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When A 401(k) Might Not Make Sense: Sorry, Ignore No Link
FYI: 401(k) could hurt you too. The tax-advantage is like a free meal. But it might cause some trouble if the fees are too high. That’s according to researchers Ian Ayres and Quinn Curtis. In 2014 they published Beyond Diversification: The Pervasive Problem of Excessive Fees and “Dominated Funds” in 401(k). Regards, Ted https://assetbuilder.com/knowledge-center/articles/when-a-401(k)-might-not-make-sense
"The authors assumed a 35-year time horizon for a young employee. ..."
That's quite an assumption - that someone is going to leave high money in a high cost 401(k) plan for 35 years. It assumes that the person is going to stay with the same employer for 35 years (otherwise the money could be moved to a new 401(k) or an IRA upon separation of service). It assumes the plan does not allow in-service distributions at age 59.5 (otherwise that longterm employee would still be able to move money out before retirement). And it assumes no matching.
The better advice IMHO is to recognize that most jobs don't last decades, put money into the plan, and move it out as soon as you can. There is significant value in getting money tax-sheltered, and a few years of higher costs are usually not enough to completely eliminate that value.
High fee is a consideable drag on annual return. The worst of all it compounds itself just like annual return. Unless the company offers a significant matching, 10% for example (in reality this is rare), it is difficult to cancel the disadvantages of high fee.
One option is open up a Roth IRA account and use inexpensive mutual funds.
Comments
https://assetbuilder.com/knowledge-center/articles/when-a-401(k)-might-not-make-sense
"The authors assumed a 35-year time horizon for a young employee. ..."
That's quite an assumption - that someone is going to leave high money in a high cost 401(k) plan for 35 years. It assumes that the person is going to stay with the same employer for 35 years (otherwise the money could be moved to a new 401(k) or an IRA upon separation of service). It assumes the plan does not allow in-service distributions at age 59.5 (otherwise that longterm employee would still be able to move money out before retirement). And it assumes no matching.
The better advice IMHO is to recognize that most jobs don't last decades, put money into the plan, and move it out as soon as you can. There is significant value in getting money tax-sheltered, and a few years of higher costs are usually not enough to completely eliminate that value.
One option is open up a Roth IRA account and use inexpensive mutual funds.