciplined enough to put money in a retirement account after they have it in their hands (versus auto-deduction from paychecks).

Answer 3

As to the rollover question. Only rollover to a ROTH if you have other funds you can use to pay the taxes you will be hit with if you do that. DO NOT pay the taxes out of the funds in the 401k. If you don't have a way to pay the taxes, then roll it to a traditional IRA. You never want to pay the government any taxes 'early' and you don't want to reduce the balance.

beyond that, A lot depends on how long you figure you will be with that company. If it's only a few years, or if you and other employees can make enough of a fuss that they move the fund to someplace decent (any of the big no-load companies such as Vanguard would be a better custodian), then I'd go ahead and max it out.

If you figure to be there for a long while, and it looks like someone is in bed with the custodian and there's no way it will be changed, then maybe look to max out a Roth IRA instead.