How to Allocate 401K Funds?

[cologero]

Thanks for all the advice everyone. I'm going to try and setup a meeting with our plan admin discuss what they recommend. I'll let you know what he says. As far as the amount matched, the $800 I'd contribute is the min amount needed to take advantage of my employers full match. They match 25% of contributions up to 4% of compensation.

I obviously have some studying up to do. I guess I'm just looking for some safe recommendations I can start out with since I can enroll right now. I'm impatient and want to start saving now I also want to mention that I will still be contributing $5500 to a Roth for 2013 and 2014.

[kv968]

I think that having the opportunity to put away money pre-tax is better than not having it, even if the funds are not so great and there is no employer match. It was much easier for me to save money in a 401(k) before I got paid than it is for me to put money away after taxes in a Roth IRA.

I agree, it does seem easier to save money in a 401k before you get paid rather than putting it away after taxes but that's a case of discipline, not taxes or expenses.

If you weren't going to save any money at all if it wasn't for them taking the money out for the 401k that's one thing. But if you're not in a high tax bracket and the match isn't contingent on what you put in, you'd be better off with a Roth that has more options and lower fees.

[kv968]

Thanks for all the advice everyone. I'm going to try and setup a meeting with our plan admin discuss what they recommend. I'll let you know what he says. As far as the amount matched, the $800 I'd contribute is the min amount needed to take advantage of my employers full match. They match 25% of contributions up to 4% of compensation.

I obviously have some studying up to do. I guess I'm just looking for some safe recommendations I can start out with since I can enroll right now. I'm impatient and want to start saving now I also want to mention that I will still be contributing $5500 to a Roth for 2013 and 2014.

If that's the way they have the match set-up then go for it. Although I'm not sure I'm reading it right when you say your employer matches "25% up to 4% compensation". I'm not sure I understand what you mean by "compensation". Normally an employer will match 25% of up to 4% of your salary that you put in. If that's the case then you'd be making $20k/month (4% of $20k = $800) or $240k/yr? Is that the case? I just want to make sure I understand what you're saying because if you were making that much you wouldn't qualify for a Roth. Or am I missing something?

For example, the way it would normally work is say if the $800 you were putting in was 10% of your monthly salary...that would mean that you make $8000/month. If your employer matched 25% of the first 4% you put in then they'd only be putting in $80 ($8000 * 4% * 25%). They normally only apply the match to the first 4% that you put and the rest is just money you're putting in but not getting matched on. Maybe I'm wrong but that's usually how it works. I'd check that out.

Regardless, I'd still ask the admin if the front-end loads are waived on those "A" class funds. Sometimes they are for 401ks.

[cologero]

Sorry if I didn't explain it correctly. I gross $5,000 per month. I will be contributing 16% of that amount which is $800. My employer will match 25% of my contribution up to 4% of my salary. So in essence they will be contributing $200 each month (which is 4% of my salary).

The reason I want to give 16% is so I take full advantage of the (max) 4% match of my salary.

P.S. What is a front-end load? Some sort of fee I pay over time? I guess I could Google it, but still want to ask here while it's on my mind.

[kv968]

Sorry if I didn't explain it correctly. I gross $5,000 per month. I will be contributing 16% of that amount which is $800. My employer will match 25% of my contribution up to 4% of my salary. So in essence they will be contributing $200 each month (which is 4% of my salary).

The reason I want to give 16% is so I take full advantage of the (max) 4% match of my salary.

P.S. What is a front-end load? Some sort of fee I pay over time? I guess I could Google it, but still want to ask here while it's on my mind.

Ok. I don't think I've ever seen one constructed like that but it makes sense. Usually its just up to the first 4% you contribute.

As far as a front-end load...that's a fee that you pay everytime you invest in a fund. For example, the Blackrock Int'l Fund you have has a load of 5.25%. Which means that for every $100 you invest they're taking $5.25 right off the top so in essence you're only investing $94.75. Every fund that has an "A" in the title carries some sort of load like that. It might not be that high but its there. Unless of course its waived due to the 401k which is what you should ask about.

The expense ratios on the funds are pretty high also but unfortunately there's not much you do about that (or really the loads for that matter). That was why I was suggesting just put enough money to get the match and then invest the rest in a Roth.

[soogar]

I agree, it does seem easier to save money in a 401k before you get paid rather than putting it away after taxes but that's a case of discipline, not taxes or expenses.

That's not really true. I pay about 35% in taxes. A 401(k) contribution of $200 would only lower my take home pay by $100. If I didn't save that money pretax, I would save the 100 and then have to reach into my after tax for the extra 100. Saving after tax- especially if a lot of money gets withheld after taxes is more difficult. It's not impossible but if you can put the money pretax, it can drop a person a tax bracket and not affect the take home pay as much.

Also a person can put away considerably more into a 401(k) than a Roth.

[kv968]

That's not really true. I pay about 35% in taxes. A 401(k) contribution of $200 would only lower my take home pay by $100. If I didn't save that money pretax, I would save the 100 and then have to reach into my after tax for the extra 100. Saving after tax- especially if a lot of money gets withheld after taxes is more difficult. It's not impossible but if you can put the money pretax, it can drop a person a tax bracket and not affect the take home pay as much.

Also a person can put away considerably more into a 401(k) than a Roth.

All true.

What I was trying to address was the discipline of saving in general as compared to the "easiness" of having it deducted. In that if someone didn't have the money taken out before they saw it, they'd spend it instead of putting it into an IRA themselves.

[jIM_Ohio]

That's not really true. I pay about 35% in taxes. A 401(k) contribution of $200 would only lower my take home pay by $100. If I didn't save that money pretax, I would save the 100 and then have to reach into my after tax for the extra 100. Saving after tax- especially if a lot of money gets withheld after taxes is more difficult. It's not impossible but if you can put the money pretax, it can drop a person a tax bracket and not affect the take home pay as much.

Also a person can put away considerably more into a 401(k) than a Roth.

I think most would disagree.

A pre-tax 401k can have more money in it (which I think was your point)
but the Roth is post tax money, so it is denser and more valueable. I would rather have $200K in a Roth than $200k in a pre-tax 401k.

The issue (according to your post) is would people rather have $200k in a 401k or 35% less, $130k, in a Roth?

That answer will be different for everyone, if you have the ability to max the Roth, that is the single best decision.

In addition, if the 401k cannot be used to drop the tax bracket, the Roth looks better, and once the tax bracket is dropped, the rest of the contributions should go to a Roth.

For example the 15% bracket cap is $73,799 (married filing jointly). Once a regular 401k was used to drop income below that number, I would argue the Roth is better at 15% tax rate than pre-tax contributions. Most at bogleheads and other investment forums would likely agree.

[cologero]

I'm getting ready to discuss my 401K option with our plan advisor. From the everyone's input here, it sounds like the main questions are:

- Are there fees involved if I want to change my allocations?
- Are the front-end loads waived for "A" class shares?

Did I miss anything?

[Petunia 100]

I'm getting ready to discuss my 401K option with our plan advisor. From the everyone's input here, it sounds like the main questions are:

- Are there fees involved if I want to change my allocations?
- Are the front-end loads waived for "A" class shares?

Did I miss anything?

Ask about all fees you will be paying, both directly and indirectly.

Have you been learning about asset allocation yet? If not, a great place to learn is Morningstar's investing classroom:

http://www.morningstar.com/cover/Classroom.html

[cologero]

Thank you! I'll have to look at that link when I get a moment. Unfortunately, I have very limited time right now. I appreciate the input though.

[cologero]

Hey everyone, have another quick question. I have the meeting with my plan advisor tomorrow. In addition to my 401K he's probably going to want to discuss my interest in ustilizing a ROTH IRA (2013 & 2014). I was planning on contributing through Vanguard due to others feedback as well as the fact that there will be no initial fees (I'll be contributing the max of $5,500).

What are the main questions I'd want to ask the advisor (and Vanguard if needed) to ensure I'm going with the right company?

[kv968]

Hey everyone, have another quick question. I have the meeting with my plan advisor tomorrow. In addition to my 401K he's probably going to want to discuss my interest in ustilizing a ROTH IRA (2013 & 2014). I was planning on contributing through Vanguard due to others feedback as well as the fact that there will be no initial fees (I'll be contributing the max of $5,500).

What are the main questions I'd want to ask the advisor (and Vanguard if needed) to ensure I'm going with the right company?

I'm not sure there's much you would need to ask him. Vanguard is a very good fund family and you should have no problem with them. The only difference I might see is if you were to trade ETF's. Vanguard offers theirs commission-free but Fidelity, and possibly some other houses, offer more. Not that that's a big deal even if you are planning on using ETF's since Vanguard has pretty much everything you'd need covered with theirs.

The only thing I could see your advisor suggesting is maybe keeping the Roth with the company that runs the 401k (if that's possible) just to have all of the accounts in one place. I wouldn't necessarily recommend you make that a high priority. Good luck and let us know how it went.

[jIM_Ohio]

Thank you! I'll have to look at that link when I get a moment. Unfortunately, I have very limited time right now. I appreciate the input though.

I don't think asking any questions until you educate yourself make sense. We can spoon feed you 10 questions to ask, more than likely you would not be able to do any follow up with the plan expert because you are not learning what questions to ask yourself.

Educating yourself is the key to success, as every answer is in the plan documents, and if you can get a copy of the plan document, you have every answer you need.