Cindy from San Diego, she writes in: “I just started a new job and I’m not pleased
with the 401(k) options.
I’d like to know if I should participate, or if there’s any alternative that you’d recommend.
This 401(k) includes a $90 administration fee and only 1% employer matching if I contribute 10%.
I’m already maxing out my Roth IRA.
I can afford to invest about $600 a month.
At the moment, that’s almost 10% of my salary, but expect that to go down starting next year.
What do you recommend?”
Well, thanks a lot again Cindy for the e-mail, and Alan, why don’t you start this one?
Okay. Well Cindy, so I guess I don’t really know what the options are.
Maybe they’re not quite as bad as you think.
I guess there’s still a match – it’s not a great match, but still there is a match,
and if you put in 10% then you’re getting a 1% match.
So that’s something.
So I guess I’d want to look at that a little more deeply.
Sometimes people think they don’t have good investment choices because they
only have 20 choices.
But some of them may be great.
But let me go down another path, which is maybe the investment choices are terrible.
And so she’s already maxed out a Roth IRA.
So then you would look at other investments outside of ar retirement account.
You don’t get a tax deduction, but then you can – it’s called a non-qualified
account or non-retirement account, brokerage account, whatever you want to call it.
And then you invest, generally for growth, if you’re working, going to be working for
a while, and when you invest for growth, that generally kicks off capital gains when you
actually sell those positions, or maybe you get some qualified dividends.
It’s relatively tax efficient.
And that, assuming that you’re really right and these are terrible options, I would just
invest outside of retirement.
Cindy, I don’t care how bad the investment options are.
I don’t care if they are 2% in fees.
I don’t care if you don’t get a match.
Put the $600 in the 401(k).
It’s out of sight, out of mind, you check a box, it’s so easy.
And you’re going to end up with a lot more money, guaranteed.
Well, I… quasi-guarantee.
Yeah you can’t guarantee anything because of compliance.
But I mean we argued about this before.
If I have a 401(k) plan and you don’t, or you’re going to go open your brokerage account,
you’re going to put $600 in your brokerage account.
I’m going to open up my 401(k) plan and I’m going to send 10% of my income, boom,
just let it go.
And then I get my paycheck, and then I’m going to spend it.
You, on the other hand, have to write a check every single month of that $600
to that brokerage account.
Guess what happens next month?
Yeah, I don’t write it, because you know what, the car broke down.
And, even worse is, the car really broke down and I got to use all those assets to pay off
the car, pay the repair.
And so now I’ve got nothing.
Well, no you’re on Amazon.
You’re buying new shoes.
Oh, it looks like I got $600 in this account.
Right, and you’re like, hey, you know what, should I save, should I not?
But if you pay yourself first, out of sight, out of mind, because humans
are not great at money.
If I could just get that money out of my hands and put it into a retirement account and let
that thing go, and select the very best options within the plan, $90 administration fee, and
I don’t care what the fees are internally.
To be honest with you, this is just my opinion, this is not advice – if I were Cindy, that’s
what I would do.
Yeah. Well, I would do the same, and I’ve got to believe that they’re not quite as bad
as what she thinks.
But you do get a match, out of sight out of mind – that’s a really good point because
when it’s in your brokerage account, you can grab that money anytime you want.
And life does happen, and people grab that money all the time.
Sometimes they grab their 401(k) money and they shouldn’t, but at least it’s in a
401(k) and you’re less likely to do that.
Another thing Cindy, what I would recommend, is talk to your H.R. department if it’s
that bad, or if it’s a small company, talk to the president or the CEO or whoever and
just say, “hey, I’m taking a look at these options and I’ve done some research and
it’s not that great.”
I want Vanguard or I want some low-cost investments.
Is there something that we can do here maybe?
The company has a fiduciary responsibility if they have a 401(k) plan.
On the flip side though, this is what drives me nuts, is that there’s so much cost and
administration for small businesses to establish a 401(k) plan.
There’s, what, only maybe 40% of all companies that have a plan?
Just because of the rhetoric, the red tape and the legalese that go around it.
“I’m going to offer 401(k) plan, but I don’t want to, as an employer that only
has maybe a handful of employees, I don’t want to spend $10,000, $20,000 administrating
this thing, get a TPA, file 5500’s and do all this stuff.”
So what they do is they find, let’s say a mutual fund company and they’ll say, Hey
Mr. or Mrs. employer, we’ll set up this 401(k) plan for you.
It’s not going to cost you any out of pocket, but you know what, how we’re going to get
paid is that it’s just going to be a little bit higher administration fees in there.
But you have a plan, and all your employees can participate in the plan – for a little
$90 administration fee for me?
I will pay that all day long.
But it’s like people want their cake and eat it too.
So anyway, Cindy, that was not reflected towards you.
I think you’re a wonderful person.
I would go with the 401(k) plan.