How should an individual evaluate a potential employer’s 401K Plan? Following are a number of factors which I used during my working career.1. Does employer offer a 401K plan? In general, I would consider lack of a 401K plan to be a ‘deal-breaker’ for me to work for that employer. Lack of access to a 401K plan will have a tremendous financial impact on employee’s future – especially if you are an above average wage-earner. Remember that contribution limits for a 401K plan are 3X-4X higher than contribution limits for an IRA – that difference translates directly into the potential value of your investment portfolio at retirement age.2. Does employer offer a Traditional 401K plan or a Roth 401K plan? My recent research shows that a typical Roth 401K has nearly 15% financial advantage (i.e., after-tax spendable income) to the retiree versus that available with a Traditional 401K plan (i.e., assuming same contributions in each plan). Until this effort I had not recognized the tremendous financial advantage to the retiree when employer contributions were made to his/her Roth 401K account. Suggest younger employees should have a bias toward those employers who offer a Roth 401K plan versus those who offer a Traditional 401K plan.Note: I consider the Roth 401K (and Roth IRA) to be high-risk for younger employees. The Roth ‘advantage’ is based on assumption that retiree will not pay income tax on distributions from a Roth IRA/401K account. Question: Do you trust that a future US Congress (perhaps the next one) will allow millennials to distribute and spend perhaps $20T (yes trillion) and not impose additional taxes and/or ‘means testing’ for government benefits (e.g., social security, medicare)? Color me skeptical. In my view Roth legislation means that IRS gets its ‘fair share’ (i.e., taxes) this year while also leaving open the opportunity for Congress to impose more taxes and/or ‘means testing’ in the future. As a risk mitigation strategy, suggest each person should consider this risk as part of his/her retirement planning. My personal bias has been to invest every dollar I can while minimizing the amount of tax I must pay ‘this year’. I will continue trying to avoid (or defer) paying income taxes so long as possible while (hopefully) passing a significantly larger portfolio on to my children. Remember those ‘deferred income taxes’ will also experience long-term compounded growth when they are invested rather than sent to the IRS.3. How MUCH does my employer contribute to my 401K plan? For most of my working career, my employer contributed 4.5% of total salary if I contributed 6%. My last employer (before retirement in 2013) contributed up to 15% of total salary (I received 13.8%)!! Remember that the IRS limits on combined employer and employee contributions was $54,000 in 2020!! Suggest that employee should have a bias toward an employer who contributes more to one’s 401K account – and even more so if higher contributions are made to one’s Roth 401K account.4. WHEN does employer contribute to my 401K plan? Obviously, employee would receive maximum benefit if all contributions were made on 1Jan of each year so that employee could enjoy that year of growth in his/her 401K account. However, most employer’s make contributions in conjunction with each paycheck. Implication is employee must adjust withholding for his/her contributions such that last contribution is made near end of December – maximizing your contribution earlier in the year could mean loss of further employer contributions. Finally, if employer contributions are based on some form of ‘profit sharing’, it is likely that such contributions will be made after close of the company’s fiscal year.5. Does employer impose a VESTING PERIOD on its contributions? My understanding is that IRS allows employer to impose a vesting period of up to 5 years. Depending upon how long you think you might be working for a potential employer, suggest you should consider employer’s vesting requirement. 6. What about FEES associated with employer’s 401K plan? Usually, the employer will cover fees associated with administering its 401K plan. Each of the funds included in a 401K plan impose fees, (e.g., ‘expense ratio’) which you need to consider before investing in one of them. In my experience Employees were usually charged $50 per year for access to a ‘stock window’. In other words, it cost me $50 annually for the option to invest in S&P Index Fund or individual stocks rather than being limited to funds offered within the employer’s 401K plan. In my case, that $50 was usually well-spent.Final Note: I believe that the person who is the most concerned with my financial well-being is me – any ‘service provider’ is only interested in using me (or you) as a source of revenue (i.e., remember fees). I believe that at every opportunity an employee should perform a rollover of his/her 401K account balance to one (or two) Rollover IRA accounts which you have opened with a well-known brokerage(s). IMO the long-term employee is the one who is getting ‘hosed’ with respect to 401K rules because he/she is (usually) not allowed to perform a 401K-to-IRA rollover. Only an ex-employee/retiree or employee who reaches 59.5 years of age has the LEGAL right to perform such a rollover. Once I reached 59.5 years, I began performing a rollover about every 3 months – until I actually retired at age 67. Each rollover took less than 5 minutes. In this manner, all of my retirement portfolio was gradually transferred from 401K account to two (i.e., I split funds between two brokerages as a risk mitigation strategy) Rollover IRA accounts by time I retired. Incidentally, I would not consider leaving my 401K account with an ex-employer – nor would I ‘roll’ my IRA account into my new employer’s 401K plan.
How should an individual evaluate a potential employer’s 401K Plan?Here's a tool that compares 401(k) plans by company https://www.brightscope.com/6. What about FEES associated with employer’s 401K plan? Usually, the employer will cover fees associated with administering its 401K plan. Each of the funds included in a 401K plan impose fees, (e.g., ‘expense ratio’) which you need to consider before investing in one of them. In my experience Employees were usually charged $50 per year for access to a ‘stock window’. In other words, it cost me $50 annually for the option to invest in S&P Index Fund or individual stocks rather than being limited to funds offered within the employer’s 401K plan. In my case, that $50 was usually well-spent.That's highly dependent on the plan. In my 401(k) plan, one of my offerings is the Vanguard 500 Index, with a 0.01% expense ratio. If I were to buy it as an Admiral mutual fund (VFIAX), the expense ratio would be 0.04% If I were to buy it as an ETF (VOO) the expense ratio is 0.03% So my 401(k) gives me a better deal than you would get in your brokerage window. The difference in expense ratio isn't huge, but if that's the only thing I wanted to buy in my brokerage window, I certainly wouldn't want to pay $50 a year to pay a higher expense ratio. Not that it really mattered, because I'm not offered a brokerage window - and I haven't seen a lot of plans that do offer one. YMMVAJ
Previous posters have noted that large employers often have very good 401K plans with leaders like Vanguard or Fidelity as custodians. Small employers lack the clout to participate in low cost plans. Some offer expensive plans provided by brokers or insurance companies.The most common complaint is lack of suitable investment choices. This is often the case with plans offered by small employers.
As you point out most index funds have a very low 'expense ratio'- so there is little differentiation between them based on fees each charge. My personal performance benchmark is the S&P Index Fund (1yr & 2yr periods). I would limit my investing to S&P Index Fund if I did not have a better performing option available. The real benefit of a 'stock window' as part of a 401K plan is that it affords employee access to individual stocks rather than funds.As for actively-managed mutual funds, (also ETFs and Target Date Funds) my criteria is that any option I would consider must have recently (i.e., 1yr & 2yr periods) outperformed the S&P 500 Index in terms of GROWTH in 'unit price'. My primary concern is amount of profit (or CAGR - compound annual growth rate) the fund returns to me - fees charged by fund's management is of secondary importance. Incidentally, this one criteria eliminates perhaps 90% of actively-managed mutual funds from consideration. I apply two criteria as I 'cherry-pick' a few (i.e., 3-5 while still working) individual growth stocks for investment each year. (1) Business must be a 'great business' as espoused by the MF - many of my stocks were recommended by MF newsletters. and (2) My analysis indicates that stock price will likely double in value within 5 years (i.e., CAGR = 14%). Am not boasting but my portfolio has actually outperformed that growth rate over the past seven years since my retirement in 2013.Final comment. (1) I would not invest in an annuity because I cannot determine what its payout might be say 20 years in the future. In effect, the soon-to-be retiree will likely be at the mercy of the insurance company in determining payout amount. (2) I would not invest in Target Date Funds - if you look at performance among its underlying funds there will be several low-performing 'dogs' among them. Again, I am not interested in any asset which has not recently outperformed the S&P 500 Index.
Agree that 401K plans - especially among smaller employers - are not created equal. To me, lack of access to a 'good' 401K plan would be a 'deal breaker' when considering a job offer. Three (or 4) factors are important when evaluating potential employer's 401K plan.1) What 401K-related fees are paid by the employees?2) Employer contributions and vesting requirements.3) Does employer offer S&P Index Fund as part of its 401K plan? If not, does employer even have the option to add this fund while continuing contract with its current custodian?4) If you are a more experienced investor, access to a 'stock window' might also be important to you.The tragedy is there are likely situations in which an employee would be better off financially by NOT participating in his/her employer's 401K plan.In my experience there are two important reasons WHY the 401K plan should be more valuable (i.e., than an IRA) to the employee. (1) Amount of allowable contributions (and accompanying tax deduction) is about 3X-4X those allowed for an IRA. and (2) Amount of employer matching contributions. For those workers who do not have access to a 'good' 401K plan, suggest the following: Open (at two brokerages for risk mitigation reasons) brokerage accounts and contribute up to $5100 (i.e., 85% of $6000) to your Traditional IRA and then contribute $900 (i.e., your annual tax savings) to your Roth IRA. Invest those contributions in S&P Index Fund with long-term expectation of about 8% CAGR. Per compound annuity formula, investing $6000 per year for 40 years at 8% CAGR should result in a portfolio value of nearly $1.75M at retirement age. As a retiree, two things will likely be true:1) Retiree will pay annual income tax from RMDs of about 1% of total value of his/her Traditional IRA account(s)(e.g. $1M portfolio translates to $10K in income tax). I was surprised when I recognized my income tax rate because of IRA distributions is less than 'expense ratio' charged by actively-managed mutual funds.2) Suggest leaving your IRA dollars invested in S&P Index Fund 'forever'. Retiree's portfolio value should continue to grow because its 8% CAGR will likely exceed that of 4% RMD plus annual (e.g., 2%) inflation rate.
The real benefit of a 'stock window' as part of a 401K plan is that it affords employee access to individual stocks rather than funds.In the 10+ different 401(k) plans I've had over the years, I never had a plan with a 'stock window', so it's useless to analyze how much better I could have done by picking individual stocks in my 401(k) plan.AJ
2. Does employer offer a Traditional 401K plan or a Roth 401K plan? My recent research shows that a typical Roth 401K has nearly 15% financial advantage (i.e., after-tax spendable income) to the retiree versus that available with a Traditional 401K plan (i.e., assuming same contributions in each plan). Until this effort I had not recognized the tremendous financial advantage to the retiree when employer contributions were made to his/her Roth 401K account. Suggest younger employees should have a bias toward those employers who offer a Roth 401K plan versus those who offer a Traditional 401K plan.I thought employer contributions had to be made to a traditional 401k. Employees can contribute to a Roth 401k.Isn't it better to look at your own situation than the typical situation? I still contribute to the tradition 401K instead of Roth IRA due to marginal tax rate.PSU
I retired in 2013 and never had access to a Roth 401K or a HSA. Potentially, I made an error in not first verifying that employer contributions must always be made to a Traditional 401K account - even when employee can contribute to employer's Roth 401K. For last decade or so of my working career, I was not eligible for a Roth IRA nor could I take a deduction for contributions to a Traditional IRA. My only choice beyond Traditional 401K was a taxable account. One bright spot occurred during last year before retirement - my employer contributed 13.8% (out of 15% max) of gross salary to employee 401K accounts - during that year I was able to get almost $45K contributed to my 401K account. I was lucky here because this type of 'sweet deal' is rare. After introduction of 401Ks, each of my prior employers contributed 4.5% of gross salary if I first contributed 6%.My contribution strategy was to maximize pre-tax contributions to Traditional 401K and then invest the tax savings - while maximally deferring taxes indefinitely. By retirement, all of my 401K funds were transferred to two (with different brokerages for risk mitigation) Traditional Rollover IRA accounts. As a retiree of 7 years, I will continue trying to grow my Traditional Rollover IRA portfolio so long as I am physically and mentally capable of doing so. My Traditional Rollover IRA portfolio consists of about 35 individual growth stocks - each stock predicted to double in value within 5 years (i.e., 14% CAGR)- incidentally buy/sell decisions are rare. Good news is that most of my deferred tax savings will continue to be deferred which helps fuel portfolio growth. Ideally, a younger person would be able to maximize pre-tax contributions to a Traditional 401K - then maximize after-tax contributions (e.g., $6000 of tax savings)to a ROTH IRA. Long-term growth achieved by investing those extra dollars should overwhelm any differences caused by tax rates.
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