Max 401k w/ Hight Expense Ratio?

[frito833]

My custodian is Merrill Lynch and they offer about 8 equity funds with 1.5% to 2% expense ratios. I talked to our company's 401k Financial Advisor and he was saying you pay the high expense ratio and fees for a higher rate of return. After explaining how my Vanguard ROTH IRA is killing the 401K's return of investment because my fees and expenses are low, he just shrugged his shoulders and changed the subject to short term investing in gold.

This is real upsetting because my hard earned money is earning less while making Merrill Lynch richer. I called Merrill Lynch to send me a written expense report and they said they can't do that! I max my ROTH and doing the 6% to get the company match. I can max my 401k which I think is $15,500 for 09 but I think I would rather do out of retirement investing through Vanguard. Any advice? I'm 30, single, out of debt, 6 month emergency fund with about 20k in retirement savings so far. Also, I want to know if I'm ahead of the average American in retirement investing making an average income. I always get discouraged watching On the Money where people call in 25 yrs old with 100k in retirement.

[kork13]

It's unfortunate that they would respond like that... My best advice would be to A) petition for more investment options, to include a number of index funds; or B) Talk to whoever you need to talk to about the possibility of using a different company.

In the end, though, I think that even if you get hit with 2% fees, if you're getting a 100% company match up to 6% of your salary, you're still doing pretty good... So even though it might kill you to see your Roth trouncing your 401k, compare them against the amount each is costing you.... You're contributing $5k/yr to the Roth, and end of year, your balance might be $5300 (6% ROI). You're contributing $15k/yr into the 401k, and end of year, your balance is $22k, accounting for higher fees. You're still taking a 46% ROI.

So I'd still max your 401k if you can, but at the same time try to effect some beneficial changes for your 401k program.

[MonkeyMama]

For Merrill Lynch I would be more concerned about the loads. Hopefully you have some no-load options? Expenses are high, agreed.

People largely max out their 401ks for the tax savings. The tax benefits can exceed the expenses, particularly if you are in a high tax bracket. I don't think you are, but if you are in a 25% tax bracket (likely) it can still be beneficial to max out your 401k. Max is $16,500 for 2009.

Another thing to consider is how long you plan to be at your job. If you only expect to be there for a few years, you can roll the 401k into a Vanguard IRA when you switch jobs. I wouldn't get too caught up in the higher fees if it's only for a few years.

That being said, I would certainly complain to your employer.

[Slug]

Agree that you should max the 401k if only for the tax advantage and building the habit of doing so every year. Also key to remember that you can and probably should roll that baby out of there once you move onto the next job. And, keep complaining about the fees/loads/expense ratios. I'm paying .22% on an S&P 500 fund in my 401k right now - that's my only reasonable fund choice so my further diversification happens in the Roth.

[ea1776]

Is there a self-directed brokerage option? If so, use it!

There are power in numbers, so if you can get some more work buddies to sign a petition and submit to your HR, that would probably turn some heads.

If all else fails, pick the least of all evils and when you change jobs, roll it all over (Roth would be great if you are in a lower tax bracket and don't mind paying the tax now) to your favorite brokerage house.