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I apologise in advance for the length of this post. Hopefully someone can lend me a hand in thinking through this problem. I work for a small company with a 401k plan. The company's plan is administered by Prudential. The plan used to basically consist of your choice of funds from a variety of companies but there was a 1% yearly Prudential advisory fee tacked on. This means that no matter what fund you choose you will end up paying the fund's expense ratio plus the 1% Prudential fee. However all front end, back end, etc. loads were eliminated in exchange for the 1% per year fee. Only 2 or 3 no load index funds were offered and their expense ratios were approx 0.4% to 0.8%. Thus the cheapest yearly expense that you could hope for is approx 1.4%.

Just last week a Prudential representative came to our office and said that they are revising the plan. In the revised plan there will be no yearly 1% fee but you are restricted to MFS Funds only. MFS does not offer any index funds and all of the funds offered have an average expense ratio of about 1.5% to 1.75%.

The representative said that we could elect to not participate in the new plan and use the old plan but the 1% yearly Prudential fee would still stand.

As I see it I have the following options:

1. Try to do index funds under the old plan and pay 1% for the privelage.

2. Let them convert my holdings to MFS Funds (in other words sell my losing funds at the lowest point in a bear market. ACK!) And then get choked by high expense ratios.

3. Reduce my 401k contributions to the bare minimum to get the employer match and start looking for a Roth IRA with the other portion that I've normally invested in the 401K.

Does anyone out there have any suggestions on how to best solve this dilemma? Your responses would be much appreciated.

JWN1

PS. I've tried explaining my concerns to the owners of the company and Prudential representatives. Lets just say It's not going to improve any time soon.
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As I see it I have the following options:

1. Try to do index funds under the old plan and pay 1% for the privelage.

2. Let them convert my holdings to MFS Funds (in other words sell my losing funds at the lowest point in a bear market. ACK!) And then get choked by high expense ratios.

3. Reduce my 401k contributions to the bare minimum to get the employer match and start looking for a Roth IRA with the other portion that I've normally invested in the 401K.

Does anyone out there have any suggestions on how to best solve this dilemma? Your responses would be much appreciated.


I've seen a lot of recommendations to contribute to the 401(k) to the match, then to a Roth and back to the 401(k) if money was available. So I'd do that no matter what. I'd tend to go with the old funds and the low cost indexes.
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As I see it I have the following options:

1. Try to do index funds under the old plan and pay 1% for the privelage.

2. Let them convert my holdings to MFS Funds (in other words sell my losing funds at the lowest point in a bear market. ACK!) And then get choked by high expense ratios.

Chances are that the MFS funds are down in this bear market too. When the market recovers, they too are likely to benefit.

3. Reduce my 401k contributions to the bare minimum to get the employer match and start looking for a Roth IRA with the other portion that I've normally invested in the 401K.

I'd say, get the free money from the employer match, then max out the Roth IRA contributions, even if it weren't for the 1% fee. If you've got kids, you might consider sending your next few dollars into an Education Savings Account or 529 Plan for college.

Whether to put additional unmatched dollars into the 401K is a trickier issue. In a taxable account you could invest in low cost tax efficient index mutual fund, pay taxes at long term capital gains rates, plus there are no penalties for withdrawals. In the 401K, you get tax deferral, but you're paying extra fees for a more limited selection, plus you'll pay regular income tax rates on withdrawals and are subject to penalties if you withdraw the money before retirement.
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Its a decision you'll have to make yourself, weighing all the variables (and doing lots of math on scratch sheets with incorporated guesswork.) I have a similar situation (Bad limited 401(k)) and here is the solution I used:

401(k) to match amount
Roth IRA to max contribution
any additional funds in a non-retirement type account Index Fund.

Currently I've lost money overall and am cheering myself with the thought of dollar cost averaging and long term possibilities. Overall, I'm happy with my solution but there is no guarantee you will be. It depends mostly on how bad the 401(k) investment options are.
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