Today’s question comes from Stephen in Connecticut…
“I have a question about 401ks. I’m working at my first full time job post college. I know there’s a 401k plan that is offered. But there are two caveats…
1. There’s no 401k match. And 2. The plan is through Voya. Not Fidelity or Vanguard.
In fact, I did some research into the 401k plan potential asset allocation options that are offered, and the average annual fees I found for them is 1.66%!
My question to you is, despite the high fee and it being through Voya, should I still invest? I do plan on going to grad school soon if that makes a difference.
I have been able to max out my Roth IRA the past 2 years, so that is taken care of. I have been putting extra money for retirement into my brokerage account.
I appreciate the helpful insight. Thank you.”
Matt & Joel’s response: Our condolences to you that you have such a trashy 401k option!
We don’t love to dump on specific companies, but Voya is far from great. Their target date funds, for instance, can cost 8x what Vanguard’s does!
I’m shocked to hear that the avg annual fee in your plan is north of 1.5%. That’s insane!
Our short answer is: With no match and awful investing options, putting money into that 401k likely isn’t worth the effort.
401k Match is Priceless
If you had a 401k match, the calculation would be different.
No matter how crappy the plan is and how high the fees are, we’d want you to contribute enough to get that full match, no matter what. No fee, even these awful ones from Voya, can eat into your returns enough to overcome a decent employer match.
Dollar for dollar, 401k matching essentially doubles your money. That’s a 100% immediate return on your investment.
Even with fees at 1.66% (compounded over decades probably means it eats up 30%+ of your would-be portfolio) the matching still more than makes up for the fees.
Roth IRA and Brokerage Options
You said that you’re maxing out a Roth. That would be our first piece of advice too.
After that, take advantage of those other tax-advantaged accounts outside of a 401k with a far superior low-cost brokerage.
Once you’ve maxed those out, you might check and see if there’s a lower cost fund inside your 401k.
Leave no stone unturned. There could actually be a reasonably priced Total Stock Market or S&P 500 index fund fund that comes with an expense ratio below half a percent. If that’s the case, while not ideal, you might want to still contribute some to your 401k, but only in those specific funds.
You could also opt to put money straight into a taxable brokerage account instead. But depending on your income we think the 401k makes more sense, but ONLY IF they offer a fund or two in what we consider the reasonable range.
Ask your employer to switch 401k providers
It’s hard to fathom why an employer would pick Voya or another similar high-cost provider like that!
It might be because they don’t know any better. But this is actually a great opportunity for you to come in and provide some help to your employer if you’re so inclined!
You could approach your HR department and mention that the high fees are killing your ability to utilize their benefits. Educate them a bit on the impact of high fees and how they’ll impact their employees over the years.
One option you might want to pass along to them is Human Interest. This company provides great low cost benefits for employers!
Even though it sounds like you won’t be there for a long time, future employees could enjoy more of their money thanks to your actions.
Rollover to IRA
Actually, the fact that you’re not planning on working there long is another reason contributing to the 401k might make sense.
That’s because when you part ways, you can always roll that 401k into an IRA. And you can choose the same low-cost brokerage you’re using for your Roth IRA.
The fees might hurt, but it’s only temporary because you’ll be leaving that employer in the not-so-distant future. You can take advantage of the tax incentive to invest in your 401k, then move to a fee-free plan with far better fund options afterwards.
Saving cash in a HYSA
You mentioned you’re going to grad school “far away” and that may affect the decision. So it sounds like you might need a cash-pile for an upcoming move?
The only reason we’d tell you to not invest your extra savings is if you need to beef up that fund for living expenses.
We’d rather see you have more cash to pay for that degree so you don’t have to take on student loan debt at a higher interest rate.
That’s one potential reason to invest less overall, so you can minimize your debt load moving forward. Then upon graduation, (and a higher-paying job!) you can ramp up your investing!
Just make sure to utilize the current awesome rates in a High Yield Savings Account!
The Bottom Line:
If you had a decent 401k match, we’d push you to invest in the 401k despite the high fees. But since you don’t, it’s not such an easy answer.
I’d spend some extra time looking at all the available funds with Voya, and see if you can find any with an expense ratio under 0.5%. It’s not ideal, but OK on a short term basis.
Since you’ll be leaving for grad school in the short term, you can roll over any of those 401k funds to an IRA. Make sure to do it ASAP after you leave.
We love that you’re maxing out your Roth IRA. The only other consideration would be beefing up your cash pile and using it towards grad school costs. Paying cash will be better than going into debt for tuition or living expenses.
Good luck!!
For the full version of this discussion, check out Podcast Episode #853 (it’s the 1st question in the episode)
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