Same old song: stock portion in a crappy 401(k)

[foglifter]

Here we go again: For the 3d time in the last 4 years my employer swiftly moved payroll/benefits/401(k) to a new provider, which happens to be ADP. We're a small 50-people company so I guess that severely limits our options. When we started our 401(k) it was a cheapest plan from Fidelity (called 401(k) Express), however it had both TSM and S&P500 Spartan funds, which are pretty good and cheap (ER .10%). Then because of the medical insurance costs hike we moved to Administaff, which offered a bunch of expensive active funds - but still, there was a lonely star on the list - Fidelity S&P 500 fund (FUSEX), which I happily used for my PP equity portion.

Now ADP is going to put us into MassMutual-operated plan: mostly MMutual funds, expensive, with relatively short track record. Below I listed the available stock funds and their ERs, skipping all the target date funds:


MMILX MassMutual Select Indexed Equity (S&P500) 0.41
PRNHX T. Rowe Price New Horizons                        0.81
NOINX Northern International Equity Index (EAFE)  0.25

MBCLX MassMutual Select Blue Chip Growth             0.98
RERCX American Funds EuroPacific Growth R3        1.13
MFUAX MassMutual Select Fundamental Value        1.24
SMCDX Wells Fargo Advantage Spec Mid Cap Value 1.31
MEFAX MassMutual Select MidCap Growth Equity 1.35
MMYAX MassMutual Select Small Company Value 1.61

Available options include an international index fund with decent ER from Northern (NOINX) , but what drives me crazy is that the MassMutual S&P500 fund (MMILX) has ER of .41% - 4 times higher than that of FUSEX. It's funny: when I compared performance numbers for the two the difference in returns almost precisely matches the difference in ERs! Note also that in case of MMILX we have an S&P fund that is almost twice as expensive as the international index - pure nonsense.

I understand that the simple way would be to eat the bullet and just use MMILX. However I just don't feel like paying for nothing - the ER is not spent on hiring staff of analysts, they just pocket the money. I'm thinking about using PRNHX (small/mid cap) and NOINX (foreign large cap) as a way to imitate a TSM-like fund. NOINX's ER is almost twice less than that of MMILX and PRNHX has a good track record and gives a small/midcap exposure - a higher volatility, yes, but that's what PP needs. I'd rather pay .81% ER knowing that the money is paid to some smart guys for their work of stock-picking than paying 0.41% to a fat cat whose only job is to buy the index. Another option is to skip the international fund and use PRNHX for the whole 25%.

Before you start throwing darts at me... please don't get me wrong: I don't believe in stock-picking and try to stick with index funds, but in this case I just can't overcome my disgust with the price tag on the offered "index" fund.

Your opinion is much appreciated.

[patrickjhall]

I'd rather pay less to some one who has less chance of screwing something up.  I go through the same issues with my 401k and my wife's 457b. Fat fees for some one to track an index. But you are still paying less for less risk.

[KevinW]

I understand that the simple way would be to eat the bullet and just use MMILX.

That's actually what I would do.  I don't believe active management does any better than an index.  So I would look for the cheapest broad-market fund which is MMILX, despite its steep 0.41 ER.  I would rather pay too much for a simple job done properly, than pay even more for unnecessary work that might be botched.

[AdamA]

That's actually what I would do.  I don't believe active management does any better than an index.  So I would look for the cheapest broad-market fund which is MMILX, despite its steep 0.41 ER.  I would rather pay too much for a simple job done properly, than pay even more for unnecessary work that might be botched.

Yeah.  .41% isn't the end of the world.  It won't matter that much in the long run. 

[foglifter]

Thanks for your responses, folks. I realize now that my anger was more of an emotional

Looks like the issue is off the table: just got back from the 401(k) presentation meeting where we learned that the brokerage link will be available in the plan! The provider is SSGA and there will be 1900 NTF funds available. The annual fee is $100, but it's negligible given that the account size is ~100K.

[Lone Wolf]

Looks like the issue is off the table: just got back from the 401(k) presentation meeting where we learned that the brokerage link will be available in the plan! The provider is SSGA and there will be 1900 NTF funds available.

Congratulations!  That's great news.  You are going to love having that brokerage link.  It really makes a PP smooth sailing.

[moda0306]

foglifter,

My jealousy of your plan is ruining my day.

Just thought I'd let you know...  The flexibility of a good 401k plan is great... high limits (over 3x an IRA), loan capabilities (IRA loans don't exist), and even sometimes reduced expenses.

Bad 401k plans, however, are a real PITA.

[foglifter]

foglifter,

My jealousy of your plan is ruining my day.

Just thought I'd let you know...  The flexibility of a good 401k plan is great... high limits (over 3x an IRA), loan capabilities (IRA loans don't exist), and even sometimes reduced expenses.

Bad 401k plans, however, are a real PITA.

Before this morning I was jealous whenever I ran into brokerage window mentioned by others on this and BH forum. Now the situation turned upside down - I really feel excited. Of course, opening an account is not that simple as MassMutual - the 401(k) provider - doesn't want plan participants to flee it's expensive crappy funds. So SDBA is not even mentioned on the website and I have to fill paper forms and send them by snail mail. I hope it all will go smoothly after the initial setup has been done.

I think the existence of bad 401k plans (and frankly most of them are bad) is a visible result of Wall Street lobbying activity. Otherwise we'd have a simple solution: allow people to spread their retirement contributions over IRA and (optionally) 401(k) limiting just the total annual amount of contributions. Bad 401(k)'s would probably quickly cease to exist.

Another observation: if I see an index fund with inception date at least a few years back, high ER and total assets just a few hundred mln I can safely assume that the only people who invest in it are those unfortunate to be in those bad 401(k) plans. To some extent this is true regarding the expensive load funds, as the loads are usually waived for institutional investors.

[moda0306]

foglifter,

My dad had his money with a Wells Fargo advisor that had him in stock and bond funds between 1.3% and 2.3% in expense ration, with a 1% back-end load.  Their performance was pretty bad for the risk (the "income" fund (stock & bond mix) lost like crazy in 2008 but didn't recover anything near the S&P 500).

I was pretty appalled.  He didn't pay her anything for her "advice."

I wonder how she got paid?

[foglifter]

foglifter,

My dad had his money with a Wells Fargo advisor that had him in stock and bond funds between 1.3% and 2.3% in expense ration, with a 1% back-end load.  Their performance was pretty bad for the risk (the "income" fund (stock & bond mix) lost like crazy in 2008 but didn't recover anything near the S&P 500).

I was pretty appalled.  He didn't pay her anything for her "advice."

I wonder how she got paid?

Recalling my less than desirable experience of having an Ameriprise advisor I think your dad's advisor were probably paid in either (or both) of the following ways
- %% of the sales load (front or back) of each mutual fund
- %% of the account annual fee (they love those "wrapped accounts")

[moda0306]

foglifter,

It probably wasn't obvious, but I am aware that she was probably paid out of the fund expenses.

In all the miles of regulatory red tape, I'm surprised they even allow people who handle others' investments to have anything but fiduciary duty, and to be paid by the funds that they are putting their clients in.

It seems to me some of the best financial regulation is pretty simple.

[MediumTex]

foglifter,

My dad had his money with a Wells Fargo advisor that had him in stock and bond funds between 1.3% and 2.3% in expense ration, with a 1% back-end load.  Their performance was pretty bad for the risk (the "income" fund (stock & bond mix) lost like crazy in 2008 but didn't recover anything near the S&P 500).

I was pretty appalled.  He didn't pay her anything for her "advice."

I wonder how she got paid?

Recalling my less than desirable experience of having an Ameriprise advisor I think your dad's advisor were probably paid in either (or both) of the following ways
- %% of the sales load (front or back) of each mutual fund
- %% of the account annual fee (they love those "wrapped accounts")

Stories like that are so sad to me.

Unsophisticated investors trust their money to someone who is supposed to be an "expert" and that expert proceeds to attach himself to his clients' money like a leech, while providing virtually no extra value for the fees he is skimming.

I always find it very amusing to let these financial advisor types tell their story about how much money they are going to make me.  When they are done I always say something to the effect of: "That sounds great.  What kind of warranty does that come with?"

Their faces always cloud up when I say this, the way a magician's might if you shouted from the crowd the secret involved in a trick he was performing.

[moda0306]

MT,

It's incredibly sad, and one of the few things that makes me think maybe Social Security is an ok idea in a general sense. 

Luckily, it got a lot less sad when I moved my dad 100% into a quasi-PP lineup (little cash, less than 25% gold) in late July, just in time for LTT's to explode.  He hadn't been totally screwed over or anything... she didn't have his money for all that long of a time... it's just hard to see because I know plenty of people don't have someone near them to walk them through the considerations a retiree should be thinking about.  And usually, the ones who put themselves out there first as the best person to do that for them are the worst of the bunch.

[MediumTex]

MT,

It's incredibly sad, and one of the few things that makes me think maybe Social Security is an ok idea in a general sense.  

Luckily, it got a lot less sad when I moved my dad 100% into a quasi-PP lineup (little cash, less than 25% gold) in late July, just in time for LTT's to explode.  He hadn't been totally screwed over or anything... she didn't have his money for all that long of a time... it's just hard to see because I know plenty of people don't have someone near them to walk them through the considerations a retiree should be thinking about.  And usually, the ones who put themselves out there first as the best person to do that for them are the worst of the bunch.

It's like seeing a nice woman with a boyfriend who occasionally beats her up.

It's just a hard thing to watch, especially when you realize that the one being beat up doesn't necessarily understand that she isn't supposed to be treated that way, or, worse, she doesn't even realize that not everyone is treated that way.

I think that people would be shocked if they knew just how much some financial advisors look down on their clients and think nothing of taking their money every chance they get.

If you think my abusive boyfriend analogy is off the mark, go read something like "Liar's Poker" and tell me if the big investment banks don't treat their "customers" at least as shabbily as an abusive boyfriend.

[KevinW]

That's a good analogy.

I find it disturbing that, when it comes to finance, the bad guys seem to be winning.  The abusive relationship seems to be in the majority and supportive/fair/honest relationships are the minority.  And when I try to steer friends or family away from abusive financial institutions into fair ones, I generally seem to come off as a kook and get ignored.

[stabiae]

foglifter,

My dad had his money with a Wells Fargo advisor that had him in stock and bond funds between 1.3% and 2.3% in expense ration, with a 1% back-end load.  Their performance was pretty bad for the risk (the "income" fund (stock & bond mix) lost like crazy in 2008 but didn't recover anything near the S&P 500).

I was pretty appalled.  He didn't pay her anything for her "advice."

I wonder how she got paid?

Recalling my less than desirable experience of having an Ameriprise advisor I think your dad's advisor were probably paid in either (or both) of the following ways
- %% of the sales load (front or back) of each mutual fund
- %% of the account annual fee (they love those "wrapped accounts")

Stories like that are so sad to me.

Unsophisticated investors trust their money to someone who is supposed to be an "expert" and that expert proceeds to attach himself to his clients' money like a leech, while providing virtually no extra value for the fees he is skimming.

I always find it very amusing to let these financial advisor types tell their story about how much money they are going to make me.  When they are done I always say something to the effect of: "That sounds great.  What kind of warranty does that come with?"

Their faces always cloud up when I say this, the way a magician's might if you shouted from the crowd the secret involved in a trick he was performing.

Newbie here who has been searching for answers since my eyes were opened after the 2008 crash. I have around $200k in a 401k and around $350k with Ameriprise. My advisor had me in funds roughly set up in 80/20 stock/bonds. I am an admittingly unsophisticated investor who trusted the advisors "advice."  I lucked out in a way because of my head in the sand investing approach. Pre- 2008, much to the dismay of my advisor, I had accumulated a pretty large cash position which protected me somewhat during the melt down. I started thinking that there has to be a better way. This is a thought that has been an obsession for me ever since, with seemingly no clear answer wherever I looked.

My quest first led me to the "End of America" guy and his newsletters. (Stansberry) which led me to the "Early Warning Report" guy (Richard J Maybury)...which led me to a fellow by the name of Harry Brown and the "fail Safe Investing" book and ultimately this forum.  The most valuable lesson learned from Harry Brown and the PP crowd for me is you must take control and responsibility for your financial future. This forum and contributors have provided invaluable guidance and great inspiration.  Thank you.

This thread caught my attention because I am just starting to get my head around the PP philosophy. I am preparing to say goodbye to my ameriprise advisor and wonder what advice you would give to this end. What concerns and considerations should I have about moving my ameriprise accounts in to another fund? Some of it is in IRA's so I understand this has to be done within a protocol to avoid triggering tax implications. I believe they must be either transferred directly to another fund, or if they cut a check, it must be redeposited into another IRA within 60 days.  My concern is, I understand if the funds are sold off in order to transfer, there can be either capital gains and/or limitations to losses you can take in a given time period? any advice in this area?  Who should I talk to understand this better?

Additionally, I am confused about Harry Browns recommendation on putting cash in a 401k. I understand the tax advantage with income producing assets. What confuses me is the loss of liquidity by placing cash in a 401k? What am I not getting here?

[KevinW]

Some of it is in IRA's so I understand this has to be done within a protocol to avoid triggering tax implications. I believe they must be either transferred directly to another fund, or if they cut a check, it must be redeposited into another IRA within 60 days.

IRA custodians are usually happy to win new business and willing to handle this for you. In the case of Vanguard, first you open an empty account with them, then instruct them to contact your old IRA custodian and request for the check to be sent directly to Vanguard. I've done this several times and it all goes off without a hitch.  You can monitor the status of the process through the Vanguard website. Other firms probably work about the same.

Additionally, I am confused about Harry Browns recommendation on putting cash in a 401k. I understand the tax advantage with income producing assets. What confuses me is the loss of liquidity by placing cash in a 401k? What am I not getting here?

That advice is usually in the context of someone with both taxable and tax-sheltered assets. In that case you are forced to keep something liquid (taxable) and it might as well be the more tax-efficient assets. For instance if you hold a lot of gold in taxable and need to liquidate it for an emergency, you can rebalance your portfolio by buying gold in one of your tax-sheltered accounts. That way you only pay capital gains (if any) in the unlikely event of a sale, instead of income tax on cash interest every year.

[MachineGhost]

This thread caught my attention because I am just starting to get my head around the PP philosophy. I am preparing to say goodbye to my ameriprise advisor and wonder what advice you would give to this end. What concerns and considerations should I have about moving my ameriprise accounts in to another fund? Some of it is in IRA's so I understand this has to be done within a protocol to avoid triggering tax implications. I believe they must be either transferred directly to another fund, or if they cut a check, it must be redeposited into another IRA within 60 days.  My concern is, I understand if the funds are sold off in order to transfer, there can be either capital gains and/or limitations to losses you can take in a given time period? any advice in this area?  Who should I talk to understand this better?

This is easier than you think.  You need to do a in-kind transfer of your assets (same account type to same account type) via the ACATS system.  It is like ACH for bank transfers, but specifically for shares and cash in brokerage accounts.  So you do not need to sell anything and potentially have issues with taxation reports and taxes.  Your destination broker will have all the forms necessary to do all this.  For example, if you have a Traditional IRA at Ameriprise, you simply need to open one or more Traditional IRA accounts at your destination broker, then fill in and send them the ACATS form for each account which will contain the information about your original broker, account #, etc. as well as choices for what you want to transfer, like kind transfer of shares or liquidate to cash proceeds, etc..

Remember, brokers are just acting as a trustee for your IRA.  You are free to use whichever trustee that you want to.  Just be sure to keep an eye on the fees; some brokers charge IRA annual maintenance fees, some do not.  And there are also IRA closing fees as well as ACATS transfer fees.  Usually about $50 each.

MG

[MediumTex]

Additionally, I am confused about Harry Browns recommendation on putting cash in a 401k. I understand the tax advantage with income producing assets. What confuses me is the loss of liquidity by placing cash in a 401k? What am I not getting here?

At the time Harry Browne wrote that, t-bill and cash-like instruments were paying 4-6% yields, which meant that cash was throwing off more current income than gold or stocks, and only somewhat less than LT treasuries.

Browne's strategy was to shield as much dividend income as possible from taxation, while relying upon lower capital gains rates and infrequent capital gain recognition to make the gold, stocks and LT bonds have somewhat greater overall tax efficiency than the t-bill holdings (i.e., gold, stocks or LT treasuries can have built up untaxed capital gains that are naturally sheltered by not selling the underlying asset, which with a t-bill all of the gain comes in the form of the coupon payments).

What has happened since then is that t-bill rates have fallen basically to zero, which makes it seem kind of silly to waste tax deferred account space on this asset.  T-bill yields won't always be zero, though, and thus it probably makes sense to keep some cash holdings in tax deferred accounts, even if right now it is just to have dry powder for rebalancing.

I have come to the conclusion that it really makes sense to have a little of each PP asset in both taxable and non-taxable accounts, probably with a tilt toward more gold outside of tax deferred accounts, and more LT treasuries and t-bills inside tax deferred accounts.  To me, stocks can be split evenly and it will probably work fine.

Also, the relationship between taxable and non-taxable accounts is dynamic for virtually all investors so I would say just aim to get in the ballpark as far as spreading the assets around your various accounts and don't sweat this part of it too much.

[moda0306]

Also, if you look at true illiquidity, the story becomes more complicated, in a good way.

Most of this money isn't truly locked away from you... you are simply forced to pay your ordinary tax rates + 10% penalty if you distribute them.

Most income-side "emergencies" (loss of a job) will leave people in a much smaller tax bracket, to where the rate difference between what they were at when they contributed and the rate at distribution plus penalty could very well be a wash.

Other than that, I'm almost 100% agreeing with MT on placement of funds, nowadays... as long as you tilt your LTT's to tax-deferred, and your gold towards taxable, and maybe throw in some I-bonds in there, you'll be about as well off as you can be.  Stocks are more tax-efficient, but expected growth and growing dividends can add up.  Cash throws out inefficient taxable interest, yes, but when the purpose of an asset is first-and-foremost liquidity during a recession, and this asset is known for low-yet-stable returns, then I think cash in your taxable accounts could be argued for, too.

Loss-harvesting should help any decision you make.

[MachineGhost]

Other than that, I'm almost 100% agreeing with MT on placement of funds, nowadays... as long as you tilt your LTT's to tax-deferred, and your gold towards taxable, and maybe throw in some I-bonds in there, you'll be about as well off as you can be.  Stocks are more tax-efficient, but expected growth and growing dividends can add up.  Cash throws out inefficient taxable interest, yes, but when the purpose of an asset is first-and-foremost liquidity during a recession, and this asset is known for low-yet-stable returns, then I think cash in your taxable accounts could be argued for, too.

I must have missed the memo again.  What is the advantage to holding gold outside tax-deferrred accounts when the long-term collectible rate is 28% and the short term is your ordinary rate?

MG

[moda0306]

MG,

Gold is taxed at the lower of your ordinary or 28% for LT... so basically no worse than interest, but you don't have to take income you don't need.  Using your tax-deferred accounts for rebalancing, and your taxable accounts for loss harvesting make this even more useful.

The key is simply that you don't have to pay tax on interest income along the way... this is really parasitic to your gains.

That said, I tend to think of Gold as the "anti-gov't" play, so I put it in my Roth to avoid any eventual taxability if it were to explode.  I consider that a good offset to holding more gold in taxable accounts for tax-efficiency purposes.

[MachineGhost]

Gold is taxed at the lower of your ordinary or 28% for LT... so basically no worse than interest, but you don't have to take income you don't need.  Using your tax-deferred accounts for rebalancing, and your taxable accounts for loss harvesting make this even more useful.

The key is simply that you don't have to pay tax on interest income along the way... this is really parasitic to your gains.

That said, I tend to think of Gold as the "anti-gov't" play, so I put it in my Roth to avoid any eventual taxability if it were to explode.  I consider that a good offset to holding more gold in taxable accounts for tax-efficiency purposes.

I read that the short term rate is your ordinary rate, and long term rate is 28% or 15% if you're in the 15% bracket.  http://www.bankrate.com/brm/itax/Edit/t ... relief.asp

Regardless, I can understand tax loss harvesting, but why would there be interest income to worry about when we're talking about gold?  That would have to be insignificant compared to capital gains.

So why would it be better off to pay ordinary, 15% or 28% than 0% in a tax-deferred account?  I'm still not getting it.

MG

[moda0306]

MG,

Because we're assuming this is for a person that has maxxed out their retirement accounts and therefore has to choose what part of the PP to put in taxable accounts.

We're talking about interest because 50% of the PP throws out interest.

Stocks tend to have the most tax-deferred & tax-preferred status, but because we expect them to grow the most over time, it's not so simply as to say "put stocks in your taxable account first... it's nice to get some of that growth into your tax-deferred accounts.

Make sense?  Maybe we're not understanding each other if not.

[KevinW]

Because we're assuming this is for a person that has maxxed out their retirement accounts and therefore has to choose what part of the PP to put in taxable accounts.

Yes.

Also HB's advice was to hold all gold as bullion under your direct control. If you follow that rule gold will always be outside tax-deferred accounts.