Tip #5: A worker at a firm with a 401(k) plan that has high fees should maximize receipt of the employer match and divert additional funds to a low-cost IRA.
- Worker has access to a 401(k) plan that matches contributions equal to 5.0% of salary.
- The 401(k) plan has an annual fee equal to 1.3% of assets.
- Vanguard and Fidelity offer a deductible IRA with an annual fee of 0.3% of assets.
- Choice One: Contribute 10 percent of income to a 401(K)
- Choice Two: Contribute 5% percent of income to a 401(K) and 5.0% of income to an IRA.
- The person earns $75,000 per year for 35 years.
- The return on investments prior to fees is 6.0% per year.
- Contributions are bi-weekly
- Choice One: Wealth at Retirement $998,933 all in a 401(K).
- Choice Two: Wealth at Retirement $1,083,089, with both 401(K) and IRA.
- Additional wealth from diverting funds to an IRA is $83,876.
Concluding Remarks: Many financial advisors ignore fees and recommend maximizing contributions to a 401(k) plan. A better solution is to maximize the employer match and divert additional savings to a low-cost IRA.