Elle wrote:

- quote -

I prefer to think of it as "saving judiciously."

-Will

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

Agreed.

- quote -

My main interest was to see your reasoning for (at first)
arguing maxing out the 401(k) (matching and unmatched)
before the Roth. What guideline (3) should be is somewhat
less clearcut and more dependent on the individual.

After maxing out the matched part of the 401(k) and then the
Roth IRA, then with no loads and low expense ratio 401(k)
choices, my gut says many or even most people are better off
with the unmatched 401(k) rather than a taxable account.

Of course, as noted a few days ago, low expense no load
401(k) choices may be the rule at this point, or at least
are certainly getting to be common. So the third guideline
above (re the unmatched 401(k)), may increasingly apply.

All this still rests on the assumption that someone is
saving madly for retirement and exhausts the first two
guidelines (matched and Roth). No doubt many do.

BreadWithSpam[at]fractious.net wrote:
. . .
- quote -

I'm glad you posted this question. I have been communicating via e-mail
with our HR Director about the fees in our 401(k). My statements show
no fees. His first reply is below. There are some typos that I've left
in incase I would guess incorrectly:

<start quotationHere are the fees associated with the 401 (K) except:

-- The investments themselves have fees to manage the funds you choose
but you do not see them. The returns are net of fees are are not
shown.

-- The participants pay a prorata portion of the plans fees based on
their account balance. These type of fees are the CPA firm annual
audit, attorney fees that might be payable for plan amendments etc, and
fees for General Pension to maintain account balances, statements, and
web site.

All of the above are listed net under the column of dividends,
adjustments, and expenses. It shows your share of the above.
<end quotation
I replied to the first bullet by saying I would guess this fee is a
percentage of the purchase price and if so, what is the percentage.

I replied to the second bullet by saying I could not find this anywhere
on my statements going back to 2004.

I find it odd that he didn't give me percentages up front, which makes
me think it's not that simple. Or, maybe it is, and he just didn't know
the answer and so sent me an incomplete answer to my question!

The funds I have to choose from are:

Massachusetts Investors Trust (A)
" Growth Stock Fund (A)
American Funds American Mutual Fund (A)
" EuroPacific Growth Fund (A)
" Intermediate Bond Fund (A)
Invesco Stable Value Fund
Vanguard 500 Index Fund
MFS Value Fund (A)


I currently have 20% of my contribution going to Am. Funds Am. Mutual
Fund, EuroPacific Growth Fund, MFS Value Fund, and Vanguard 500 Index
Fund (20% to each of those). I then have the remaining 20% going to
Invesco Stable Value Fund.

This seems to be working out well (no stinkers).

Would you still suggest putting most of my savings here even if my
company does not match?

BreadWithSpam[at]fractious.net wrote:

- quote -

http://www.cfo.com/article.cfm/3013443/1/c_5678665?&x=1

http://www.pbs.org/wgbh/pages/frontl...ews/bogle.html

These two cited articles.

But I do question the numbers as my limited experience shows otherwise.
My 401(k) fees range from .05% for the S&P to .75% for international funds.
JOE

joetaxpayer <joetaxpayer[at]nospam.com> writes:

[re: expenses on funds in 401k accounts]

- quote -

Where are you folks finding this 1.56% number?

401k plans have overall administrative costs - those are
usually borne by the employers and are not an issue here.

As far as the expenses of the individual funds within 401ks,
they are typically a mix of regular mutual funds - the
same ones that one might buy outside of a 401k. Noting
that the average expense ratio of actively managed funds
in *general* is on the order of that 1.56% number - whether
in the 401k or not.

The key question is then much more specific - which funds
are available in a given person's 401k - what are their
expense ratios - if they are load funds, do folks get the
'A' shares with the load waived (not uncommon, btw - and
often a means of accessing excellent funds which some of us
would never otherwise pay the loads to get to!).

So the answer to "do I fund my 401k first or my Roth or
outside IRA and in what order and how much?" can not necessarily
be answered with a single one-size-fits all answer - it
depends especially on the funds available in the 401k.

Nevertheless, even the worst 401ks now typically have at
least one or two decent funds, alongside several mediocre
and/or high-expense ones. (I've seen 401ks offering
S&P 500 indices with expense ratios over 50bp - outrageous -
but, actually, probably still a better deal than some of
the mediocre actively managed funds with 1.5+ ratios).

On top of that, many 401k plans now offer what is called
a "mutual fund window" whereby folks can direct some or
all of their 401k contributions - throught the 401k - to
an outside brokerage mutual-fund-supermarket account and
thereby get access to hundreds or more additional funds -
again, one is very likely to find some excellent ones in
the mix.

Even if the funds available are only good and not great,
and even if there is no match or mutual-fund-window, for
most folks out there - and this may not apply to the more
diligent and disciplined - and interested folks - here -
for most folks, the 401k is the best long-term savings
deal going. Folks can set it and forget it and never miss
the money and most folks need that sort of simplicity.

So unless I know that the only funds available in a 401k
are complete stinkers, my first reaction will always be
to tell folks to max out the 401k and work throught he
rest of the options afterwards. Even if the funds there
are stinkers, if the alternative is that folks will forget
to invest at all, I'd rather they invest in the 401k with
stinky funds than not at all. That money will still grow
tax-deferred, it can later on be rolled into an IRA, and
it's entirely possible - even probable - that the funds
available in that 401k will get better and the money that's
already there is a great start.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

bluecutie wrote:

- quote -

It's definitely a convenience to have everything in one place, but
unfortunately not all banks/brokerages provide the best value for
all of one's needs. For example, the interest rates on savings
accounts are far higher with online banks such as Emigrant Direct.
Likewise stock trades and mutual fund transaction fees tend
to be lower at traditional brokerages. Both of these lack plentiful
ATMs that are needed to avoid withdrawal fees. So I basically
use a mix of these.

If it helps, some banks/brokerages/credit card
companies provide a service, typically for free, where you can
view all of your accounts in one place. The basic software for
this was developed by a company called Yodlee, and it looks
like it has been licensed by several banks.
http://corporate.yodlee.com/customers/clients.htm
If you are interested, you should look for more information
on your bank's website. I haven't used this service, though,
primarily because I am paranoid about possible gotchas in
the way folks implement network security.

Anoop

bluecutie wrote:

- quote -

I went through this as well, but I thought it distributes things into
too many asset classes and sometimes these may not be readily
available in 401(k) plans. I prefer something a lot simpler. I just
pick between some mix of S&P 500, EAFE and stable value funds. I
plan to add bonds into the mix, but I'm waiting for interest rates
to stabilize before adding bonds. The following link might make
an interesting read in this regard.
http://tinyurl.com/lf68y

Anoop

Elle wrote:

- quote -

Yup, that one.
I agree with First, Max out matching 401, and Second, Max out Roth.
The Third step has a large question/warning. If in fact, the average
expense is 1.56, that would put about 2/3 of people above 1%. At that
level, you're losing quite a bit. A 1% delta (i.e. fees 1% higher in 401
that outside taxable account) will wipe out any tax advantage over a 25
year period. As the fees go down, closer to .75% or less, the tax
deduction advantage of the 401 kicks back in.
Good to be diversified across investments and pre-tax/post tax accounts.

As this question will likely recur, I'd suggest we ask about the 401
fees and offering before suggesting the 'magic three' above.
JOE

"bluecutie" <BlueCutie[at]gmail.com> wrote
- quote -

This amounts to, roughly:
26% domestic large cap
13% domestic small cap
7% real estate
13% international
8% emerging markets
18% conservative domestic fixed income
18% international fixed income (not sure if this is
conservative or not)

Or something like 75% is in stocks and the rest in bonds.
Such an allocation for a younger person is nothing out of
the ordinary. A crude rule of thumb is to put [100%-your
age] into stocks, tilting that even more towards bonds as
one ages. You can try the TRowePrice and Vanguard tools
listed at http://home.earthlink.net/~elle_navorski/id8.html
and see this pretty quickly.

I take the IFA allocations (along with other online asset
allocators' output) as a guideline. One can trust them only
insofar as one thinks historical stock market trends will
continue. The good allocating tools clearly note that the
output is based on historical returns of different sectors.

Building serious "trust" ("confidence" may be more accurate)
requires a study of what a stock is; the history of stocks
and their trends; some hands on experience, back-and-forth
with others on the subject, etc.

One thing the allocation that the IFA site and others like
it accomplish is getting investors diversified and cognizant
of some of the ways to do so.

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

I suppose you mean the guideline I post often here (with W.
Trice around to offer caveats :-) ): First, max out the
matched contribution to one's 401(k); second, max out the
Roth IRA; third resume contributing to the 401(k).

We agree that (a) high expenses of some 401(k) mutual funds
and (b) distributions in retirement being taxed at ordinary
income tax rates both take a toll. I am not sure how bad
that toll is, though. It could be that the annual tax
advantage of contributing to the 401(k) (something like 25%
for a whole lot of people?) more than makes up for (a) and
(b). I suspect it does for "a whole lot of people." Hence
many sources advocate the guideline I post above.

I'd really have to see some numbers. (I know: I should
experiment with that fine spreadsheet you sent me and do my
own homework... )

- quote -

But it might be a much higher bracket is needed to defeat
the guideline above.

Another question:

What do all of you think about the www.ifa.com website? I took the risk
capacity survey and it spit out a score of 54%, matching me with the
index portfolio 55.

http://www.ifa.com/portfolios/p055/index.asp

If I can trust the risk survey, do you think I can trust the
allocations listed for portfolio 55?

anoop wrote:
- quote -


anoop -- Honestly, I didn't think about using a company other than my
bank. I like the ease of going to one website to see everything. I
changed from Wachovia to BOA for checking, savings, and the Roth IRA
followed.

But, making more $ beats not having to go to another website to get
updates. I'll have to look into Fidelity/Vanguard.

Thanks!

Elle wrote:

- quote -

I stand corrected. This link offers a list of state currently running an
'inheritance tax' paid by the heirs, vs the 'estate tax' paid by the estate.


http://www.cbpp.org/6-8-06sfp.htm

Doug -- Thanks for pointing out the simple solution! I just sat here
and estimated 2006 taxes using the '06 schedules at irs.gov. I also
learned that hubbie's company matches 50% of every dollar up to 6%
contributions. We're both contributing 10%. After looking at the tax
schedule, we're going to hold at 10% because it keeps us in the 15% tax
bracket (after figuring in our Flexible Spending Account contributions,
dependent care acct contributions, married deductions, 3 exemptions,
etc.).

So, now I know 401(k)s are both where they need to be. In 2007, we
might drop hubbie's to 6% and mine to something else lower because
we'll be contributing enough to dependent care account for a whole year
of daycare.

Now I'm babbling and risk getting my post booted off.

And, now that I understand tax schedules -- I realize I truly didn't
before 30 minutes ago -- I'm guessing we'll be in a higher tax bracket
when we retire UNLESS, like you say, life's unpredictable misfortunes
fall our way.

"joetaxpayer" <joetaxpayer[at]nospam.com> wrote
- quote -

I think it's somewhat more of an exception. Retirement
resources in particular seem to advertise which states do
and do not tax inheritance.

I for one would not generalize about the states but instead
suggest googling using the particular state's name.

bluecutie wrote:
- quote -

Why not Fidelity/Vanguard? Their mutual fund fees tend be lower
than those offered by Bank of America.

Anoop

Elle wrote:
- quote -

The rules, both state and federal, is that the estate pays the tax if
any. The heir gets cash to do as they will or stock will a stepped up
basis, which can be sold with no tax due (unless it went up during a
long probate period. Of course there's always an exception to any
generality here).

If you inherit enough, you would want to manage that money tax-wise. A
million dollars can throw off 50K in interest each year or can be
invested in stocks for the long term with lesser dividend amounts and
long term cap gains down the road. A good problem to have.
JOE

Will Trice wrote:

- quote -

Will - I'm in the same situation as you. With a 5 basis point (.05%) S&P
fund, and other choices ranging up to 50 basis points. Elle's reference
in her latest post to the two articles;
"Mine is an impression based on coming across articles like

http://www.cfo.com/article.cfm/3013443/1/c_5678665?&x=1
(2004)

and the Bogle interview recently discussed here at
http://www.pbs.org/wgbh/pages/frontline/retirement/interviews/bogle.html"

has me rethinking my assumptions. Perhaps the first question right after
'does your employer match?' should be 'what are your fund's expenses?'.
If 1.56% is the average, I dare say that half to two thirds of the time
the 'well reasoned, generally accepted' advice here is wrong, regarding
401(k) accounts. At much over 1% expense, one should quit right after
getting the match. I'm hoping to find the Roth 401 in my future,
otherwise I'm trapped in the cap gain to ordinary income/ higher bracket
at retirement scenario.
JOE

"bluecutie" <BlueCutie[at]gmail.com> wrote
- quote -

You're in the same boat as the rest of us. Diversify among
tax advantaged plans (meaning Roth IRA and 401(k)), or go
with your best guess, re-visit the issue once a year as
maybe your circumstances change, and do not lose sleep over
it. :-)

- quote -

I am not terribly well read on this, but depending on the
state, it can change your state tax bracket for a year. I
can't remember the federal rules, other than you either pay
no federal tax or you only pay federal tax if it's a
humongous, over a million dollars amount. You can google on
both points using key words like {inheritance tax state},
etc. and turn up information on this quickly.

- quote -

Look especially for what is called the "expense ratio" and
any loads.

A good expense ratio for a mutual fund in a 401(k) should be
under say 1% a year. Preferably, well under. You want funds
with no loads, ideally. The Vanguard 500 index fund is most
likely way less than 1%, for one. It's an excellent fund for
the long run, IMO.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

Mine is an impression based on coming across articles like

http://www.cfo.com/article.cfm/3013443/1/c_5678665?&x=1
(2004)

and the Bogle interview recently discussed here at
http://www.pbs.org/wgbh/pages/frontl...ews/bogle.html

But it also seems that scrutiny of 401(k) management has
produced more competition, and so there is a trend towards
lower fees.

Again, only an impression.