Our 401k provider (Prudential) has expense ratio's higher than 1.5% on pretty much all their funds, and on the two equity funds that I'm investing in an expense ratio of 1.62% and 2.12%.Also, all the funds seem to have a 5% deferred sales charge.TMF tells me to look for funds that have:-Low management fees (below 0.75%)-No sales charges (also known as loads or commissions)-No 12b-1 fees-Turnover no higher than 40% a year-Established track record -Consistency of return1) Is the expense ratio the 'management fees', meaning that each year, 1.62% (and 2.12%) of my investment is given to the managers of the funds? Seems pretty steep. 2) Deferred sales charge. Does that mean that when I retire and take the money out of the fund, 5% of the total goes to Prudential? ------------As our company does not currently match any contributions to 401k, and as the funds provided by Prudential don't seem to be all that great (yet...), the high sales charges now make me wonder...Are the gains of a 401k plan with funds like this (high sale charges) worth it? Is the only difference between finding stocks/funds to invest in on my own and contributing to a company 401k the tax benefit? (which, eventually, I'll have to pay when I retire).Should I a) accept the fact that a company 401k is just a really good thing, even when it comes with high sales charges and so-so funds?b) do more research and only contribute small amounts to company 401k until I know more?Thanks for your patience... I AM learning :)VeryYoungFool
Unfortunatly, most of us have no control and very little influnce over the options available in a 401K plan.In your case the fact that your employer does not match any contributions is certainly a strike against participating in the plan. The tax deferal is of course typically the big advantage in 401k plans.My suggestion would be to expore other tax deferal options first such as an IRA but participate in the 401k to the extent you can.The expenses you mentioned do seem high but there is not much you can do about it other than discuss with your employer an improved plan.Sales charges are typically reduced the longer you hold the fund so you might want to check into it. The 5% charge may only apply if you sell the fund in the first year and may go down 1% each year you participate so that after 5 years there is no sales charge.
Just found that the percentages I listed are not the actual management fees, but rather a combination of a) management fee (.95% in one, 0.46% in other)b) 12b-1 fee (1.00% in both)TMF tells me a 12b-1 fee is money that a fund takes from me to market itself. Not quite sure what that means, but TMF advices to not go with any fund that has a 12b-1 higher than 0.25%. So, the management fees seem to be acceptable (although 0.95% is still a little high and makes me want to look elsewhere), but now the 12b-1 comes into play.Just a little update :)
Our 401k provider (Prudential) has expense ratio's higher than 1.5% on pretty much all their funds, and on the two equity funds that I'm investing in an expense ratio of 1.62% and 2.12%.Also, all the funds seem to have a 5% deferred sales charge.Too high on both counts, regardless of whether they're calling them administrative expenses or 12b-1 fees. Are you sure you're being charged all those fees? Some funds offered through 401K plans waive some of the charges that are normally assessed.With no match and high costs, you should absolutely max out your IRA alternatives before considering the 401K. Because you're eligible for a 401K plan, you may be subject to income limits on the deductibility of Traditional IRA contributions. If you can't deduct, but fall within income guidelines to make Roth IRA contributions, do so.After you've maxed out your IRA contributions, then you should consider whether long term buy and hold investing in individuals stocks or tax efficient mutual funds (index funds) might be a better option than bad 401K funds. You don't get the tax deferral, but you'd benefit from lower capital gains rates.Also consider, if you leave your employer, you will be able to roll 401K funds to the IRA provider of your choice, so you might eventually be able to get your money out of that plan.
Hello VeryYoungFool:TMF tells me a 12b-1 fee is money that a fund takes from me to market itself. Not quite sure what that means...Another way to explain 12b-1 fees is this fee is used to advertise the fund through magazine adds, commercials and such. It's used to sell the mutual fund to new investors. You've seen those really cool mutual fund commercials, like the Janus ones. So, they don't really do much for your invested money.As PMcMullenCT stated, these fees often aren't charged in 401k plans. I'd make sure one way or the other.HTHBookm
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |