I have been looking to optimize the wife and my investment options, which is why I am in the processing of transferring her ROTH IRA to avoid the fees on her loaded fund. So when the option to join her work 401(k) opened after a year of employment I figured it can’t be worse than throwing more money into the ROTH at Edward Jones, right?
WRONG!
So it took awhile to this point where we know we need to stop contributing. First, to be eligible, my wife had to work at her employer for a year. That passed in May so we signed up in June and stopped contributing to the load fee ROTH account. Step in the right direction, yes?
The next step
The 401(k) guy was supposed to come and talk to my wife to give her the options. Well he didn’t come by the place, we ended up setting up a meeting on a Friday in July after she had already been contributing for over an entire month. The 401(k) sounded, well not normal, almost like a really good deal. You could choose whatever investments you want except they wouldn’t do Vanguard funds… but you could choose individual stocks even. Not bad, once you get signed up online you will be able to choose what to do. So alright, we got the account info, now we can signup and start investing the money building in the account. Except…
Error Signing Up
We couldn’t sign up for the account online. Just kept getting an error, thought at first maybe it wasn’t ready on their end since we had just met with the guy. Well time goes by and a month later here we are getting the same error. So we called support. Apparently they put in my wife’s social security incorrectly, so when trying to put in her information to sign up… it was “incorrect”.
Finally able to get in
Now that that crap was taken care of, just this week we were FINALLY able to get into the 401(k) that was signed up for at the first pay in June. Whatever, capital needed to build up anyways so the trading fees wouldn’t be too bad anyways, right? Well… yea… IF it was a flat fee that would make sense. But no… it is not. It is a percentage fee on a transaction. Ok, yea I could handle a 1% fee, MAYBE a 2% fee being I would hold the positions, it would be ok. Investing in her 401(k) gives us a .75% tax break from the city tax, so it gives a little flexibility on how much we could do for fees. But no…
10% transaction fee. W… T… F…
Yea… I couldn’t believe it. What sounded like a pretty cool 401(k) where you could do everything (except get a vanguard fund apparently) turned into a polished turd. And that is putting it nicely. It was more like a turd that was shaped into a chocolate bar and scented like chocolate so you couldn’t tell it was a turd until you bit into it. That is kind of how this deal went down.
Where to go from here
Well the plan was next year to try to cut our expenses a little bit more and go for the Savers tax credit. That is still obtainable.. I can increase my 457 (like a 401K) contributions to get our pretax income low enough to claim some extra cash. I am just missing out on the break for city tax of .75% (.0075). So it would cost us maybe $70 more in tax a year to do it this way. Doable… but frustrating. Also to note, we still need to make $2,000 contributions in my wife’s name to get her portion of the saver’s credit, which can be done in a ROTH account. Potential problems could include occasional overtime being too high (wife only) or any unexpected income boosting our income *just* over the threshold. I don’t want to play the game too close, so maybe a small contribution to this 401(k), like enough of her base salary to only be $1,000 a year, would be a buffer to help if things go better than expected as I will be playing it close to the contribution cap if we place ALL pretax contributions into mine.
Keeping things in perspective
This really is a first world problem, I know, and it is important to remember that I have won the lottery in life just being here in America. And it is in a great position just to be able to invest a great sum of our earnings. Many people do not (or cannot) do so. So for approximately $70 more in annual taxes, it isn’t a bad deal to change course, but it is important to take corrective action. Because a 10% fee on trading isn’t an account I want to be stuck in… with any real money at least. And our contributions upto this point have barely broke $1,000 this year. So nothing horrific on this front. On the bright side, I can get 1 share in several companies without worrying about trading fee killing my return (because it will anyways)! Also, mutual funds may be a better deal, but we can’t just go and select a fund, her fund manager needs to do the transaction. So while he does whatever our cash just sits there doing nothing, but that may be an option to invest with lower fees. It is just… inefficient. So not all is lost, but I do need to see what kinds of fees the funds he can get us into have. I would imagine they are the types riddled with high operating and management fees… on an annual basis. If that is the case, a one time 10% fee might not be as bad.
What about you, would you get a little very upset at those sort of fees?
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Wow WTF indeed. Is Edward Jones listed? With that kind of ridiculous fee structure I want to be an owner.
Edward Jones has some pretty crazy load fees too, but the 401(k) is with Morgan Stanley.
Ouch buddy, that’s rough. I certainly would complain to HR and only invest enough to get the match. No match, NO WAY
Maybe sticking with a self directed ROTH and investing in Vanguard ETFs is the way to go. I do so with a large part of my portfolio, and it has turned out to be extremely inexpensive. Plus, when you go the self directed route……you can literally buy anything!
-Bryan
Yea self directed is a good way to go. I think I will max or nearly max out my 457 and see where that will put us tax wise – if we can get that deduction or not. And, sadly no match. They do a profit sharing after a year of employment, but they haven’t had anything the last couple years to my understanding.
Also I was looking at the mutual fund “options” if would call them that, they are all the load fee type funds.
Wowzers! That’s about all I can say. Totally crazy and rant is justified.
I honestly can’t comprehend the justification for 10% trade fees…
It’s weird. The money in your retirement account is suppose to be yours. But whenever you decide to do something with it, the fees and penalties just stack up. I know there are penalties for withdrawing earlier, but just wow. Just transferring a retirement account is almost as worst!
Yea… we plan to either change this to 0% or a very nominal amount in the near future. It is kind of crazy, it is basically like a double early withdraw penalty.
Holy hell! 10%!? Where can I sign up to start my own 401(k) company?
Weird question, but why can’t you choose your own 401(k) provider? What happens when you switch companies?
Hey NMW,
If you are self employed you get to choose your provider. If you are employed your employer chooses first of all if they will even do the plan, then they choose who. You can get an IRA (individual retirement account) with anyone you choose, just the maximum contributions are much lower – $5,500 for someone my age. So if we desired to contribute more, which was the plan for next year, then you need a 401(k) which allows upto $17,500 for someone my age. The great thing is you can do both so I planned on contributing to a ROTH IRA while maxing out one 401(k)… but that 401(k) clearly sucks so we need to go over the figures. The main goal is to get a bonus $400 tax credit by increasing tax deferrals, it can still be obtainable by increasing my 401(k)-like-account, we will just have to see how much (if any) would need to go to this 401(k) to see if it is worthwhile.
For switching companies, you are basically locked in that 401(k) until you leave your employer. It is your money (unless if you get matching, then some of it may not be until you worked there X number of years), but you can’t just move it at your will until that separation. So if the wife decides somewhere has greener pastures in the future – you can be that money will be rolling out of there ASAP.
On the investing strategy side, with whatever money is in there, I think we will want low-yield high grow stocks that way to minimize the purchase price compared to future value, which in turn should minimize the 10% fee. Something like Visa looks expensive, but if it keeps growing then it could be the best way to minimize the transaction fee over the long haul.
Thanks for the insightful reply, Kipp!
Too bad the IRA limit is way lower than the 401(k). I’m sure you’ll find a way to minimize the effect of the 10% fee for the money that’s already thrown in there.
Yea, I think a long term investment in a more growth style stock is the best way to minimize it… maybe even a few of the Berkshire B shares since they don’t spit out dividends that would get eaten by the 10% fee.
Shoot, I used to have a Roth with Edward Jones. That was bad. That really got my blood flowing for this rant!
Well the ROTH was bad, you can see by looking at the article where I was looking at the costs to transfer.
But this 401(k) administered by Morgan Stanley is worse… MUCH worse.
Wow! That is probably one of the worst 401Ks I’ve ever heard of. Who does a 10% fee?
Morgan Stanley apparently does. Now on Friday it won’t even let me do a transaction, just stupid overall. Anyways the plan is to stop contributing… obviously.
Yes, it’s terrible. I’m not clear on what your corrective action is. Does your wife need to contribute to get the company match? Therefore are you going to contribute and then move the money out or can you not do this?
Well they do “profit sharing” if they have profits. So nothing yet.
Plan is to stop contributions going forward, and see about maximizing mine to the legal limits and do some pro forma tax return calculations to see if we can still claim the tax credit, or if we need to put a little into hers to get it.
Gotcha! Thanks for clarifying, Kipp!
Whoah. That sounds nearly (maybe actually) criminal!
Does her employer know how awful it is? Terrible plans are more common at tiny employers who don’t know better and are swayed by sales pitches. I imagine her employer is getting hosed by Morgan Stanley as well.
I’d respectfully bring it up with HR/the owner.
That being said, depending on your tax situation, investing in this cesspool may still be worth it.
Hey Mr. Frugalwoods,
The employer isn’t too large, it is family owned, under 500 employees, but over 100 for sure. I don’t know the specifics since I don’t work there!
I hope they know how awful it is… actually now we apparently “don’t have access to trading”… even though we did before. Still trying to figure out what to do with the funds that they are contributed, changes can be made on a monthly basis so not sure if we will have to get the contribution change in before the end of this week or if the October deadline has passed. Either way… I have to crunch numbers and I need to soon. Just needs to combat other priorities such as working on the blog, spending time with wifey, and just general upkeep and crap that needs to be done on a weekly basis.
So, yes, I have to see tax wise where we can get WTIHOUT investing in this cesspool. I am even considering utilizing traditional IRA’s just to avoid it. When I looked a bit into where Traditional IRA’s and my 401(k) will get me… I might even get the income low enough to claim a state tax credit for property taxes. Every dollar counts, right? Just the problem is access in the future being in a traditional IRA…
Wow, I never realized such high fees exist!
I’m not sure of your wife’s tax bracket, but another way of looking at it is that you’re paying pre-tax money, perhaps at a marginal rate of 25%.
So even with the 10% transaction fee, you’re still able to buy 15% more than you would were it post-tax. Plus the income from the investment won’t be taxed. It still totally sucks that it’s such a high percentage though.
As an example:
No 401k -> $1000 gross income buys $750 investment (@ 25% MR)
cheap 401k -> $1000 gross income buys $1000 investment (plus lower tax bill and no taxes on investment income)
WTF MS 401k -> $1000 gross income buys $900 investment (plus lower tax bill and no taxes on investment income)
Also, are there any other fees associated with the 401k plan e.g. fees to transfer assets out of the plan in the event your wife changes jobs? That may be another factor in how much you want to invest in the 401k.
Depending on your goals and the total fees associated with the 401k it may be better to put tax-deductible money into a traditional IRA (lower contribution limits as you mention) and any additional post-tax money into a tax-efficient (& low expense) fund in a regular taxable account.
Best wishes,
-DL
Hi Dividend Life,
I am well aware of my tax bracket, and I kind of alluded to where I am since I mentioned we are trying to get the Saver’s Tax Credit. So basically we are in the 15% bracket and are seeking to score a bonus $400 for our diligent efforts. So that would give us a 5% spread on federal taxes, plus another 5% between state and city…. but keep in mind that money is just tax deferred, you pay your effective tax rate on it later. Now with some further digging… the state has a tax credit for home owner’s but your income must be below $50,000. I recently figured we could get to this 50k mark by investing $17,500 into my non-WTF 401(k) and $11,000 into traditional IRA’s. This then doesn’t allow for us to build a balance in our ROTH, but we will get the most savings for our dollars this way by far. It is highly tempting… Now my wife on occasion will also get overtime, that is the one uncertainty. If we continue with her doing maybe 1% to 2% that can cover overtime income to give us a buffer so we can claim the tax credits with more certainty.
And yea… I would not have known high fees existed like that if I hadn’t of seen it with my own eyes. I should of done a screen shot, because right now we can’t even do anything trading wise. They are such a pain…