Stocks — Part VIII-b: Should you avoid your company’s 401k?

Sometimes the universe has a way of telling us to look more closely or again at something we thought we knew. In my case, two jlcollinsnh readers have caused me to take another look at 401k programs. I don’t like what I see.


Caution! Pickpockets at work.

401Ks were enacted into law in 1978. In fact, the term 401k refers to the section of the IRS code that deals with the law.

But it took awhile for them to spread. As memory serves, it wasn’t until the early or mid 1980s the company I was working for at the time rolled one out. I thought it was the greatest thing since sliced bread. I enrolled in that one and every one since, had the max withheld and never looked back.

In fact in Stocks — Part VIII, where I talk about them, my first bullet point is:

“These are very good things.  I always maxed out my contributions.”

Sure, the funds offered back then typically had somewhat high ERs (expense ratios) but the tax savings and the sometimes company match more than made up for those. 401Ks were a no brainer.

Now I’m not so sure.

(Please note: for the purposes of this discussion I refer to 401K plans. But it also applies to 403b plans and other variations of employer sponsored tax-advantaged retirement programs)

Last week in the comment section under Part IX of this series, reader Prob 8 posted:

“If anyone doubts JLC’s claims regarding the impact of fees and commissions on your portfolio, please check out this video from PBS: The Retirement Gamble

There are interviews with Jack Bogle and all you’ll need to know to realize fees and investment advisors are hurting your portfolio more than helping.”

It is about an hour-long and Prob 8 points out the discussion of excessive 401k fees starts at around the 20 minute mark. But I strongly urge you to watch the whole thing. In fact, if you own investments and especially a 401k, you should consider it mandatory viewing.

I was appalled and frankly a little stunned to learn how fully investment companies have plundered what was once a great retirement tool. So important is this new information, I copied Prob 8’s comment and link and created it as an Addendum on:

Stocks — Part IX and Stocks — Part VIII, the two most relevant posts for this in the series.

In the film, the math on how damaging even seemingly modest 2% fees really are is well demonstrated. It is nothing short of breathtaking; and even I didn’t fully appreciate just what a cesspool of fees some 401k plans have become.

But as I was about to learn, we should be so lucky has to escape with 2% fees.

Last Sunday in the comments section of Putting the Simple Path to Wealth into Action, reader Chris posted a comment outlining his situation and asking a few questions. Among other things, he is investing in the “Simple IRA” (think 401k) offered by his employer. The funds in it are all from Fidelity.

He mentioned that he was considering a specific fund: Fidelity Asset Manager 85%. I jumped on the Fidelity site and quickly saw this fund carried a .82% ER. Not great but not a deal breaker either. Pretty much in line with what I’d faced in my own 401Ks.

In his reply, he said some very nice things about the blog, said he would explore his fund options and he provided a link to the Fidelity offerings. Curious, I clicked on it and poked around.

OMG! as the kids say.

Here is my slightly updated reply (you can read the entire exchange over on that post):

OK Chris…

…now I’m offended. Not at you, but at Fidelity.

As you and everybody who reads this blog knows, I recommend Vanguard as it is truly the only investment company that puts its customers’ best interests first.

Competition has forced companies like Fidelity to offer a line of low cost index funds and that has allowed me to soften my view on them, especially if Vanguard is unavailable for some reason. But I’ve always cautioned their heart wasn’t really in it and they only served up low-cost funds when forced to and as “loss-leaders.”

But clicking on the link you just provided, I am truly appalled. Not only is the list of funds almost endless and confusing, they are all “Class T” where as far as I can tell “T” means “Take lots of your money.”

These things are absolutely dripping with fees.

You may recall in my first reply I said: “Fidelity Asset Manager 85% is an OK fund but has a pricey expense ratio of .82%.” I got that ER simply by looking up the fund on Fidelity’s web site:

As high as .82% is for an ER, at least it is the only fee. But in your IRA they don’t offer you this class of the the fund. They force you into their Class-T. Here’s a look at that fund “T” classed and the related fees:

Maximum Sales Charge 3.50%
Gross Expense Ratio 1.37% as of 11/29/2012
Net Expense Ratio 1.32% as of 03/31/2013
Expense Cap: 1.50% as of 10/2/2006
Management Fee 0.56% as of 03/31/2013
Distribution and/or Service (12b-1) fees 0.50%

Holy crap!

I poked around and looked at several other funds, and all were laden with fees. For instance another option you might have considered would be this TRF (Target Retirement Fund):

Maximum Sales Charge 3.50%
Gross Expense Ratio 1.29% as of 5/30/2013
Management Fee 0.00% as of 03/31/2013
Distribution and/or Service (12b-1) fees 0.50%

Holy crap, again!

This is nothing short of a money grab on Fidelity’s part and shame on your employer for not better protecting your interests.

All of this is enough for me to seriously suggest you skip investing in your 401k all together. Here are the three things that you might want to consider before you do:

1. Does you employer offer a match? A match would help offset these horrible fees, so you might still invest but only up to the full match.
2. Are you in a really high tax bracket? 25%+. Even without your 401k deduction, you are not.
3. Does the 401k get your income below $41,952 for the EIC (see #3 below) as we discussed?

My condolences,


As troubling as all those fees are, they are only the ones we can see. Even more troubling are those, as that video points out, so deeply buried as to be undetectable.

So what should you do?

Well, unfortunately, Fidelity isn’t alone in this money grab. Indeed, with so much money at stake, my guess is virtually every other investment firm is engaged in this same disgraceful plundering of your retirement fund. Vanguard being the sole exception for the reasons I’ve already described.

The time has come to seriously reconsider participating. To do so, you are going to have to take hard a look at your plan. I know this is unpleasant, and it runs counter to my contention that investing should be simple. If you wanted to just step away, things are bad enough that I wouldn’t argue. (Although the Mad Fientist would, so be sure to read his take in the Addendum.)

But there might still be some value in your plan and with a little work you should be able to figure it out. Here’s how:

1. If your plan offers Vanguard, you’re golden. More and more do. Good for them.

2. If you plan offers any other investment firm, you’ll want to take a close look. The Fidelity plan we have above offers a great template as to what to avoid.

  • Notice first the huge range of funds offered. This is not done for your benefit. It is done to force you into throwing up your hands in despair and asking for their help in choosing. Making investing complicated is a way of gaining control. What they will choose for you likely will be what costs you the most and works best for them.
  • Beware if the funds offered are in a special class. When Vanguard does this, it is because the economies of scale allow them to offer even lower costs. VTSAX has a super low ER of .05%. The Institutional Shares version — what would be in your 401k, VITSX — is even lower at .04%. But as we can see, when Fidelity does it, it is designed to drain as much of your your money as possible into their pocket. This will be true of most other 401k special class fund groups.
  • Look, as always, for index funds offering the total stock market index or the S&P 500 index. These not only are the best investments, they should have the lowest cost. But in our Fidelity example above, not only do they offer a huge range of funds all in the hyper-expensive “T” class, they seem to have held back their Spartan (low-cost index) funds. At least I couldn’t find them.

Once you’ve assessed just how bad your 401k plan is, you can decide if and how you want to participate. Here’s how:

1. Does your company offer a match and if it does, how much? Sometimes it can be as high as 100%. Sometimes less, sometimes nothing. Usually up to some limit that will be less than the maximum you can contribute. This match is “free” money. If it is generous enough, it can make up for even the horrible fees we see in our Fidelity example above.

2. Think about your tax bracket. Federal income taxes here in the USA are actually pretty low for most people. For instance, if you are married and filing jointly you are in the 15% tax bracket until you earn more than $70,700. But that’s what’s known as AGI (Adjusted Gross Income). You’ll also have a standard deduction of $11,900 and a $3800 personal exemptions for each of you, your spouse and any dependent children. Looking at our friend Chris above with his two kids, this means he could earn $97,800 before hitting the 25% bracket:

$97,800 in income, less…

$11,900 standard deduction

$15,200 in personal exemptions — ($3800 x 4) =

$70,700 AGI for the 15% tax bracket.

Any additional deductions would drive the threshold for income taxed at 15% even higher.

Now this is just one example and taxes being taxes, there are lots of variations. If you are single you’ll hit the 25% bracket at $35,350, for instance. So you really do need to explore your own situation.

Remember, too, that 401Ks don’t eliminate taxes. They only defer them. There is a lot to be said for your investments growing tax free for decades. But 15% is also a very, very low tax rate. In retirement your rate could easily be higher. Maybe you’ll be wealthy enough to be in higher brackets. Maybe the government will have simply raised the rates. Maybe both.

But if your 401k plan is fee heavy as so many appear to be these days and your bracket is 15% or less, you’ll want to think long and hard. For you, maxing out your 401k might not be the slam-dunk it was for me in my day.

3. Does maximizing your 401k get your income down low enough to qualify for the EIC? (Earned Income Credit). The EIC is a very desirable credit where the government basically gives you money. It can wipe out any tax due and, importantly, it is a “refundable” credit. This means once your tax is zero, they give you the rest as a cash payment.

The EIC is designed to help low-income people, especially those with children. Your Earned Income and AGI must both be below certain limits. Here they are direct from the IRS website:

Preview of 2013 Tax Year

Earned Income and adjusted gross income (AGI) must each be less than:

  • $46,227 ($51,567 married filing jointly) with three or more qualifying children
  • $43,038 ($48.378 married filing jointly) with two qualifying children
  • $37,870 ($43,210 married filing jointly) with one qualifying child
  • $14,340 ($19,680 married filing jointly) with no qualifying children

Tax Year 2013 maximum credit:

  • $6,044 with three or more qualifying children
  • $5,372 with two qualifying children
  • $3,250 with one qualifying child
  • $487 with no qualifying children

Investment income must be $3,300 or less for the year.

(One caution when looking at those credit dollars, they are figured on a sliding scale. The closer to the income limit you are, the lower your EIC will be. So just tucking in under the ceiling won’t really help all that much.)

 So what is the bottom line?

It is a little hard to say as I have no way of knowing how bad your plan might be, (and please don’t send it to me. I simply don’t have the time to wade thru them all.) The Fidelity plan above is awful, others could be even worse. But we can use this one as a measuring stick. After you investigate your own, you can adjust my recommendations accordingly. But for this one Chris is stuck with….

Go for it if:

  • Your tax bracket is 25% or higher.
  • Your 401k deduction will lower your income enough to get the EIC.
  • Your employer offers a match, and then contribute only up to the match ceiling.

Consider skipping it if:

  • Your tax bracket is 15% or less.
  • Your employer doesn’t offer a match.
  • You think your tax bracket might well be higher than 15% in retirement.

*Personal Capital is a great free tool to manage and evaluate the investments you have, including costs. Most folks reading already have a range of investments and now you can track and compare them. At a glance you’ll see what’s working and what you might want to change. Very cool. *(This is an affiliate link and should you choose to use their free service this blog will earn a small commission.)

But absolutely, positively roll any 401k you have over to an IRA at Vanguard the moment you can. Unfortunately, this is usually not until you leave your employer.

Never, ever leave your 401k with your employer once you move on. Too much chance for mischief.

Finally, please join me in thanking Chris and Prob 8 for opening my eyes to how the 401k world has changed. I’m grateful to have such bright readers contributing and asking astute questions. If you don’t already, let me encourage you to read the comments after the posts around here. Some of the best stuff is found in them.

Addendum I:

Before publishing I sent this post out to the Mad Fientist for a peer review. His efforts have made it both more accurate and more complete. He also did a little additional analysis and as you’ll see he concludes that, as ugly as all these fees are, you are still better off funding your 401k. Here it is:

I’d argue that it is usually always prudent to invest in your 401(k), even if you only have high-fee investment options, due to the fact that the tax savings resulting from the 401(k) contributions will more than compensate for the higher fees.

To get some numbers to support my argument, let’s compare two different scenarios.

Assume two investors make $80,000 per year.  Investor A decides to max out his 401(k) with $17,500 every year and invests his 401(k) money in the Fidelity fund with the awful fees mentioned in the post (3.5% front-end load and 1.32% expense ratio).  Investor B does not contribute to a 401(k) and instead invests his money in a Vanguard taxable account with an expense ratio of 0.05%.

Thanks to the fact that 401(k) contributions are pre tax, Investor A’s taxable income decreases from $80,000 to $62,500.  This means that he only has to pay $9,225 in federal tax instead of the $13,600 that Investor B has to pay.

Due to the front-end load of the 401(k) fund, Investor A’s $17,500 contribution would actually only buy him $16,888 worth of shares.  Combining that with the tax savings I already mentioned, however, means his $17,500 401(k) contribution would actually fetch him $21,263 worth of shares ($16,888 into his 401(k) and $4,375 of tax savings into his taxable account).  Compared to Investor B’s $17,500 contribution, Investor A is able to invest $3,763 more every year.  These additional contributions definitely add up and more than cover the higher 401(k) fund expenses.

Assuming both investors contribute to their accounts for 10 years and earn an 8% return, Investor A would end the 10-year period with $293,056 in his portfolio ($229,828 in his 401(k) and $63,228 in his taxable account) and investor B would end up with $252,914 in his portfolio (all within his taxable account).

As was mentioned in the post, it is important to roll over 401(k)s into a low-fee IRAs as soon as possible, since there’s no point paying high fees if you don’t have to.

By rolling over his 401(k) into a Vanguard Traditional IRA after the ten years, Investor A would then have the benefit of tax-free growth within his IRA, an expense ratio equal to that of Investor B’s, and $40,142 more than Investor B.

Obviously the money in Investor A’s Traditional IRA could be taxed at withdrawal, although it doesn’t have to be if he  slowly rolls it into a Roth IRA. (  But I’d still choose the extra $40,142 and the possibility of multiple decades of tax-free growth any day.

Addendum II

Using this calculator I ran some numbers to illustrate the difference in having Vanguard v. Fidelity in your 401k.

First, I set the current age to 55. With the retirement age preset at 65 that gives us a 10 year window, a reasonable job length/holding period for a 401k. I used an 8% projected return and set the “lower fee” option to 0%. Then I ran both scenarios separately to get a cleaner look.

Scenario I: Fidelity’s Asset Manager 85% Class-T.

401k contribution of $17,500 less 3.5% load (commissions) = $16,888 invested.

Plugging in 1.32% for the net expense ratio, after 10 years the account would be worth $262,076 and Fidelity would have collected $19,033 in fees in addition to the $6120 in load/commissions. ($612 per year x 10 years)

Scenario II: Vanguard’s VTSAX.

401k contribution of $17,500 + zero  load (commissions) = $17,500 invested.

Plugging in the .05% annual fee, after 10 years the account would be worth $290,520 and Vanguard would have collected a grand total of $776 in fees. That’s right. Less than $1,000.

$290,520 – $262,076 = $28,444 extra dollars Fidelity has picked from our pocket and cost us in lost earnings from that money not being available for investing. That’s an astounding 9.8% of our $290,520 potential.

Here’s another Expense Ratio Calculator

Addendum III

In proofing this post and the two Addendum, it occurs to me it starts to look like you have a choice:

Give you money to Fidelity or give it to Uncle Sam. If the numbers are close, and since Uncle Sam is at least upfront about it and provides some useful services, I’m inclined to lean that way.

But if you take only one thing from this post, this is it:

Reading the Mad Fientist‘s thoughtful case it is clear — most often you’ll be money ahead funding your 401k. Given the highway robbery now imbedded in so many of them, that’s tough for me to say. But there it is. 

Addendum IV

Here’s a very cool tool that let’s you evaluate your company’s 401k plan: Bright Scope. The link takes you to the report on Google , a company famous for being a great place to work. The 401k plan reflects this and shows they even offer Vanguard. To find your own plan, just enter your company’s name in the search box.

Unfortunately, they don’t provide specific cost numbers, only a scale relative to other plans. Still, fun and useful.

Addendum V:

Mr. 1500 shares his own 401k horror-show.

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Important Resources

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  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.


  1. Trish says

    Good! I’m glad it’s official now, since it’s on your blog-!

    As a business owner, I offered both 401K plans and at one time, Defined Benefit Plans to the employees.
    I felt both were rich with fees, expenses, hidden costs – and extreme paperwork – and I’m talking about the employer’s side! I stopped both – and still feel slightly soiled when I think about them. What a waste.

    I don’t offer any now, except a simple seminar on Financial Independence – and a link to your and MMM’s blog!
    Much better. Better for them, better for me.

    • jlcollinsnh says

      It is a shame how what really should be a great concept has been turned into a money grab.

      Glad this blog and MMM have been helpful in bridging the gap.

    • jlcollinsnh says

      Hi Trish…

      I’ve a question for you.

      When investment companies pitch you to let them handle your 401k, do they offer any financial incentive?

      With Vanguard in the game, I’ve often wondered why employers don’t all just go there. Maybe they just don’t know, or are there benefits to them to go with a firm that might not be the best choice for their employees?

      • Rob says

        They have to, it’s the only reason I can come up with for us to be forced in to such bad/expensive investments. It’s worse for teachers with 403bs. We may be offered an index option but still have to pay some “professional” a fee to put our money where we want it. Knowing that employers are getting kick backs would still suck, but it would make me feel better than if they actually think they’re helping us…..

  2. Jason says

    Very timely post for me, Mr. Collins! I’ve been following your blog and related blogs (MMM, etc) for some time now and have just finished re-evaluating all of our investments, and moving everything to Vanguard where we could. Something interesting I found with my wife’s 401k is that when she signed up, she was only given the option of choosing Nationwide funds (the plan is through Nationwide). But we recently created an online account to manage it better and I found out that she had the option of many, many more funds than was initially presented to her. Lo and behold, Vanguard total stock market and total bond market institutional shares (VTSSX and VBTSX respectively) were options! Needless to say we moved to those funds as soon as we found them.

    Is that normal for companies to only present a select menu of funds when people sign up for their employer’s 401k plan? Doesn’t surprise me in light of the info in your post and the Frontline show.

    Many thanks for passing on your wisdom to all of us! I frequently refer people to your stock series when the subject of investing comes up.

    • jlcollinsnh says

      Good to hear it, Jason!

      As to your question, I have to speculate a bit. Doing so, two possibilities occur:

      1. The generous possibility is that shortened, select menus are provided to ease the burden of choosing.

      2. The less generous possibility is that the investment firm is putting forward the funds they would prefer you to choose, i.e. the ones they’ll make the most money on.

      Given that yours buried the low cost Vanguard options…. 😉

  3. Chris says

    Thanks for all your help Mr.Collins. I feel famous now!

    Thanks to your feedback, i looked long and hard at my Fidelity options and ultimately i was able to make some beneficial changes. As it turned out, you can make penalty free and tax free transfers from your Fidelity SIMPLE IRA into another SIMPLE IRA (has to be a SIMPLE IRA) So, I was able to work with Vanguard to open up a SIMPLE IRA (paperwork is in the mail!) and then changed my Fidelity investment option so that all of my pre-tax distributions are going into a money market instead. Then every month Fidelity will sweep my money market account and send a check over to Vanguard.

    Anyway- i’m not sure if this is applicable to 401K options, but i was pretty surprised that I was able to get this done without my employer having to make any changes. So if folks aren’t thrilled with their employer’s 401K fund options I would encourage them to look into this type of transfer possibility. it does take some work, and involves more paperwork, but as your math on the management fees shows, it will probably end up saving a ton of money in the long-run.

    Thanks again!

    • jlcollinsnh says

      Brilliant solution, Chris!

      Thanks for sharing and hopefully it will help others in their escape. Please keep us posted on how it works out.

      BTW, what Vanguard fund did you choose?

      • Chris says

        I chose 100% VTSMX. I’m pretty early in my wealth building phase, so this seemed to make the most sense.

        In addition, Vanguard does charge a $25.00 yearly fee for each fund that you invest into a SIMPLE IRA until your’ve reached “flagship Voyager”” status- which for an individual investor is, i believe, $50,000. So 1 fund is the cheapest option right now. Once I get to 50K i might introduce some new funds into the mix.

        • Elephant Eater says

          Hey Jim,

          You’ve made me a bit of an anti-fee Nazi. When my wife switched jobs to one with a Simple IRA I came to check in to see if any of your readers had any experience with this. After reading the above comment and then poking around on bogleheads I learned that you actually have 2 options with simple IRA’s. I just wanted to share and get a quick opinion if you’d care to offer.

          The first option is the one outlined above. The only downside to this is that Vanguard only allows buying Investor shares instead of Admiral (regardless of amount invested) in the simple IRA and as already stated above they also charge a $25/year fee if you don’t have Voyager status (we do so not a factor for us). Not quite as good as most Vanguard options but MUCH better than any options with the work selected brokerage for us.

          There is a second option for those with Simple IRA’s. If you have been in your Simple IRA for at least 2 years, you could then roll over into a regular rollover IRA. This would give someone who already has a roll-over IRA the chance to consolidate for simplicity and also have the option to buy lower cost Admiral shares. The 2 year waiting period is an IRS rule. You would also have to continue to make future contributions to the work chosen brokerage and then perform roll-overs every year. (You have to love IRS rules!)

          We’re still mulling it over, but think we’ll choose option 1 because of the ability to begin contributing to the funds we would like immediately. For someone who has already been in a Simple IRA for the 2 years and looking to switch brokerages I would think option 2 would be better for the lower fees and ability to consolidate with other Rollover IRA’s. Any thoughts?

          • Ross says

            I currently have a SIMPLE IRA with my employer that uses Fidelity. I reached out to Vanguard and the person was not that helpful. They said I needed to check with my employer to see if they also offered Vanguard options. I doubt that is the case so was there a certain contact you used at Vanguard to get the Fidelity to transfer or could you provide some general guidance on where to locate on the website?

            I just recently found this blog and love it! Thank you!

          • jlcollinsnh says

            Hi Ross…

            The Vanguard rep was correct. You have to check with your employer as to what options your plan offers, and those are your only choices. Nothing Vanguard can do about that.

            Once you leave that employer, you have the option of rolling your 401(k) into an IRA. That IRA can be with Vanguard and they can help you move it there.

          • Ross says

            Gotcha. I’m assuming that was the case with Chris where his SIMPLE IRA plan had the option of both Fidelity and Vanguard. I’ll see the lowest ER index fund Fidelity has through our plan. I think they may have some of the Spartan funds you spoke of. Thanks again!

  4. Travis says

    “But absolutely, positively roll any 401k you have over to an IRA at Vanguard the moment you can. Unfortunately, this is usually not until you leave your employer.”

    I cannot for the life of me understand this part of the law! If you stay with your employer for 10, 20, 30 years, you’re stuck with whatever 401k options they have, even if they are terrible. If you leave after a few years (staying long enough to have your 401k 100% vested, of course), then you can roll the 401k over to wherever you want. How does that make sense?!

    I just went through this situation a couple months ago with a friend of mine. He finally got a good-paying job that offered a 401k. The fund options are terrible though — basically along the lines of the Fidelity example. We went through all the numbers and figured out he would still be better off investing in the 401k, even though the fees make me cringe.

    There needs to be an open 401k platform that makes it easy for employers to match employee contributions, yet gives the employees complete control over their retirement accounts. It could basically be an investment vehicle much like a Traditional or Roth IRA, but with the contribution limits of a 401k and the ability for an employer to still offer a match. This would also help employees that work for an employer that does not offer a 401k. It doesn’t seem fair that one person is limited to $5,500/yr in tax-advantaged accounts while another can have $17,500/yr (and possibly over $50,000/yr) tax-deferred just because of the employer.

    • jlcollinsnh says


      Or even, why have 401k plans at all? What sense does it make to have your investments tied to your employer and the choices your employer makes?

      Why not just traditional and Roth IRAs with much higher limits?

      Could it be that investment firms make tons of dough with the fees and loads on these things and that buys lots of lobbyists?

      • Travis says

        Yes, that’s basically what I was getting at — simplicity and fairness. Not two words our politicians (or their bos…err, lobbyists) like to hear. Why we have 401k’s, Roth 401k’s, Traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP IRAs is beyond me. Well, actually it’s not. It’s what happens when our government gets involved in…anything. Kind of like our tax code in general.

  5. Executioner says

    Just curious, where are you getting the 2.44% number from? Isn’t the yearly expense actually the net expense ratio of 1.32%?

    The management fee and the 12b-1 fee should be included in the net expense ratio.

    I’m not suggesting that 1.32% is a reasonable expense to pay, but it is certainly lower than 2.44%

    • jlcollinsnh says

      2.44 comes from 1.37 gross expense ratio + .56 management fee + .50 12b-1
      Adding it up again now, I see it should be 2.43. Opps.

      I believe you are confusing a TER (total expense ratio — which is a sum of all costs associated with a fund) with the net expense ratio.

      This from Fidelity’s website might help:

      “Net Expense Ratio is an annualized figure that reflects amounts reimbursed by Fidelity or reductions from brokerage service or other expense offset arrangements, if any, and is updated as the annual or semiannual information is available. Net Expense Ratio could be higher than the Gross Expense Ratio due to different reporting dates and fluctuations in expenses and/or asset levels. If the Net Expense Ratio is lower than the Gross Expense Ratio and no fee cap is provided for, the difference may be attributable to certain broker service and other offset arrangements which may be discontinued at any time.”

      This also explains why I chose the 1.37 gross rather than 1.32 net or 1.50 cap. As you can see from the dates in the chart these can be a bit of a moving target. Choosing the middle seems most reasonable to me. For those for whom 1.32 (or 1.50) seems more reasonable it is easy to run the numbers using it instead.

      At least this is my understanding and that of the Fidelity rep interviewed as part of the due diligence for this post.

      • jlcollinsnh says

        Just changed the numbers in the post reflecting management fees and 12b-1 fees as part of the expense ratio.

        I’ve also decided to use the lower 1.32% expense ratio for running the numbers in Addendum II, if only to keep it from being a distraction.

        It is important to note that the difference between gross and net expense ratios depends on the fund choosing to waive some of its fees. So net is what they are charging you. Gross is what they could charge you if they decide not to waive whatever fees they are waiving. Since that change can be made easily and at any time, I typically feel more comfortable using gross expense ratios.

        Thanks E, and good catch. If you’re not careful I might start pressing you into service for peer reviews. 😉

        BTW, changing these numbers also makes the Mad Fientist’s case in Addendum II even stronger.

        • Executioner says

          They certainly don’t make their fees and expenses easy to decipher; that’s for sure. If I was editing their glossary I’d want to make sure it was clearly stated that the management fee and 12b-1 fee are components of the expense ratios.

  6. The Kechi One says

    Jim you are one of my favorite bloggers and I always am excited when I see you’ve updated your blog. I’m not in the USA right now but if I do come back I know that I’ll be referencing this post again.

  7. Jennifer says

    I was so excited when my employer added VTSMX to our 401k offerings last year. I moved my whole portfolio into that fund because of what I read on your and MMM websites. So glad I did too.

    • jlcollinsnh says

      Great to hear Jennifer…

      and kudos to your employer! It does seem more are becoming aware of these issues and offering Vanguard.

  8. cv says

    just need a simple tip after wading through all the information above; i am single making 90k pretax looking to retire in 10 years; employer offer 403b through Fidelity matching 5%. should i stop contributing the additional 10% and put it in a vanguard IRA instead? Thanks kindly!

    • jlcollinsnh says

      Hi CV…

      I guess that the post didn’t point to a clear path? 🙂

      Not surprising, it’s pretty muddy.

      Personally, I am persuaded by the Mad Fientist’s analysis. I’d certainly fund it up to the full employer match. And then I’d hold my nose and fund it the rest of the way too.

      Once you are able to, roll it into the Vanguard IRA.

  9. Sam says

    Hi Jim. I only have Fidelity funds that I can choose from in my 401k. Would you recommend going with the spartan total market fund or the spartan sp500 fund? They have .06% and .04% expense ratios respectively. I know that usually you recommend a total market fund but would a reduction of .02% in fees be worth it for the S&P 500 spartan fund?

    • jlcollinsnh says

      This is a great question, Sam.

      It indicates you understand the concepts around here, not just the specific recommendations. Or if not around here, the concepts from wherever you’ve been researching.

      It’s also a tough question. The difference between a Total and a S&P 500 fund is that the first holds mid and small cap stock in addition to the big ones. I prefer Total as some of the great growth winners are to be found here.

      Indeed, most often Total provides a small performance advantage. Looking at the last 1, 3, 5 & 10 periods that advantage has ranged from about .40 to about .90. So even in the closest period of time, the .02% spread would be handily covered.

      Of course, there is no guarantee that Total will continue to outperform. Sometimes the market favors the big cap companies. Whereas the .02 cost difference will always be working against you. That’s what makes this a tough call.

      For me, the advantages of Total are strong enough and the .02 modest enough that I’d go that way.

      Good luck!

  10. Jan Dieber says

    QUESTION: Several seemingly knowledgeable friends of mine have suggested that I buy bonds as opposed to investing in a bond fund such as the Vanguard one you recommend. Their reasoning is all the same: Bond Funds are tied to the stock market whereas individual bonds are not. Because they are not tied to the stock market, they can never lose their original value, unlike bond funds.


    Thanks, as always.

    • jlcollinsnh says

      Hi Jan…

      They must know something I don’t know. “Bond Funds are tied to the stock market whereas individual bonds are not.” makes no sense to me.

      Typically investors who prefer buying individual bonds over bond funds do so to control if and when a bond gets sold. The thinking is that, if you hold a bond to maturity you will get your full principle back. This eliminates the potential for loss, assuming the bond issuer remains solvent.

      A bond drops in value when interest rates rise. So while you’ll get your principle back at maturity you are now stuck with a bond paying lower than market rates.

      So your friends are confused when they say individual bonds don’t lose value as interest rates rise. They do. If you don’t sell and hold to maturity, they’ll come back to their original value. But that’s not the same. For that matter if rates fall and bond prices rise, they’ll also give up that gain as their maturity date approaches.

      Further, when you buy individual bonds you have all the same challenges of buying individual stocks: You’ll need to research them and unless you buy a very large number you now have a much higher risk should one default. Plus brokerage costs in buying and selling.

      These friends wouldn’t happen to be in the business of selling investments, would they? That would explain a lot. 😉

      For more on bonds:

  11. Jeremy says

    I would also add, talk to your employer! Talk to your coworkers. Rally the troops

    At my last company, after some hard work by one wonderful employee, enough people were coming to talk with HR about the horrendous fees that the company was essentially forced to change the 401k plan. Gone were all the Fidelity funds with high fees, and instead were those wonderful low load Vanguard funds.

    If enough people participating in the 401k plan speak up, employers will respond

  12. Shilpan says

    I just finished reading this article on PBS. And it was a spectacular read. It’s shameful that most media outlets are not interested in conveying the wisdom of Jack Bogle.

    I always believed that we, the street smarts, can do better than those so-called experts on the Street.

    Well, Jack’s thoughts on the market and the industry has made me compelled to write a post about his wisdom soon.

    Some facts worth knowing:

    1. Investor earns only 30 cents on a dollar while management companies earn 70 cents for the life of investment.

    2. Management companies — that are owned by publicly traded companies such as T Row Price — have fiduciary duty to serve their shareholders(to charge maximum fees) and they also have a fiduciary duty to get maximum return for their investors. you’re faced with this no-man-can-serve-two-masters dilemma.

    3. 401(k) — Funds chosen by employers are like elite contractors. They have captive audience to sell any crap. Mutual funds compete to be enlisted(or, become a preferred vendor) have to pay fee(shall we say bribe?). Who pays for it? YOU, the 401(k) participant.

    It’s mind boggling…

  13. arebelspy says

    My 403b (and 457) is invested in Fidelity’s 4-in-1 Index fund, FFNOX. The expense ratio is 0.22%

    I could also put it in individual Spartan funds.

    As far as I know, there aren’t any other fees (no load).

    This post should have a huge disclaimer to very carefully check one’s own situation, because I’m worried many readers will stop funding 401ks “because JL Collins said so.”

    I typically point people to your blog and tell them to blindly follow your advice until they learn more to figure out why it’s good advice.. Now I’ll have to be more careful.

    Bottom line: I agree with everything you said…. but it only applies to some people. For others, not funding the 401k would be terrible advice. This post should have giant red letters saying some people should fund their 401k, some shouldn’t, but do your own research.

    • jlcollinsnh says

      That’s great. Sounds like your plan gives you access to Fidelity’s better offerings.

      As to your concern, I greatly value you opinion and am concerned by it.

      But I just reread the post and I just don’t see it.

      Three times the case is made to check carefully your personal situation and/or to go ahead and fully fund your 401K:

      1. What’s the bottom line
      2. Addendum I
      3. Addendum III

      In fact I close the post with this:

      “But, reading the Mad Fientist‘s thoughtful case, most often you’ll be money ahead funding your 401k. Given the highway robbery now imbedded in so many of them, that’s tough for me to say. But there it is.”

      Seems to me a very clear endorsement of funding 401k plans despite their issues.

      Do you really think it needs to be clearer? I certainly want you to continue to feel comfortable sending people to my site, but in writing it I have to assume some reading comprehension on their part. No?

      I always appreciate your insights and would like to hear more. Feel free to send me a private email if you prefer. Thanks!

      • jlcollinsnh says

        Good talking to you more off line, Arebelspy.

        Accordingly, I’ve decided to modify and bold face the post ending. Check it out.

        • arebelspy says

          Looks great, I do like the “If you take one thing from this” to aid those readers who may..struggle with large blocks of text. 🙂

          Good talking to you Jim, keep up the great work.

  14. Le Code Civil says

    I’ll be starting work in a couple months with a firm that does its retirement funds through Fidelity. Bad luck!
    I didn’t see it stated this way in your post or in the Mad Fientist’s addendum, but my impression is that the 401k still gets better results because, despite a large chunk of fees, the fact that you can invest more of your income earlier has a greater positive compound effect than the negative effect of the fees over time. So the fees do eat away at earnings, but the tax savings allow you to save more, sooner, and the compound effect on the earlier savings is worth the cost.
    Are 401ks and IRAs really the only tax-free investment vehicles? Obviously this news means I will be going IRA first, but that’s done pretty quickly. Are there other tax-free options I just don’t know about?

    • jlcollinsnh says

      Nah LCC…

      I’d say that’s Good Luck! 🙂

      The plan Chris is in has Fidelity’s ugly Class-T shares. But the one Arebelspy has (in the comment above) offers their much better Spartan funds. So you really have to look at your specific plan and what it offers.

      Your assessment in your second paragraph is spot on and matches MF’s findings in Addendum I. Or, as I say in closing the post:

      “But, reading the Mad Fientist‘s thoughtful case, most often you’ll be money ahead funding your 401k. Given the highway robbery now imbedded in so many of them, that’s tough for me to say. But there it is.”

      401K plans and IRAs, and the variations of them, are pretty much it. For more:

  15. Prob8 says

    Wow, I didn’t realize a comment on an older post would get so much attention. Thanks for another great post.

    For me, the high fees and underperforming funds offered at prior jobs has made me shy away from 401k plans. I also would like to retire early (or at least have the option to do so) so having money tied up with Uncle Sam’s various restrictions was never really appealing. I voluntarily pay more tax in exchange for more freedom. I don’t like it, but I do it.

    • jlcollinsnh says

      Guess the stars just aligned. 🙂

      I really expected, as I worked thru writing this post, that my conclusion would be to just step away from 401k plans. But, as the last paragraph says, instead I think the best approach is to hold your nose and fund them. And, as Jeremy says above, work to get a better plan in place.

      Since it sounds like you have decided to step away from them, I wonder what your take on MFs analysis in the Addendum is?

      • Prob8 says

        MF’s analysis appears sound to me – he’s a good blogger as well. My comment in Part IX of the series was not accidental. Even though the video was geared towards 401k plans, I wanted to call attention to fees and commissions in general – which can be cancerous where you don’t have the benefit of tax shelters to minimize their impact. Of course, that was one of your points in that post.

        The one thing that stood out to me in MF’s analysis was the theory of equal investment returns. From what I recall, the high fee 401k selections are usually from managed funds. My research indicates that managed funds tend to underperform the market. That certainly has been my experience in the days of trying to pick “good” funds. CGM Focus comes to mind.

        For me, the complication of extracting money from tax sheltered accounts during a potential early retirement is not ideal. Perhaps once I hit financial independence I’ll start maxing out tax sheltered accounts. Until then, I know Uncle Sam has his hands deep in my pockets – I paid AMT last year. But I prefer to pay the toll in exchange for the freedom.

        Do you have a post in mind for those looking to extract cash from tax shelters early? Perhaps that would change my tune.

        • jlcollinsnh says

          CGM Focus was the last actively managed fund I owned back in my pre-Index days. If ever a manager seemed likely to out perform, Ken Heebner was it. Ah well.

          Interestingly, including you and couple of readers have asked now if I’ve a post planned on extracting cash from tax advantaged accounts early. I don’t, but maybe should plan one.

          Meanwhile, MF has an interesting take here:

          If you ever find yourself in NH, coffee is on me.

  16. Chris says

    This worries me. I can NEVER find any information about fees other than ER on my 401k through Fidelity. Some of our funds seem like great options: I use an S&P fund at 0.02%, an R2000 fund at 0.06%, a euro fund at 0.09, and a bond at 0.06. All of these ERs are awesome in my book, and the extra fees section in the information about these funds all say “No additional fees apply” whereas a dividend fund has this “Short term trading fees of 1% for shares held less than 30 days.”

    Looking back at my fund information, it says that any funds would be listed on my statement. No deductions are listed on here at all. I only see this statement “Some of the administrative services performed for the Plan were underwritten from the total operating expenses of the Plan’s investment options.”

    I have no idea what that means, and I haven’t been able to see anything throughout my plans information as to any extra fees other than the ER. The only thing I can think of is that I work for VERY large company, so they don’t nickel and dime us because of the large volume of $$ that flows from our company into them.

    Anyone else have positive experiences like this with Fidelity? I feel like I must be missing something!

    • jlcollinsnh says

      Those ERs are nice and low and the one @ .02% is lower than any I’ve seen.

      I have no way to tell if your plan really is that good or if there is something ugly hidden. Hopefully other readers who have some insight might chime in.

      If you are really curious, visit your HR department and ask somebody who knows this plan to sit down with you and walk thru the fees and expenses. Working for a very large company as you do, they should be able to handle this.

      Short of that, you can take comfort in MF’s analysis in Addendum I. You are almost certainly ahead by funding your 401k.

    • Tofu Casserole says

      Actually I just set up my 401k at my new job with Fidelity, and I was pleased to discover that they actually offer the Vanguard total stock market index as one of the investment options. Not only that, but it’s the signal shares fund which has an ER of 0.05% as opposed to the 0.17% that the investor shares offers. Unfortunately most of their other funds have pretty absurdly high expense ratios, but I thought I’d point out that they do offer some very good options

      • jlcollinsnh says

        Welcome TC…

        Thanks for joining in the conversation.

        Do I understand correctly that your employer is Fidelity? And that in the Fidelity 401k they offer Vanguard funds?

        That’s amazing!

        • Tofu Casserole says

          No, I meant that my employer’s 401k program is run through Fidelity. Sorry, I just noticed now that my phrasing was a bit confusing. I think that the funds that they offer depend on what kind of plan your employer signs up for, this is just a guess though.

  17. GamingYourFinances says

    Very interesting post. In the past my employer used to cover 50% of ER’s, they cut that out 3-4yrs ago, as a result our ER’s are crazy high relative to “retail” options. It’s unfortunate, but it’s still much better than going it alone due to the 100% company match.

    Provocative post. There definitely must be situations where it’s not advisable.

    • jlcollinsnh says

      Thanks GYF!

      100% match is certainly worth grabbing with both hands. Makes up for a lot of fees. Too bad they stopped picking up 50% of the ER. Very nice perk, that.

      With investment firms looking for every way possible to bleed money from 401k plans into their own pockets, these things bear watching.

    • jlcollinsnh says

      Interesting question.
      Here’s what the IRS has to say to employers:

      “Once you have established a 401(k) plan, you assume certain responsibilities in operating the plan. If you hired someone to help in setting up your plan, that arrangement also may have included help in operating the plan. If not, another important decision will be whether to manage the plan yourself or to hire a professional or financial institution – such as a bank, mutual fund provider, or insurance company – to take care of some or most aspects of operating the plan. Elements of a plan that need to be handled include:
      Investing 401(k) monies
      Fiduciary responsibilities
      Disclosing plan information to participants
      Reporting to government agencies
      Distributing plan benefits
      More here:

      So a company doesn’t actually have to hire an investment firm at all. But, since it is a big chore and even if they set one up on their own they’d still have to find investments to offer, most do.

      As to offering more than one firm’s investments, I don’t see anything that would prohibit it. However, in my limited personal experience I’ve not seen it, and because of the complexity, extra work and expense my guess would be that this is uncommon.

      I’d welcome anyone with some 401k expertise to weigh in on this….

  18. jlcollinsnh says

    Here’s a very cool tool that let’s you evaluate your company’s 401k plan:

    The link takes you to the report on Google , a company famous for being a great place to work. The 401k plan reflects this and shows they even offer Vanguard. To find your own plan, just enter your company’s name in the search box.

    Unfortunately, they don’t provide specific cost numbers, only a scale relative to other plans. Still, fun and useful.

  19. Mr. 1500 says

    Hi Jim-

    Someone just pointed me to this post because I was lamenting my ridiculously high fees on my 401k. I looked at the Fee Calculator on and noticed that by the time I hit 65, the amount that I’ve paid in fees will be greater than my contributions (594K verses 579K respectively).

    I’m glad to see that I had come to the same conclusion as you; that is to contribute enough to get the match and then stop.

    Anyway, thanks for the great write-up. This kind of advice is worth it’s weight in (something very valuable, but not gold. I hate gold!).

    • jlcollinsnh says

      Welcome back Mr. 1500…

      ..glad you found this one helpful, but sorry about your 401K.

      Did you try the Bright Scope site I just put up in Addendum IV? I’d be curious as to what you think and what it says about your particular plan.

      More importantly, been to the Heartland of late?

      • Mr. 1500 says

        Hi Jim-

        I did just try Bright Scope and I don’t think my particular 401k is in there. I work for a company called Adecco and some of their other plans in there and one was similar. It actually said that the plan had “Low fees.”

        So, I went back to my plan’s website and some of the fault is mine. I was throwing money at a couple funds that had fees in excess of 1.5%!! What was I thinking?!? I have rectified that.

        The biggest fund is Fidelity’s Contrafund which has an expense ratio of .74%. This still seems high to me, especially when compared with Vanguard’s offerings. What do you think?

        Heartland! You have one helluva memory! No, I have not been back lately, but I have a trip planned for August and I’m going to make it a point to go there. Thanks for little trip down memory lane this morning. My memories of Chicago are fond ones!

        • jlcollinsnh says

          For an actively managed fund like Contra .74% isn’t too bad. Especially in a 401k. But I’d look for the index fund option if there is one.

          My memory’s not that great. I thought you still lived in Chicago. Uptown, maybe?

          I look forward to the loan strategy post!

          • Mr. 1500 says

            OK, I don’t feel too bad about Contra then. Most money will sit there until I can roll it out.

            Uptown near Irving Park and the lake (Buena Park) was our old stomping ground. We have since moved on to Colorado (low taxes, mountains, mountain lions and fresh air).

    • jlcollinsnh says

      Hi Mr. 1500…

      I just read your 401k post on your horror-show of a 401k. I especially loved your idea of quitting, rolling your 401k into and IRA and getting rehired.

      Too bad they didn’t go for it.

      Anyway, I loved your post and it is now a link in Addendum 5 in my post above.

      • Mr. 1500 says

        Thanks Jim!

        What I actually ended up doing was taking out a 401k loan and investing the money myself (explained in next Tuesday’s post). I think that I’m half insane for doing this, but desperate fees call for desperate measures. However, according to Brightscope, maybe my fees weren’t so bad in the first place. Dunno.

        Anyway, thank you for the kind comments.

  20. Aleks says

    Great article!

    One thing I’d point out, which many of the commenters have also mentioned, is that there’s a difference between a plan’s administrator, and the funds that it offers.

    For example, I used to work for Microsoft, which used Fidelity as their plan administrator. However, there were no fees associated with maintaining the account, and many of the fund choices were low-fee funds from Vanguard. Even the target-date funds were the BlackRock LifePath Index series, with expense ratios of 0.10%.

    FutureAdvisor maintains a great database with comprehensive (and up-to-date) information about many employer’s 401(k) plans. I’m not a fan of FutureAdvisor’s product, but the database is free and very useful.

  21. No Waste says

    The employee match is very, very hard to wash away. Every dollar I put is immediately doubled in value. It would take astronomical fees over decades to eliminate the benefit of a 100% investment return, on the spot.

    That said, fee-shopping is certainly the way to go. My employer’s plan is administered by T. Rowe Price and I have the option of an S&P 500 Index fund with an ER of 0.05% which is in line with Vanguard.

    As you said, other companies are being forced to bow down on fees because of Vanguard’s leadership, and it’s a wonderful thing to see the free market at work!

    My personal funds are currently NOT with Vanguard, but they are invested in low-cost index funds that mirror the ER charged by Vanguard, at least for now. I always worry those fees will start to tick up and I’ll be forced to move money.

    • jlcollinsnh says

      “The employee match is very, very hard to wash away.”

      Ha! Great line. and very true.

      Nice to have you here, No Waste.

  22. Seth says


    Been reading your website for the past few months now and I have learned so much from it. Thank you for all this great information. It has made me feel more at easy when making the plunge to invest my money.

    However, this article has me a bit worried now about my current 401K. I recently set it up with my employer 2 months ago. I’m contributing my money to the Charles Schwab SWPPX Fund. From my understanding it is a straight S&P500 index fund. By the way… you should have heard the fit the sales lady on the phone was having with me when I told her I only wanted an index fund :).

    Anyways, after reviewing the prospectus a couple more times. I cannot find any hidden fees that are mentioned in the Fidelity fund. It says that “gross expense ratio=.1” and the “net expense ratio =.09”. Those are the only fees I can find.

    Is there any chance you could take a quick look at this fund to see if I am missing anything? I’d greatly appreciate it!


    • jlcollinsnh says


      I would have loved to have listened in to that index fund conversation. The more a sales person fights the index idea the better you know it must be. 🙂

      SWPPX is Schwab’s S&P 500 index fund and, with an ER of .09 it is a pretty good one.

      To understand the difference between gross and net ERs check out the chart you’ll find here:

      Those should be the only fees SWPPX charges.

      However, your 401k plan might also charge its own fees. Of course, there is no way for me to review that. You might sit down with your HR dept. and ask them to walk you thru it.

      Hope that helps. Glad you are here and thanks for the kind words!

  23. Papa says

    There has been no mention of the government Thrift Savings Plan. It’s a low cost plan, with an expense ratio last year of .027%. For Active Duty military, there is no matching. For Reservists, I believe they get matched up to 5% of their income. I don’t know about government workers. It’s a simple plan, with 5 funds, 4 of them index funds. There are target retirement date investments, as well, that are combination of the funds that get rebalanced periodically. In my opinion, while simple and government/military don’t seem to go together, we have hit the mark with this plan. Any thoughts?

  24. Terese says

    Hi Jim – thanks so much for your sound advice! After reading this post, I promptly headed over to my Fidelity 401k site and changed my elections from a target date index/lifecycle fund (2045) to 50% extended market index fund (which only includes small and medium companies) and 50% S&P500 market index fund. The ERs of these are 0.07% and 0.04% respectively. There is also one Vanguard option which is bonds only, but I opted not to invest in that one because I would rather be more aggressive. Do I have your blessing? Are my arbitrary 50%/50% investments sound? Thanks again!

    • jlcollinsnh says

      And thanks for your kind words Terese!

      Certainly you have my blessing. In fact I’d have been OK with your life cycle fund if the expenses were not too high.

      One thought. If you are trying to duplicate vtsax with your two funds you should have about 80% in the s&p500 fund.

      • Terese says

        Thanks! You’re right that I was trying to mimic the total market funds. I will change the S&P500 one to 80%. The lifecycle fund had a 0.68% expense ratio which I deemed too high after reading your article. You’ve taught me so much here, and I really appreciate it!

  25. penelope says

    My division was divested and I have a fully vested 401k with them. I had to do new employee paperwork with the new company that bought out our division. I was told by the new benefit people and my HR that the only thing I could do was to roll over my 401k funds into the new employee 401k plan. I would rather roll it over into a self directed IRA. Is there a law that gives me choices? Feedback please.

    • jlcollinsnh says

      Hi Penelope…

      ..and welcome.

      Your question is a bit above my pay grade here.

      My guess is that, since your division was acquired even though you are working for a new company, you have not left your employer (your division) in a way that would allow for an IRA rollover.

      Which is what I would want to do as well.

      Unfortunately, HR is likely correct.

  26. Ally says

    HI Jim, GREAT post, GREAT video. I am really enjoying having my eyes opened. I always thought I was good at watching the fees in my 401k. I am lucky enough to have Vanguard options in my 401K which I utilize. My boyfriend on the other hand has an awful 401K (in my opinion). I tried picking the “best” of the options available but I feel lost. He has JP Morgan and Putnam funds available to him and all have annual expense ratios of 1.04%-1.38% and all are Actively Managed accounts so the Load Charge is anywhere from 5.25% to 5.75% per fund. I think this is just outrageous. My question is, is it best to just pick one fund with an outrageous fee or spread the money and diversify? Does it cost more to have all your money in one bad fund or many bad funds? Thanks Ally

    • jlcollinsnh says

      Holy crap, Ally….

      Those options he has really do sound ugly. “Outragous” doesn’t seem strong enough a term. 🙂
      Are there no choices without the loads?

      As for your question: The only reason it would cost more to have the money spread around is that some of those funds are even worse than the others. Other than that, more funds are just more hassle in keeping your allocation choices in balance. Given those loads, he should be sure to do that with new money rather than buying and selling shares.

      Personally, I’d look for the lowest cost fund offered. It is likely to be the index fund if they offer one and that’s what you’d want anyway.

      If all the funds have fees as intense as what you describe, I’d be tempted to skip it all together. I’d certainly hesitate before funding it beyond the company match. (Please tell me there is a company match!)

      If he is feeling ambitious, he might also campaign for better choices with his HR department.

      Read Addendum #1 very carefully and walk thru the Mad Fientist’s math as it applies to your boyfriend’s situation, and then decide.

      Good luck and keep us posted!

      • Ally says

        Hi Jim,

        Thanks for replying. I was pretty upset with JP Morgan after watching that video that I wanted to opt out of all their choices. Right after I posted my question and watched the video I changed his current elections down to the 4 funds with the *. I guess I should have just changed the elections going forward?? It was the heat of the moment. There are only 2 choices with lower Expense Ratio fees and Load fees of 3.75% and 0.00% but they are the low low risk. I’d prefer higher risk funds since we are only 32 and have 23 more years left to work. Yes there is a company match of 100% up to 4%. Currently my bf does 9%. I will definitely re-read Addendum I and see if there is anything he can do at work about their choices. His company has I’d say around 100 employees and more than half of them are union, so I am not sure if that makes a difference with how much he can do to persuade HR or the Union. I did open up a Vanguard VTSMX for him in Feb, maybe it would be best to drop his 401K contribution to 4% and put the rest into his Vanguard acct? Thanks for the advice!!

        These are his options!
        Investment Name
        JPMORGAN INTREPID MID CAP FUND AGER – 1.40% Load – 5.25%*
        PUTNAM MULTI CAP GROWTH FUND A AGER -1.08% Load -5.75%*
        PUTNAM GROWTH AND INCOME FUND AGER -1.04% Load -5.75%*
        JPMORGAN LARGE CAP GRO FD A AGER -1.20% Load -5.25%*
        JPMORGAN US EQUITY FD CL A AGER -1.06% Load -5.25%
        GEORGE PUTNAM BALANCED FUND A AGER -1.01% Load -5.75%
        JPMORGAN CORE BOND FUND A AGER -0.98% Load -3.75%
        JPMORGAN LIQ ASTS MMK FD RES AGER – 0.72% Load -0.00%

      • Ally says

        Hello Jim, I wrote you 2 years ago regarding my boyfriend’s, now my husband’s awful 401K plan. I read your advise and was very reluctant to even try to persuade a company to change their plan because who would listen to my little voice? but this year I wrote up a proposal and had my husband submit it to his union. I am so excited about this I just had to write. I was able to get his Union on board with adding Vanguard Low Cost Index Funds to their 401K portfolio. They voted on it Friday 4/29/16 and they will be getting 4 Vanguard funds (VTSAX, VFIAX, VTINX, VMFXX). I was shocked that they went for it and am thrilled that they did. Thank you for the advise, just wish I would have listened sooner. Thanks, Ally

        • jlcollinsnh says

          Hi Ally…

          What a great story!

          Well played!

          Congratulations on making it happen and thanks for taking the time to check back and tell us about it.

          Hopefully it will inspire others and more of these plans will shift to a focus of serving their investors.

        • Cody S. says

          Hi Ally,

          I would love to do something like that with my wife’s union at her hospital. Is there any way I could see your proposal and draw some ideas from that? We need Vanguard in our lives!


  27. Jeff says

    My 401k includes the following Vanguard funds – is there any reason to choose something other than the mid-cap index fund? Just want to make sure I’m navigating these correctly!

    Mid-Cap Index (VIMSX)
    Prime Money Market (VMMXX)
    Target Retirement 2010 (VTENX)
    Target Retirement 2020 (VTWNX)
    Target Retirement 2030 (VTHRX)
    Target Retirement 2040 (VFORX)
    Target Retirement Income (VTINX)
    Total Bond Market Index (VBMFX)

    • jlcollinsnh says

      Hi Jeff…

      The mid-cap index fund is likely your lowest cost fund choice, but it is also very focused on one type of stock: Mid-sized companies. If you have other investments outside your 401k you can balance this with large cap and small cap index funds. I’d shoot for about 70% large and 15% in each of the small and mid cap funds. This will roughly duplicate the Total Stock Market Index fund like VTSAX.

      If you don’t have other investments, one of the better diversified Target Retirement funds would likely be a better choice for you, even with the bit higher expense ratio.

  28. David says


    Your thoughts on my 401k investment options, which include only one Vanguard fund (VINIX, ER .04%). The next lowest funds are Stable Value (.37), Intermediate-Term Bond (PTTRX .46), and Large Value (DODGX .52). Everything else is above .82.

    Would you contribute to the Vanguard account only, with max contributions or up to company match only? Or, would you mix it up a little with most of your funds going towards VINIX?

    • jlcollinsnh says

      Hi David…

      VINIX is an S&P 500 index fund and with its rock bottom ER of .04% it would be my 1st choice. whether it was my only choice would depend on where I was in the wealth building/wealth preservation dynamic, my tolerance for risk and how much longer I planned to work.

      Assuming tax deferral benefits are important to you, I’d fund my accounts like this:

      401k up to max matching
      deductible IRA
      401k up to max allowed
      taxable accounts

      • David says

        I see. We’re still early in our career (30+ years left), so our current selections are aggressive. We have no plans to leave b/c we both love our jobs, but after reading your blog and JMoneyseed’s blog, I may have to place early retirement back on our radar.

        Thanks for your input. I’m sure I’ll have more questions along the way.

      • David says

        Wow. It’s been two years since my last comment. Since then, we’ve set ourselves up to be FI in 15 years! Thanks for putting this together, and opening my eyes to the FIRE community.

      • jlcollinsnh says

        Welcome back, David…

        Great to hear you are making progress and that this blog an others have helped!

  29. Bill A. says

    Something not mentioned here are PCRAs–Personal Choice Retirement Accounts. They’re 401k accounts where you can trade freely; and in particular avoid all the pre-selected funds that pilfer your 401k with fees.

    Not many companies provide the PCRA option, probably because the companies pay slightly higher administrative fees considering the bank trustees make less money that way. Yet even when offered they mostly go unused because people have no idea what they are.

    With PCRAs you get all the benefits of a 401(k) without the unnecessary downsides. Presuming a 401(k) otherwise makes sense, it’s the best option.

    Here’s how Schwab describes them:

    • jlcollinsnh says

      Thanks Bill…

      Good to know about, I suppose, but “trading freely” is the polar opposite of the approach of this blog. 😉

      • Bill A. says

        Absolutely. I suppose another reason the PCRA and similar types of accounts are not offered much is because management doesn’t want to see their employees gamble away their retirement.

        But many 401k plans don’t offer the particular ETFs discussed here. In fact, I would think that the vast majority don’t offer most of the particular ETFs discuss here. Not just particular, but whole categories, like funds focused on foreign economies.

  30. Mr Dumpster Stache says

    I just checked my 401k with Lowes – they have over a dozen different vanguard funds you can chose from! As well as a dozen or so from other companies.

  31. Nearly Retired says

    I work for an absolutely huge non-public company that absorbs 100% of the fees for the 401k funds their investment team manages. They also offer about 10 Vanguard target date 401k funds that have a 0.07% fee.

    Where’s my money? In the large cap equities 401k fund my company manages, which has outperformed every Vanguard 401k fund they offer, even if you DON’T consider the Vanguard fee.

    The pension plan is also fully funded by the company. Add that to the annual 401k match, and you’ll understand why I’ll be retiring at 55 with enough money to live a carefree life. (It’s ridiculous I didn’t get my spending under control sooner so I could retire even earlier. Shame on me!)

    There are good companies out there with low or no 401k fees. So if you’re young and mobile, maybe you can land a job at one of them.

    • jlcollinsnh says

      That’s great to hear, NR…

      as is what Mr. DS reports above.


      Hopefully, over time, more companies will see what is going on and take steps.

  32. Justin says


    Great article!

    I’ve been reading your website for a few months now. Thru my employer, my 401k is with Transamerica.

    Since reading your website and MMM, I have moved my 401k money into what is called the “Vanguard Total Stock Market Index Ret Acct”. There is no ticker symbol.

    I find Transamerica’s webpage to be a little overwhelming at times. Any insight as to wether or not this is a good place to put money…? (I understand that Vanguard is great, but investing thru Transamerica is where I am little nervous – especially since my employer does not match anything).

    • jlcollinsnh says

      Thanks Justin!

      For all my ranting, Addendum 1 is what’s important here: Funding your 401k is almost certainly worth it.

      As for “Vanguard Total Stock Market Index Ret Acct” it certainly sounds like the right choice, but I am unfamiliar with it. I’d give Vanguard a call and ask them about it. Specifically, is it the equivalent of VTSAX. Also, I’d look at the 401k plan and see what the expense ratio for it is and the investment objectives. That will help you get a better handle on it.

      Good luck!

  33. Sam says

    Hi Jim,

    Quick question I have for you regarding investment vehicles. I have the opportunity to either max my 401k or an IRA. In the 401k, I have access to an institutional total stock market fund that has an expense ratio of 0.035% and an SP 500 index fund with a 0.02% expense ratio. I get a really nice match with my company and profit sharing. I am 23 right now and have put everything in the total market fund and am going to leave it there untouched for many years to come. A common idea is to put money into a roth IRA for the flexibility it allows (I also have access to the roth 401k as well). My only concern with that is in the roth IRA, I wouldn’t have access to the institutional index funds. I would have access, of course to itot (0.07% expense ratio and commission free) and total market mututal fund (0.10% for $2500+ and 0.05% for $10k+).

    Do you think the flexibility of the roth IRA is worth the extra expense ratio?

    I think this calculator is a really interesting comparison of the costs overtime. It builds so quickly. I’m so glad I’ve find your website. I’ve been following your advice for a year now and really feel like I finally understand and have a firm grasp on investing. Your blog has been absolutely instrumental to getting me on the right path right out of college. I will be putting about $25k per year to the total market each year and am confident it will lead me to great success.

    • jlcollinsnh says

      Hi Sam…

      Congratulations on getting off to a fast start and I’m delighted this blog has helped! Kudos for doing your due diligence before investing.

      You are lucky to have a brilliant 401k plan and I’d definitely max out the S&P 500 fund with the .02% ER. Ordinarily I prefer the total stock market index fund as it very slightly outperforms over time. But the difference is razor thin and in the coming decades it could go either way. Meanwhile you’d have the higher .015% ER at .035%. Small, but still less and guaranteed.

      Moreover, I would keep this 401k even after you leave the job. Ordinarily I suggest rolling 401k plans to an IRA once folks leave the job. More control, better choices. But what you have is so good, just leave it and enjoy.

      Forget about the Roth. Problem is you have to fund a Roth with after tax money. That money you pay in taxes is not only gone forever, so is all the money it could have earned for you compounding over the decades. For more:

      Once you retire you can look into building a Roth ladder as described here:

      • Samantha - me again! says

        MAN this stuff is confusing! i have done many CTRL-F’s on “roth” including this article and many others. it seems like most people don’t have an option within their 401k’s for either pre-tax or roth. I DO! And I am trying to figure out what is best. I am similar to Sam above, age 27 and recently moved all my 401k stock to VIIIX (most similar to VTSAX). However, I didn’t ask you the recommendation to split up my 401k. Currently it’s 8% pre-tax & 4% roth. mine is more balanced, however my husband’s is rather favorable towards roth (2% pretax & 12% roth). I was wondering if you had a different stance on the decision WITHIN your actual 401k. Most things I’ve read were referring two different accounts, in which mine is ONE 401k with the option to allocate to pre-tax and roth! any suggestions?

        i did find this very interesting. and i am also one of the lucky ones who has a pension.

  34. Matt H says

    Hi Jim,

    My employer recently changed 401k plans to a different provider and they have a whole new portfolio. Unfortunately VTSAX or something similar isn’t available. There aren’t any total market or S&P index funds. So I’m going to try to make VTSAX out of the options I have. My current plan is the following:

    80% in (SFLNX) Schwab Fundamental US Large Company Index 0.35% Expense Ratio
    20% in (VSMAX) Vanguard Small Cap Index Admiral 0.09% Expense Ratio

    There isn’t a good Mid cap index so I guess I’ll just be leaving that out. Another option could be a target date fund, but my option would be (TRRNX) T Rowe Price Retirement 2055 which has an expense ratio of 0.78%. I’m going to ask about adding VTSAX or VINIX since the plan is still so new.

    Any thoughts on my options?


    • jlcollinsnh says

      Hi Matt…

      Given the choices you have, I think you’ve done an excellent job in choosing your options. Either should work just fine.

      Let me just offer one “wild card” to consider. Over long periods of time, VSMAX sometimes outperforms VTSAX. I don’t recommend it generally because small cap stocks can go out of fashion for extended periods too.

      However, if you have anything like the 50%+ savings rate I recommend, you’ll be investing considerable sums outside your 401k. If you focus those on VTSAX, you might consider putting all your 401k into VSMAX and its .09% ER.

  35. Thomas says

    Hi Jim,
    I’ve been reading your site lately and am getting more and more convinced I should start to invest in low-cost index funds. I’m still in college, but I’ve inherited €20k which I can invest and let grow slow and steadily in the coming decades, and start adding to that when I’ll be getting a job.

    However, something keeps bugging me, while reading your and almost all other sites I’ve read in the past. You talk about ‘tax-free growth’ in a 401k or other tax-deferred accounts, and compare the amounts that are accumulating in Roth IRAs and Traditional IRAs like they’re the same. While in fact they’re not!

    Since you still have to pay taxes on your Traditional IRA, all the extra money is just fictional. The only way you’ll see any money of these gains yourself, is if you pay lower taxes when getting the money out. It’s just that, a way to pay lower taxes. That’s perfectly fine, especially if you plan to live on a lower income in a lower tax bracket than the amounts you make right now. But all the ‘tax-free growth’ makes it seem like this in itself is something to strive for, which it is not.

    I’ve crunched the numbers for you, to illustrate my point, with the example in Addendum I (I used and to calculate the taxes and amounts). First, I’ll be ignoring all fees and using 8% annual growth.

    Investor B invests $17500 to a taxable account every year, which has grown to $253513 after 10 years.
    Investor A invests $17500 in his 401k every year, and is able to invest the 17500 x 25% = $4375 from his deductible into a taxable account. After 10 years, his 401k has grown to the same $253513 and his taxable account to $63378. However, if he still is in the same tax bracket, he has to pay the same 25% on his 401k when getting the money out, which is 253513 x 25% = 63378, exactly the amount he had more than Investor B.

    The crux: contributing before or after taxes doesn’t matter when the taxes in and out are the same. All of the profit will be in the lower taxes you may pay in the future, which is also a bit of a gamble. And of course the added money you may get contributing to a 401k. But this ‘tax-free growth’ is a myth.

    Taking the fees into account, the picture actually becomes a lot worse if you include the taxes. After 10 years, Investor A then has a net amount of $235754 (after paying 25% taxes), while investor B has $252913. This means the fees cost him $17158 or 6,8%.
    After 20 years, the situation is even worse: $700503 vs $796412, a difference of 12%! Now you’ll need to be two tax brackets lower to see any benefit from this.

    • jlcollinsnh says

      Hi Thomas….

      I think the piece you are missing is that investor B doesn’t get to keep all his earnings along the way. He has to give up 25% of them in taxes or find that 25% from other sources.

      Meanwhile A has all those reinvested tax free, plus his new taxable account working for him.

      • Thomas says

        Are the earnings in these tax-deferred accounts, suddenly tax-free then? I thought I read on your blog, the earnings are also just tax-deferred. Then, investor B has to give up 25% immediately, but investor A also has to pay taxes on his earning, just later in his life. And he’ll end up with the same amount, as I showed you, as long as he pays the same taxes.

        • jlcollinsnh says

          Nope. You read correctly. But letting them grow free from taxes until withdrawal is very powerful. Having to pay taxes along the way means you not only give up that money but all the money it could have earned.

          • Thomas says

            Ah, of course I should have factored those in, they are – taxable – accounts. Is there any difference for capital gains or dividends, or are they both taxed every year?

            I guess the calculations I made above are for Roth IRA vs Traditional IRA/401(k). Then you pay taxes on the initial contribution and earnings grow tax-free, or you pay taxes on the whole afterwards. Then the only difference would be the lower taxes you might pay after you’re retired.

          • jlcollinsnh says

            Dividends and capital gains distributions (if any) are taxed each year. Capital gains are taxed when shares are sold.

            One interesting point that would bolster your position is that in a taxable account qualified dividends and cap gain distributions are taxed at special, favorable rates. Those paid out into tax advantaged accounts are taxed at ordinary income rates when they are withdrawn. These rates are usually much higher.

            I’m still wrestling with how to account for this in deciding the relative merits.

  36. cb says

    Dear Jim,

    As I read through this, I’m coming up with a few questions…

    I am soon to have 3 retirement accounts: A pension fund through my university (the university puts in 7% of my salary, and I put in 7% of my salary –so I guess, in essence, they match my required contributions), a 403b with a max of around 17k (I think), and a Roth IRA through TRowe price with a rather measly amount of money in it thus far (4k). (The previous two accounts are about to be set in motion, pending some paperwork that I have to hand in).

    My questions:
    I have the option of opening a regular 403b or a Roth 403b. I was thinking of going with roth *after* I paid off my student loans (thereby having a little more money up front for the few years that it will take to pay off the loans). However, this is also contingent upon the following:

    2) My original plan was to max out my Roth IRA yearly, but that would mean that I put less toward my 403b (whichever kind I open). I’d love to be able to max out both, but I can’t do it. I’m wondering: Should I let my Roth IRA sit with the original 4k that’s in it right now and *not* add to it as originally planned, and instead work toward putting as much in my 403b as possible?

    If I focus only on the 403b, I’d feel more comfortable with making it a Roth 403b. But again, I figured I’d open a regular one (pretax) to have a little more money to put toward my student loans for the next couple of years.

    I am not sure whether I’ll be able to contribute to the 403b separately (beyond what they’ll take from my paycheck), and I wonder if that’s a question for the university. This answer will also influence how much I have them deduct every paycheck.

    3) As I said, the Roth IRA (2040) is through TRowe Price. I’m wondering whether I should bring it over to Vanguard?

    Thank you so much for your education. You should seriously start a school. I hope my questions are not too convoluted 🙂


      • CB says

        Dear Jim,

        I can see that I was beyond unclear.

        I guess my most pressing question is, I have a Roth IRA (with Vanguard, VTSMX) and am soon to have a 403b (traditional). I cannot max out both, on my annual salary.

        With that said, where should I focus my energies? Does it make more financial sense to put as much as I can toward the 403b, or does it make better sense to put as much as I can toward the Roth IRA? Equal contributions to both?

        Thank you!

        • jlcollinsnh says

          Hi CB…

          I hope you read the post I linked to? It addresses exactly this concern you have.

          In short, keep the Roth you have. No need to change this.

          Focus on the 403(b) going forward. By doing so you save money on your federal taxes and that money can then compound for you over the decades.

    • jlcollinsnh says

      Thanks Walter…

      I appreciate the kind words.

      Unfortunately, I am unfamiliar with this fund and the link you provided requires a password and Net-benefits account to access.

      Doing a little searching on the internet, it appears to be a fairly high-fee Blackrock fund run by those guys for Fidelity. But many of these funds have similar names and/or are different inside of 401k plans.

      It sounds like a Target Retirement Fund and as such it is a fund of funds likely holding funds focused on US stocks and bonds and international stocks and bonds. It will be designed to increase the allocation of bonds the closer it comes to 2040. Here is my take on these:

      The ER of .09% isn’t bad, but it isn’t first-class either. VTSAX, for example, is .05% and the versions of it found in 401k plans is even cheaper.

      Personally, I’d scan your options looking for a total stock market or S&P 500 index fund. Both should have lower ERs.

      Why do you see it as “too good to be true?”

      • Walter Guillioli says

        Hi Jim,

        Thank you for your prompt reply and apologies for sending you a broken link that required login.

        It might be an index fund only available for my employer (Microsoft), very weird. Because when I did a search on the internet and came to the one you mention from BlackRock at horrible 1.18% ER.

        However, in the internal website at fidelity it says 0.09% ER. I wonder if they can hide other expenses?

        I said 0.09% was too good to be true since it’s a TRT with a very little ER. Even lower than the ones Vanguard offers. BTW, I have VTSAX in my taxable and IRA.

        My 401k has a few other Vanguard funds including VIIIX at 0.02% (wow!) – seems to be a similar version that VTSAX:

        Thank you again!

        • jlcollinsnh says

          No worries Walter…

          Got it.

          You are right, .09% ER is great for a TRF, but since you have VIIIX available, that would be my choice. It is actually Vanguard’s institutional S&P 500 index fund rather than a version of VTSAX, but don’t let that stop you. While I have a slight preference for a total stock market index fund, the performance differences over time are not worth getting excited about.

          Over on the Bogleheads forum, in response to a question, a guy called Nisiprius gives a great overview:

          Good luck!

  37. Andrew says

    Is the mutual fund URSIX a good bet? If not, what would you suggest for younger investors with not a lot of capital built? Could you give some insight on what investors in their early 20’s should do in order to become FI?

  38. PencilThinMustache says


    Thanks again for the excellent website. I was poking around and came across this article you wrote a while back and wanted to chime in with my own scenario as I just became eligible to participate in my company’s 401k. I was initially very pleased to see that it offers 2 vanguard options (VIFSX and VSISX) with low expense ratios. Here are the disclosed fees in their online program:

    Sales Charge (Load) Imposed on Purchases None
    Purchase Fee None
    Sales Charge (Load) Imposed on Reinvested Dividends None
    Redemption Fee None
    Management Fees 0.06%
    12b-1 Distribution Fee None
    Other Expenses 0.03%
    Total Annual Fund Operating Expenses 0.09%

    Sounds good, right?

    But imagine my surprise when I called to inquire about these options and found out that an additional 0.50% fee is added by the 401k provider (SunTrust bank) for their services (which amount to running a website in my estimation). Is this even legal?

    So now the total annual ER is 0.59% . Now I have been doing lots of reading some of your recommended sources including “Investors Manifesto” by William Bernstein and “2nd grade portfolio” by Alan Roth and I have determined that I want to have a broadly diversified portfolio in the easiest (and broadest) way: VTSAX, VGTSX and VBTLX. Of course these are not available in the sun trust 401k. I do own some of them in my backdoor Roth IRA, but If I buy the Vanguard offerings in my 401k I will have a much narrower slice of the stock market (small cap and large cap blend), which will screw up the asset allocation I am striving for. What should I do?!?! I am a high income earner and skipping the 401k is not advisable as I get a partial match and am in high tax bracket.

    I did see another option, a TRF from T rowe price. check out the fees:

    Management fees 0.00%
    Distribution and service (12b-1) fees 0.25%
    Other expenses 0.00%
    Acquired fund fees and expenses 0.78%
    Total annual fund operating expenses 1.03%

    It does not say anything about a load, so I will call and inquire about that. But in reality this gives me a nicely diversified option with the 90/10 stock:bond ratio I desire; however, it comes at a fee 0.44% higher than the vanguard options. Would you consider this?

    Last thought was possibly investing my 401k in cash equivalent (0.05% savings account), which is a no-fee option in my 401k. This would allow me to reap tax deduction by participating in 401k but allow me the flexibility to use taxable account and IRA to buy whatever I please (VTSAX mainly). Is this stupid?

  39. jlcollinsnh says

    Welcome PTM…

    and thanks for the kind words.

    VIFSX and VSISX are great funds and you are lucky to have them in your plan. I’d put:
    80% in VIFSX
    20% in VSISX

    Doing so will get you close enough to replicating VTSAX the difference doesn’t matter.

    It is too bad about the extra fee, but it is legal and you’re stuck with it. Once you leave the company you can roll into your Vanguard IRA and escape.

    Cash is a poor long term investment, which is what 401Ks are for. I wouldn’t do that.

    And I’d still also invest in VTSAX in your taxable account.

  40. Conrad G says

    First off, amazing series! I stumbled on this yesterday and have been spending every spare moment reading through the articles. I found your site though Mr. Money Mustache, and am having to digest a ton.

    Just this past week, our HR department sent out an updated offering for our 401 (k) plan. Embarrassingly, I haven’t contributed a dime yet to the plan and I’ve been here for two years! (yikes!). I’m urgently trying to rectify the situation, and having trouble identifying which of the plans offered are best. None of the plans seem to be a total market index fund.

    I tried to list all of the options below with the Net Expense ratio, which I think is the number you guys keep referring to? There is also a Gross Expense ratio, but I’m not sure the difference.

    here are my options:
    -Putnam Money Market M — Net Expense Ratio = .65%
    -AllianceBern High Income R— Net Expense Ratio = 1.25%
    -Putnam Small Cap Value R— Net Expense Ratio = .65%
    – Franklin Small Cap Value R
    – T Rowe Price Retirement (target years 2015-2055 in 5 year gaps. otherwise identical) (— Net Expense Ratio = 1.13% for 2015, up to 1.26% for 2055)
    – American Funds EuroPacific R3 — Net Expense Ratio = 1.14%
    – American Century Small Co R— Net Expense Ratio = 1.38%
    – Prudential Short term Corp Bd R — Net Expense Ratio = 1.08%
    – MFS Mid Cap Value R2— Net Expense Ratio = 1.47%
    – Hartford MidCap R3— Net Expense Ratio = 1.48%
    – American Funds AMCAP R3— Net Expense Ratio = 1.03%
    – Prudential Total Return Bond R— Net Expense Ratio = 1.01%
    – American Funds Amer Mutual R3— Net Expense Ratio = .96%

    Thanks for the help! I’m at a small company, so our HR person is also the company Lawyer and he seems to be really busy lawyering, so he doesn’t spend much time on HR. I also reached out to the plan’s financial advisor, but I’m concerned he’s just gonna spin me a bunch of malarky since he probably has an incentive to get me into an expensive option.

    • jlcollinsnh says

      Welcome Conrad…

      Glad you found your way over here.

      Wow. That is one stinky, high-cost list. Looks like your HR person spends more time lawyering than selecting the 401K options, too. 🙂

      Not a single low-cost index fund to be found. Not even a broad-based market fund. You’d have to cobble together several to get there. Personally, I wouldn’t bother.

      For about the same net cost, you can just chose the T.Rowe Price Target Date fund that best suits your needs and be done with it.

      For more on these:

      • Conrad G says

        Thanks for the quick response! Sounds my best option is to reach the match, then max out my Roth IRA (already in Vanguard, per my mother’s instructions back in Highschool). After that, I’ll just open an after tax market index and use that for savings beyond the Roth.

      • jlcollinsnh says

        That’s not what I’d do, Conrad. Instead I’d:

        1. Fund the 401k to the full match.
        2. Fully fund my deductible IRA, rather than the Roth. The reason is the money you don’t pay in taxes will compound for you over the decades.
        3. Finish funding the 401K to the max.
        4. Fund my taxable account with any money left.

        Be sure to read Addendum I above.

  41. Jason says

    Great website, so much valuable help. Thanks indeed.

    Tons of comments, spent 30 mins reading but might have missed something. Seems your current opinion is fund the 401k even if lousy option (no match, high fees, etc) because numbers crunch better. Correct?

    I’m stuck with high cost, no match 401k, but have no debt and lots of $ to invest. Hate the fees but gotta do something, either 401k or taxable account.

    Thanks Again,

    • jlcollinsnh says

      Yep. Hold your nose and fund it. Basically the tax deduction out weighs the high fees.

      But look closely at your options and go for the lowest cost. Most 401k plans these days have at least one low-cost index fund option.

      And, of course, move it to an IRA as soon as you are able. Usually that’s when you leave the job.

  42. Paula says

    Hi Mr. Collins,
    I just found your blog through MMM. Big fan! you’ve helped me tremendously to consider why/where to invest smartly and I’m loving the Stock Series posts.

    My question is: I have recently changed my paycheck contribution to my 403B to 35% but after reading this part I am not so sure I should contribute any money to it at all!

    first of all, the type of investments are super complex to understand and not sure if they even offer index funds and if they do, they are very well hidden cause I haven’t been able to find one! My contribution is currently going to the MetLife Asset Allocation 40 Portfolio.

    I am not so sure this is the smartest option. I have another 20-25 years to retire although, I will probably work part-time 3-5 from now. How can I be smart about researching the type of investments offered through MetLife. What will be my best choice as investment?

    I am a 40 yr-old married woman. No kids. So, my tax bracket should be in the 15%. Should I aim for a more aggressive fund to direct my money to? should I forget about my 403B altogether. My company offers a 5% match-up contribution.

    I would appreciate your help or any other genius investor out there!

    • jlcollinsnh says

      Welcome Paula…

      Glad to hear you are finding value here.

      If you read thru Addendum 1 you’ll see that, as ugly as these things can be, it is almost always worth funding your 403b. Especially with a company match.

      I took a quick look at MetLife Asset Allocation 40 Portfolio.

      It is basically a stock/bond balanced fund with a 40/60 split. That’s very conservative if your time horizon is 20-25 years.

      Depending on which class shares you have, your ER is either .65 or .90. Not great, but not terrible as funds in 403b plans go.

      To find the index fund offerings, if any, scan down the list of offerings looking at the ERs. The lowest ERs should be the index funds.

      From there, you’ll need to read a bit about them to decide which fits your needs.

      Good luck!

  43. Paula says

    Thank you so much for your quick feedback! I have actually reduced my contribution to my 403B to 15% as of today and decided to invest my money in other Vanguard investment options. I’ll try to find the index funds within my 403b and start investing in those!
    Looking forward to learn more about investing and growing my stash!
    Happy Holidays!

  44. Rhody says

    Jim, a couple of things. I currently have Fidelity as my 401k provider through my employer. No fees on the account itself, all of my investments are in index funds with very low fees (sub .25%). Good choice of funds – some active, some index. Good tools to see performance, rate of return, etc. Much better than my previous employers. I’m very happy with my Fidelity account – they also manage the Employee Stock Purchase and Option Plans – which I also participate in.

    One of the thing I didn’t see in your post is that sometimes small employers aren’t sophisticated and get “sold” a plan that is “free” to the employer by shifting the costs to the employees. This allows the company to offer a plan with minimal cost to the company. I worked for a start-up for a number of years and they had such a plan. The individual funds in the plan were okay – some index and some active, with average expense ratios for each type of fund. But the gotcha was the fact there was a 2% management fee extracted from the account – regardless of investments. Something that was easy to miss with the old fashioned quarterly paper statements purposely designed to hide that unpleasant fact.

    Once the 401 Provider switched to offering detailed online portfolio tools I quickly saw the onerous fees and complained – loudly to the CFO and CEO in writing. At the time I was being dinged over one full paycheck’s max contribution of fees each year. Within 6 months of my agitating, they switched plan providers to one that charged no management fees for the account to employees.

    I think the lesson here is you need to pay attention to the middlemen tolls. Even with the exorbitant fees I was still coming out ahead when factoring in tax benefits so I kept doing it but I wasn’t happy about it. But I was able to get it changed. These high fee 401k accounts are more common in small companies and young companies – once a company is large enough or mature enough – the 401K providers beat a path to their door trying to become the provider of record.

    • jlcollinsnh says

      Great points, Rhody…

      Thanks for sharing the story and kudoes for getting it changed where you worked!

  45. Alex says

    I am definitely in the minority with this viewpoint, but I think this article is misleading at best. Taking a single posters 401k without any context (meaning, did his employer ask the 401k provider to handle all management of the 401k relationship for free in exchange for management fees) and then drawing a comparison that the high fees are “OMG” high as compared to a retail index fund is ridiculous. I can tell that you and the people here are smart, so I don’t get how you could have been OK with a sample size of 1.

    Not to mention, you are quoting prices from Fidelity’s advisor network site given the URL, which I don’t think applies to regular retail investors. A quick google search brings up the correct page, which does not have any fees beyond the Expense ratio.

    I have a 401k with Fidelity so am very familiar with the fund lineup, and I have access to the Spartan Index fund with an expense ratio of .02%. Does that mean Vanguard is now evil? Absolutely not. Most 401ks offer very inexpensive options, and investors should seek these out.

    Sadly, scanning the comments in this section I see most of your readers have missed the point, and are unsure what to do as you’ve painted 401ks as the devil and Vanguard as the social justice warrior. Maybe not your intent, but given this is the first article I’ve read on your site – it does have me questioning everything else written here.

    • Mr. 1500 says

      Hi Alex-

      You mention the sample size of 1, but I think that this problem is fairly common. Every place I’ve ever worked at has had mostly high-fee choices in their 401(k). The job I just left had the worst with some of the fund’s fees exceeding 2%. The best option was the Contrafund which was around .7% at the time. Not horrible, but not nearly as good as the index funds Vanguard and many others (as you pointed out) are now offering.

      I don’t think it has to be this way either. I just setup a 401(k) recently for my own corporation. I went with Vanguard and I admit that the offerings aren’t as great as they would be to a retail investor (no Admiral shares available), but they are still pretty damn good compared to anything I’ve ever had in the past.

      I think that it’s all a symptom of a bigger issue. Many of these active fund managers make obscene amounts of money and most don’t beat the indices. The incredible greed that has taken over Wall Street hurts the average retail investor. It’s not a good system. Perhaps Warren Buffett said it best here:

      Allocating capital is often more lucrative for the people in a position to grab some of the money flying around the room than it is for the people whose money is being thrown.

      But back to Mr. Collins. I don’t think that he painted 401(k)s out to be the devil. In fact, in the addendum, his conclusion is that you should use it:

      Reading the Mad Fientist‘s thoughtful case it is clear — most often you’ll be money ahead funding your 401k.

      If you were to talk to Jim in person as I have a couple times, I’m pretty sure his message would be that like anything else in life, you should put a little thought into your 401(k). Just don’t dump money into it blindly, but take time to evaluate your options.

      I do encourage you to check out more of the posts here. From meeting Jim, I know that he’s a thoughtful, open minded and pragmatic person who would be the first to admit fault if he was wrong. I don’t think he’s wrong here though.

  46. John Mark says

    Greetings, Jim,

    You’ve been so helpful over these past few months as we’ve gotten our financial house in order. I’ve said goodbye to my financial advisor, am recharacterizing some of our assets, and we’re on the way to a solid plan for independence. Thank you for sharing such rich, simple unbiased knowledge!

    Another question is coming up my wife and I. It’s a question about the qualifications for an individual 401K. (sometimes called solo 401k) My wife is Ecuadorian (I hope you had a great trip, btw!) and has started working 20 hours a week as a translator for a hospital. She receives no benefits or retirement perks from them, just a straight hourly wage. She’s coded in their system as a “contractor.” Is she eligible to open an individual 401k and max it out at $17,500? (not exceeding her yearly compensation) What else would I need to know if she qualifies for this? It looks like Vanguard offers these: but according to Retire by 40, you can’t access Admiral shares:

    Assuming she’s eligible, would a solo 401k affect my wife’s ability to fund a yearly traditional IRA at $5,500, as well? I was under the impression that maxing out your 401k (17,500) doesn’t meant that you forfeit trad. IRA deductions of $5,500. What is your understanding of this? I’d really appreciate your insights, Mr. Collins.

    Thanks for your help!

    • jlcollinsnh says

      Hi John…

      If you check out this IRS link:

      The first paragraph says: “These plans have the same rules and requirements as any other 401(k) plan.”

      This seems to suggest that your wife would be able to also fund her IRA up to the contribution limit. But I can’t find anything that says so specifically.

      When you open the Solo 401(k) ask Vanguard. They very likely have dealt with this question many times.

      Please report back to us and let us know what they say.

      Good luck!

      PS: Headed back to Ecuador in October for this year’s Chautauquas!

      • John Mark says

        Thanks, Mr. Collins. I did some extensive research with Vanguard via phone, and it turns out that she is eligible for a solo 401K. This means that we both have 401k options up to $18,000 this year.

        Here’s the thing I’m not clear on. My wife and I, between the two of us, make about $95,000. You once told me your basic hierarchy for deploying investment money:

        1. Fund 401k type plans to the full match.
        2. Fully fund a deductible IRA, rather than the Roth if your income is high enough that you are paying Federal income taxes. (that’s 5.5K each)
        3. Finish funding the 401K to the max. (for us, that’s 18K each)
        4. Fund your taxable account with any money left.

        I was under the impression that steps 1-3 were all deductible since our income is low enough, but someone at Vanguard said that if you max out your 401k, then your traditional IRA isn’t deductible? That conflicts with things I’ve understood here and at Mad Fientist.

        What is your take?

      • jlcollinsnh says

        Hi John…

        You are correct, steps 1-3 are deductible.

        What the Vanguard rep was likely referring to is that, over certain income levels, the deductibility phases out if you have an employer based plan like a 401(k).

        However, for people married and filing jointly the current limit is 181k, which you are comfortably under. So your IRA is deductible.

        I just rewrote and updated my post on this:

        Be sure to checkout Addendum 2.

  47. Laura says


    I recently started a new job and set out to educate myself on investing before setting up my new 401k. I picked out a few index funds (luckily available for cheap in my plan), rolled my old 401k into an IRA, and mostly skimmed over this post.

    But then my curiosity got the better of me, and I decided to use my newfound knowledge to see how big my mistakes were in my former plan.

    When I set up my 401k allocations with my previous employer, I remember comparing expense ratios and trying to pick the lower ones, choosing funds that included a random assortment of words like “balanced” and “mid cap” and “growth” (that would mean I was diversified, right?) and uneasily moving on with my life. Like the gentleman in the PBS video you shared, I would check in on my balance periodically and wonder why it seemed flat when the market was posting huge returns. So this afternoon I logged back in to my old 401k provider.

    I am still picking my jaw up off the floor.

    Now I know why my portfolio never grew- I was invested in a couple of funds with 1.5% expense ratios and 5.75% loads.

    A few gems from that plan: TMGAX, available for the staggering ER of 2.54%, with a 5.75% load. That fund’s return from inception to today? 2.78%. Oh, and the lowest possible fee in the plan at 0.87% (and the only one below 1%) – was for a money market fund! I am still trying to wrap my head around the existence of the bottom feeders with the nerve to charge 0.87% for what can be had for free, plus 1% interest, and FDIC insured, from Ally bank!

    I have therefore concluded that I made zero mistakes in my initial 401k allocation – the mistakes were all made well before I arrived on the scene. Luckily I worked there for a short time, and made only small contributions to the plan while investing ~25k in a vehicle with a guaranteed return of 6%. Paying off my student loans didn’t come with any hidden fees either.

    In the last 4 hours I’ve become an evangelist for making people aware of this heinous nonsense. And I’m starting with my former coworkers!

  48. James says


    I saw your link to Personal Capital and, as is sometimes habit for me, looked at the actual link and saw you are linking to an affiliate link instead of directly to their website. Here’s the link you’re using above:

    Can you speak to this? It concerns me and I worry about your objectivity, but I would like to hear your thoughts on it before I jump to conclusions. Everything else I have read of yours has been spot on so far, but this had jumped out at me as a red flag.

    Thanks. James.

    • jlcollinsnh says

      Hi James…

      I’m not entirely sure what your question is here or what conclusions you are about to jump to.

      That I have affiliate links?

      Yes, they along with AdSense (the banner ad at the top and the square ads imbedded in some posts), are how I pay the bills around here.

      I am willing to spend (considerable) time and effort operating this site and sharing the information here. But I am unwilling to pay for the privilege.

      These affiliates are no secret. At the end of my 5 or 6 most popular posts (like this one: I list them. It looks like this:

      Important Resources:

      —Personal Capital* is a great free tool to manage and evaluate the investments you have, including costs. Most folks visiting here already have a range of investments and now you can track and compare them. At a glance you’ll see what’s working and what you might want to change. Very cool.
      —Betterment* is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
      —YNAB* has the best budgeting tools going and just might be the Best Place to Work Ever
      —Republic Wireless* is my $10 a month phone plan. My daughter is in South East Asia and is on the $5 a month plan. We talk whenever can and for ever long we please. My RW Review tells you how.
      –Tuft & Needle* helps me sleep at night. A very cool company and a great product.

      *These are affiliate links and should you chose to do business with them, this blog will earn a small commission.

      (There are live links embedded there which didn’t carry over when I cut and pasted this in)

      At some point I plan to have this information on every page on the blog, mostly to give these products and companies more exposure. They are the ones that support this blog. They also provide a way for those readers who want to support the blog to do so should the products offered be of benefit to them.

      Each of these products and companies I have vetted carefully.

      Personal Capital is the most recent and just appeared on the site for the first time. They first came to my attention ~10 months ago when a couple of financial bloggers I deeply respect suggested they’d be a good fit.

      While impressed with what I saw, I waited until this past FinCon conference where I had a change to spend an hour+ with Michael the Director of Marketing, quizzing him closely and getting my questions answered.

      At some point I’ll do a post about them (something they are anxious to see and that should boost my affiliate revenue from them) as I have about the others, but at the moment I have others in the queue. Meanwhile, those who click on the link will have to check it out for themselves.

      Of course, a company doesn’t have to offer an affiliate program for me to link to them and/or their products. I have included countless links here, anytime I come across something — product, tool, information — I think will be of value to my readers. Vanguard is the largest example.

      But shortly I will be devoting a full post to Stockchoker, a cool new tool I came across and its creator. If it offered an affiliate program I’d certainly sign up. It doesn’t, but that’s not going to stop me from introducing it to my readers.

      Nothing, affiliate or no, gets linked to here unless I’ve decided it has reader value. But every time an affiliate relationship is offered I am going to take advantage of it.

      Finally, let me point out that this blog has grown to the point where I routinely am offered lucrative opportunities. Unfortunately, most are not in harmony with the philosophy and approach here and thus far I turn them all down.

      The most recent of these was last week: An offer to promote Jim Cramer’s website. Anyone familiar with this blog and Mr. Cramer’s approach will know why.

      • James says


        That answers my questions. I had seen you previously discuss AdSense but had seen no reference yet to affiliates and because I had not seen any mention of it from you I felt as if the reader may be unwittingly clicking on affiliate links. I also just discovered that you already have a statement about this in your disclaimer section. My apologies.

        That being said what you said makes sense and I appreciate the honest answers. I have no issues with you paying the bills, but I do get a warm-fuzzy when I see you discuss it openly. I might suggest that, in addition to the links you post throughout the articles, you should consider a tab at the top of your site dedicated to companies you recommend — affiliate or not. It could be a central location where you could discuss each company and why you recommend them.

        Thanks for explaining it and sharing your thoughts. James.

  49. PMcC says

    I panicked a bit reading this thinking I’d done unwise things with my 401k. However, it does look like fidelity is figuring out the need to offer the lower cost options. The Spartan total index FUSEX is what I picked and it looks like VTSAX lite. Am I missing anything there?

    • jlcollinsnh says

      No need to panic, PMcC…

      FUSEX is an S&P 500 index fund that more closely matches Vanguard’s VFINX. Both are fine choices for a 401k.

      That said, they approach the concept a bit differently and, given the choice, I prefer VFINX.

      FUSEX: “The fund normally invests at least 80% of assets in common stocks included in the S&P 500® Index, which broadly represents the performance of common stocks publicly traded in the United States. It lends securities to earn income.”*

      VFINX: “The advisor attempts to replicate the target index (S&P 500) by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.”*

      That lending of securities produces an annual yield of 2.21% for FUSEX v. 2.1% for VFINX.

      However, overall VFINX’s pure indexing approach generates a slightly better return: 53.25% v. 51.93% over the past ten years.

      Plus, Vanguard is my investment company of choice for reasons I outline here:

      *descriptions from Yahoo Finance

  50. Abby says

    Hey! I’ve loved your series so far. I found you from Mr. money mustache. I’m at a dilemma. My company 401k is American funds which has no index fund options and I have no match. I am at the upper end of the 25% bracket. What is your opinion on contributing? I am leaning toward continuing to contribute for the tax break.

    • jlcollinsnh says

      Hi Abby….

      At the 25% bracket, the tax deduction is very valuable. I’d contribute the the least expensive option offered and I’d roll to my personal IRA the moment I left the company.

      In the meantime, I’d badger HR on why the choices are so poor and for better options to be added.

      Good luck!

  51. Josh says

    Just a quick note that I called Fidelity regarding my company’s 401k options since the info on our plan document is different than what is in the prospectuses Fidelity provides for their funds. Turns out that many of those load fees are waived for 401k’s, so only the expense ratio and your advisor’s fees should be considered. Still, our plan only has one index fund (JP morgan index), and it’s fee is 0.73%! Incredibly expensive for an index fund. My guess is that the advisor has jacked up the fees to compensate them for their “advising,” which is actually nothing at all.

    The 401k is a travesty to the American employee. One tax-advantaged limit should be available to us regardless of the account type: 401k, ira, roth ira, simple, i401k, etc. Some plans for self-employed folks offer up to $53k a year in tax-advantaged investing! What an advantage for them. For those who work for a wage, and for an employer, they are essentially screwed out of having choice. We should be striving to protect choice in our society, not force people into precarious financial decisions that dilute their savings and enrich advisors.

  52. E. says

    I’ve got a question about implementation. The company I work with does a match for a 401(k). It is quite typical. I’d like to contribute the maximum amount for the year. My issue is that the majority of my income comes from commissions. I don’t know what percentage of my salary to set aside because I don’t know what my income will be. The only idea I have is to wait until December and then request of human resources to change the percentage from my paycheck close to 100% and then switch it back to something more typical. I don’t want to just increase it now and hit the max before the end of the year because I will miss out on some of the company match.

    How do we who make our living on commissions manage this?

    • jlcollinsnh says

      If you plan to contribute the maximum, a very good idea, I’d just go ahead and front load it as my pal MF describes here:

      When I was working on commission, and when I was managing sales teams working on commission, we were all expected to provide sales forecasts for the coming year which, of course, also were a prediction of our earnings. Although never precise in the end, certainly they were close enough for setting up 401k contributions.

      • csloan26 says

        Watch out – some companies only match your contribution and if you max it out earlier in the year they will happily match 0 in those last months.
        I almost walked into this but luckily had a chat with an HR person about what happens when I hit the max; I’m not paid on commission so I recognize your situation presents a ‘planning ahead’ challenge.

        • Nice Joy says

          Same with TSP ( 401k for federal employees)
          This is how I do I divide 18500 by number of pay period. That will tell me how much you can invest every paycheck. ( I can set the dollar amount)
          For those who can only set the percentage, it takes little more work and need to keep an eye on the year to date contribution on your pay stub and adjust to make sure you can contribute until the last pay stub to earn the employer match.

          • Ali says

            How do you set a dollar amount through TSP? Not on the MyPay website. Through Having trouble locating. Tried googling it…

          • Nice Joy says

            The only way you can do that is using Mypay . This way you can precisely max it the yearly contribution limit. Just a side note if you max out earlyer than your last pay check of the year then you will not get the agency match for the remainder of the pay periods.

  53. rovi says

    I know this is older, but everything seems valid still for this question if you don’t mind…

    My company does offer the Fidelity 500 index fund (FXSIX) as an investment option in our 401k list. This is supposed to replace Fidelity’s Spartan fund. Is this comparable to the Spartan fund you referred to in this post? Also, why wouldn’t a company offer this as an investment option to its employees?

    thanks in advance,

    • jlcollinsnh says

      Hi Rovi…

      I am not familiar with Fidelity funds, so I can’t say for sure.

      But my guess is that FXSIX is their institutional version of their Spartan 500 S&P index fund. This would be a good thing and should mean an even lower expense ratio.

      But I’d call Fidelity to confirm this.

      • Rovi says

        Thanks for the quick reply!

        Your guess was absolutely correct. I just realized the different classes of fund (ETF, investor, institutional) available. I guess I’m fortunate that this is an option available to me.

        Great content. I wish I had discovered this a few years ago!

  54. Honestly Naive says

    For what it’s worth… I’m fortunate enough to have an employer who contributes to a Vanguard Simple IRA (match up to 3%). However, I just learned that Vanguard will not permit me to put my funds into the VTSAX (Admiral Shares) because it is a Simple IRA account. I can (and do) put the funds into the VTSMX (Investor Shares). Unfortunately the expense ratio is .16% vs .05%. Any suggestions for getting the employer contributions into the VTSAX?

    • jlcollinsnh says

      I’m not sure why, and it seems very odd, but VTSMX seems the only version available to Simple IRA and as far a I know there is no way around this.

      If you learn different, please let us know!

  55. Christopher says

    Hi John,

    Thank you so much for this wonderful stock series. I have finished reading and continue to re-fresh my mind with the series since finding it through Go Curry Cracker! My wife and I started doing budget/retirement planning this year now that we are 100% debt free. Yay! So I had a few questions if I may:

    1) Wife’s 401k was easy as they offer vanguard target date low fee options but my 401k at work is through John Hancock. I have some target date funds available through American Funds but the expenses all exceed 1%, so based on what I have learned in your series I am shooting for either of the following index options and I am not sure which is best?:
    -500 Index Fund (ER .63%) or
    -Total Stock Market Index Fund (ER .68%, based on wilshire 5000)

    2) Our combined income is over the limit for traditional IRA contributions to count as tax free. Does this mean after maxing out our 401k we should go to a roth IRA? We are in our early 30’s don’t have kids, a mortgage or anything big really to write off outside of our work 401k’s. So I’m slightly confused on how we should follow the “basic hierarchy for deploying investment money” in part VIII of the series.

    Thank you!

    • jlcollinsnh says

      I have no idea who “John” is, but he had nothing to do with my Stock Series here. 😉

      1. Either of those are fine, but I’d go with the 500 for it’s lower ER.

      2. If your income allows for a Roth, absolutely fund one. While there is no upfront tax advantage, once you fund it you are done with taxes on it forever.

      • Chris says

        My sincere apologies Jim, I have once again proven to myself that multi tasking in a rush is not in my best interest. Thank you for the prompt response.

  56. Scott says

    Thanks for all of the articles. They’ve helped me fine tune my plans and simplify my investment accounts. I was already using indexing, but I was using 60% Large Cap Index (S&P 500), 20% Small Cap Index, 10% REIT (nasty fees that I missed) and 10% Bond (income fund with dividend reinvestment, also more fees than I like now). I have moved to 80/20 split between large cap and small cap, simulating total market fund.

    What prompted me to write today was that the shame and fault in the situation you presented are 100% on the employer. The employer chooses what funds are offered within the retirement plan administered by Fidelity. I work for one of those S&P500 companies (in top 200 of Fortune 500). They recently switched (for 2017 onward) to Fidelity as our plan provider. The selection is limited, but about half the funds available for our 401k are target funds (mediocre expense rates), and the others include index funds with competitive expense rates. The funds are named after our company, but I think they mirror various Fidelity funds. Bottom line is, while it’s not Vanguard, the Fidelity funds available in my 401k are competitive on expense rates. Also, we have access to Fidelity’s full range of equities if we open other buckets within our accounts. I think these are without fee, and I know they’re available through a single interface. My HSA is set up to keept the first 1k in a moneymarket account, and sweep everything over 1k into investments of my choice. I chose a total market index.

    • Josh says


      I did some research on 401k’s recently for a small business-owner friend of mine. It’s a crazy business once you get into the weeds with how these accounts are constructed. If the business has less than 100 employees, they can qualify for small-plan 401k’s that offer better pricing and easier compliance red tape. For very large employers, they can get nice low expense funds due to the volume of assets. It’s the companies in the middle that have the most difficult time.

      Interestingly, there are endless configurations for 401k plans – traditional, safe harbor, employer match, no match, etc. Safe harbor plans offer a waiver of most compliance tests and filing in return for a mandatory 3% employer match (fully vested). Traditional plans can be structured in any way, but there are arduous compliance forms and testing requirements that ratchet up the cost. Employers weigh the costs of compliance vs cost of matching, and decide which works best for their business. Many opt to pay compliance, scrap the match, and then pass on the compliance costs to the fund-holders (this is the worst case but very common).

      When you see fund exp ratio’s in the 1%+ range, it is very often due to there being an embedded profit % for the “advisor” of the 401k plan. Those fees are passed to the fund holders rather than the company eating it. Sometimes there are record-keeping fees and custodial fees that are in the fine print of the “plan summary.” Read yours carefully. Fund prospectuses often detail fund loads and fees that are not what the 401k actually costs, so follow the details in the plan summary over the prospectuses.

      Anyone looking to have a small business plan, should look at Employee Fiduciary. They offer fixed costs based on number of employees and a base setup fee, while offering every fund family in the universe AT-COST. No cost sharing, kickbacks, etc are included. They also offer comparisons and fee disclosure forms on their website to see what other plans are paying vs theirs. Often companies are saving 80% over traditional plans offered through Fidelity, ADP, payroll companies, etc.

      A good rule of thumb to gauge your 401k plan is are the total fees to you worth close to the tax-cost of a taxable account. Typically it will be always worth it to defer compensation from taxation into the future with a 401k, HSA, IRA, 529, etc. 401k plans are probably the most convenient since there are no income restrictions, and the money goes in pre-tax, not requiring any deductions or adjustments on the 1040. IRA deductibility is directly related to MAGI (not including the IRA contribution amounts), so if one say makes $80k and they want to adjust for $5500 ira contribution, they are unable to do so. If they max the 401k their MAGI is now $62k. You only need $1,000 in additional adjustments to get to the $61k income limit to qualify for the ira deduction, which can easily be done by company health insurance payroll deductions or an HSA account.

      If you max all accounts $18k 401k, $3400 HSA, $5500 IRA, your MAGI will be $53,100. That also qualifies you to deduct student loan interest to the max ($2,500), bringing you to $50,600. Take the standard deduction and one exemption ($6300/4000) bringing your taxable income to $40,300. You have cut your income in half for tax purposes, and saved at least $9,925 in federal tax plus state.

      • Josh says

        As far as public policy goes, it seems clear that we need a simpler approach than all of this craziness. We should simply allow for $53,000 a year in tax-deferred investing using any account you wish (a standard brokerage account will do). This contribution is reported to the IRS by the brokerage, and you report it on the 1040. You get to deduct the entire amount from your compensation for the year. Done and Done. No need for your employer to do anything at all! They can re-focus on paying you more money, offering better health care, or reinvesting in their business. You get ultimate freedom with your money.

        We already have social security that is mandatory, so why are we continuing to muddy the waters by putting all of the retirement arrangement compliance and costs on employers? The people should take back their money from the grips of these programs, their benefactors, and the restrictions limiting their ability to access their money any time. It’s a crazy world.

  57. Felipe says

    The 401k really depends on the company. My friends and family have shown me their 401k plans and offerings for advice and holy f***. The expenses are ridiculous. Black Rock, Fidelity, and Schwab all can’t compete with Vanguard. They may have some products that can match Vanguard but they sure seem to want to milk their clients at every opportunity.

    I seriously recommend Vanguard due to no conflict of interests. The more I study, the more I realize how valuable this alignment of interests is.

    I started a Safe Harbor 401k with a nice match at the small business I work for- I used Employee Fiduciary as the third-party administrator and Vanguard funds. The expenses are rock bottom on both the business’s and participants’ side. My entire 401k is in VTSAX so you know some of my reading of your work is sinking in.

    The Institutional Shares you’re describing are only available once a company has a 401k with over a million dollars in assets, otherwise we are stick with the Admiral Shares. Still better than 90% of the 401k funds out there (that’s an understatement.)

  58. Henry H says

    I just checked the fees on my 401k, and it appears as though they are lower than Vanguard. I’m not sure if there is an alternate place I should be looking to find more fees.

    For example:
    S&P 500 Index Fund
    (Investment Mgmt Fee ratio ‘deducted by the plan and paid to the fund manager’) = 0.01% +
    (Investment Mgmt Fee ratio ‘deducted directly by the underlying fund manager) = 0% +
    (Admin Fee Ratio ‘deducted directly by the underlying fund manager) = 0.01%
    = Total Expense Ratio = 0.02%

    Is there anywhere else for fees to reside? The Index is run by ‘Northern Trust’ (
    It appears as though there is a 0.11% fee.
    Why would my company not state this? Is that only for people buying the fund outside of a 401k?

    • jlcollinsnh says

      As 401(k) plans can be a bit of a cesspool of fees, some hidden, there is no easy answer.

      You’ve made a great start. Next, I’d go to your HR folks and review/ask.

      Good luck and please report back.

      • Henry H says

        So, my 401k fees were as stated (the S&P 500 Index Total Expense is 0.02%). Wonderful! Northern Trust Global Investments manages the funds, but they are not the same funds that are available at Northern Trust to the public.

        BUT, there is a flat fee ($8.75 per QUARTER – see legal text below) that applies to any account with over $2500 in vested contributions. There is an employer match, so assuming only contributing to the match, this kicks in at $5000 (or 0.7%). Not as wonderful.

        Compare VFIAX (Vanguard 500 Admiral) or VTSAX:
        Expense 0.05%

        x(0.05%) = x(0.02%) + (4*8.75)
        x(0.03%) = 35
        x = $116,667

        In order to match VFIAX or VTSAX,
        (assuming the flat fee remains constant)
        I need to have at least $116,667 in my account.

        I am going to follow up again to find out if the $8.75 is a max/min charge or if it only applies if I rebalance, etc.
        Pretty sad about this discovery but it is better to know.

        “As of 1/1/17, the amount of the flat dollar administrative fee charged to your account each quarter was
        $8.75; however, the amount charged can fluctuate each quarter depending on changes in services rendered from time to
        time, actual third-party billings incurred by the Plan and changes in the number of eligible plan participants in the Plan.”

  59. Evan says

    Excellent read and just started following your blog (newer investor here).

    This was a very helpful post for me, as my situation is very similar…SIMPLE IRA plan with fees as follows:

    Max Sales Charge: 5.75%
    Distribution and/or Service (12b-1) fees: 0.22%
    Expense ratio: 0.77%
    Other expenses: 0.14%

    However, my employer contributes 2% regardless if we put money into the account or not. After reading your post it looks like we should actually stick with these crappy plans.

    My question is, what if I let my employer continue putting in the 2% (while I stopped contributing) and I opened up a Vanguard Total Stock Market Index Fund to invest there instead of the SIMPLE IRA?

    Thoughts? or should I just stick with the painful SIMPLE IRA?


    Note: I am already maxing out a ROTH IRA on the side.

    • jlcollinsnh says

      Hi Evan…

      Wow, those are really ugly fees.

      I’d make the call based on your tax bracket. The higher your bracket the more valuable the deduction to offset those fees.

      Your use of the Roth suggests you are in a low bracket, though.

      • Evan says

        Thanks for the reply.

        I think I will go with the VTSAX.

        I just have so much more confidence investing with Vanguard compared to my employers SIMPLE IRA.

        I appreciate the advice, hopefully it’s the right decision moving forward!

  60. David says

    Hi Jim,

    I have a Simple IRA through Fidelity from my work, however since we have merged with another company, our new retirement is a 401k plan with Nationwide. I am trying to figure out what to do with the old Simple IRA Fidelity account.

    Would you recommend converting/transitioning it over to a Vanguard Simple IRA and distribute the funds in something like 100% VTSMX (Investor Shares) or VTSAX/VFIAX (Vanguard 500 Admiral)?, or should I keep it with Fidelity and see if I can put the funds into an indexed fund like FXSIX or a Spartan Total Market Fund?

    Currently, the Fidelity funds in my old Simple IRA are distributed all over the place, probably heavy in fees. More specifically, my Fidelity Simple IRA is distributed into three Class M funds: FAIGX (Balanced Fund), FSIAX (Strategic Income Fund), and FNITX (New Insights Fund). Breakdown of funds is 31%, 43% and 25% respectively. Apparently Class M funds were previously called Class T Funds. Fees for each fund: FAIGX – Max Sales Charge – 3.5%, Exp Ratio – 1.14%, Management Fees – 0.4%, Distribution/Service Fees – 0.5%; FSIAX – Max Sales Charge – 4.0%, Exp Ratio – 1.01%, Management Fees – 0.56%, Distribution/Service Fees – 0.25%; FNITX – Max Sales Charge – 3.5%, Exp Ratio – 1.14%, Management Fee – 0.44%, Distribution/Service Fees – 0.5%.

    All these fees seem excessive and changing this to Vanguard seems much better, considering what you and others have posted regarding fees and expenses that seem to range from 0.05% to 0.17% with Vanguard.

    I guess the other option would be to roll-over my Fidelity Simple IRA into Nationwide where my new 401k is.

    As for the new Nationwide 401k Retirement plan we are now setting up, do you have any suggestions for Index funds that would mirror the Spartan Total Market or Spartan SP500 with Fidelity, or the VTSMX, VFIAX, and VTSAX Indexed Vanguard funds? The Net AMC/Asset Fee for the various indexed funds offered (Specialty, International, Small, Mid, Large-cap, Balanced, US bonds, Short-term bonds) are listed as 0.60% with Net Exp Ratio’s % ranging from 1.08% to 1.73%. I don’t really know what are acceptable or reasonable fees vs. really high fees. Total Annual Operating Expenses as a percentage within the various funds seem to range from 1.68% to 2.33%. From what I have been reading on the posts here, the fees I just listed seem extraordinarily high!

    We have a meeting with our old Fidelity Advisor next week so hopefully that will answer some of the questions.

    Any suggestions would be greatly appreciated,



    • jlcollinsnh says

      Hi David…

      I certainly wouldn’t roll anything into your new 401k. Those selections are limited and the ERs. I see nothing in what you listed that mirrors a total stock market or S&P 500 index fund.

      I’d roll the Fidelity IRA into Vanguard and VTSAX would be my fund of choice. But before you do anything, give this Stock Series a careful read so you understand why I suggest this and what you need to be aware of before you invest.

      Good luck!

  61. Johnny says

    What’s your take on VPMAX, it’s one of the funds in Fidelity’s 401k 22 mutual funds lists, I’m limited in my options with Fidelity but my company’s 401K is there.

    • jlcollinsnh says

      This is an actively managed fund and its .23% ER is reasonable given that. But still much higher than the .04% of something like VTSAX. It also seems to be well managed.

      Still, I’d look for an index fund among your options. There is a good chance they offer on that tracks the S&P 500, for instance.

  62. Kevin says

    I thought I had a good handle on these things, my entire 401k is invested in what I believe is a low ER S&P 500 Index fund but upon further investigation that may not be the case. When I view my holdings on Prudential both the Gross & Net ER are listed as 0.04% but when I follow the link to the Fund Fact Sheet it lists a “Net Expense Ratio (Before Contract Charges):” of 0.31%! Any idea what’s going on here? Is it possible my company is paying the difference for me or am I being taken for a ride?

    The fund is Prudential’s Dryden S&P 500 Index Fund. Thanks.

    • jlcollinsnh says

      Like the post above points out, too often 401K plans have become a target for investment firms to line their pockets. My guess is that is what is going on.

  63. Aaron says

    Hi jlcollinsnh,

    I have to admit I’m incredibly confused about the rolling of the 401(k) into the IRA after leaving an employer. Does this only apply if you have a traditional IRA?

    I max out my 401(k) and max out my Roth IRA but have never had a traditional IRA as I am not eligible for deductions due to having the 401(k) plan. If I left my employer in the future and wanted to do the rollover of my 401(k) funds into my Roth IRA, is this not possible due to the Roth being after tax, and the 401(k) being pre-tax?

    Any clarification is greatly appreciated!



    p.s. Huge fan like everyone else here, your material is mandatory reading in my opinion.

    • jlcollinsnh says

      Hi Aaron…

      You are correct that you cannot roll a 401k into a Roth IRA, for the reasons you mention.

      You can roll it into a traditional IRA, which can be newly created for the purpose. The advantage is you can open that IRA with the institution of your choice and select the fund(s) you want.

      Make sense?

      • Aaron says

        jlcollinsnh ,

        Thanks for your prompt response. Yep, that clears it up, I figured that would be the obvious answer but I don’t like to assume when it comes to financials if at all possible 🙂

        With that being said, fortunately my current employer has Vanguard index funds that I invest in for my 401(k) but who knows what the future holds. Do you think switching over to Traditional IRA(if this is even possible, I am not certain the rules) is a smart decision to safe guard myself in the future if I get a back stack of 401(k) funds with a different employer and need to roll into an IRA after I leave?

        Thanks again!

  64. Ed says

    I started a new job approx. a year ago, and was happy to know that they offer Vanguard in their 401k. I was even happier to learn that they offered VTSAX, and rolled over my previous 401k to my new 401k. I had also been investing 100% of new money in VTSAX. They also offer a 6% match.

    I learned about a month ago that my company removed VTSAX as an investment option and replaced with something other than what I wanted. By default they exchanged VTSAX for a target fund that they offer, because I had missed the communication of their intent. Once I learned of the exchange I moved everything to their VFINX fund. Based on what I’ve read here that seems like the next best option to VTSAX.

    So now my question. Considering that my company may arbitrarily remove an investment option, is it wise to put more than 6% into my 401k? If I knew they would at least keep VFINX I would continue more than the 6%, as I am now, but I have concerns.

    I think my AGI is too high to be able to contribute the full amount into a traditional IRA, otherwise I would annually add to my current VTSAX IRA, and stay with 6% in my 401k.

    I realize that the Roth IRA(VTSAX) may be an option, but is it the best option?

    Any advice?

  65. Caroline says

    First off, I love your blog and anytime I ask my dad questions about investing he tells me to read your blog and book! I have read the above article and comments on the blog and am still a little confused on what option I should select for my 401k.

    My job offers an automatic 3 percent contribution after working for a year.

    My job offers the following choices:
    Putnam U.S. Government Income (.51-1.64)
    Lord Abbott Affiliated
    Putnam Fund for Growth and Income
    Lord Abbott Mid-Cap Stock Fund
    Putnam Capital Opportunities A
    I-Shares Dow Jones US Total Market Index (.20)
    Putnam Global Equity A
    Nasdaq-100 Index Trading Stock (.54)
    Putnam High Yield Adv A
    Lord Abbott Value Opportunities Fund
    Putnam Daily Dividend Trust
    Growth Fund of America
    Putnam Multicap
    American Funds Capital World Growth and Inc.
    Putnam Growth Opportunites
    Victory S&P 500 Index Fund (.55)

    After reading your blog, I believe you would suggest picking an index fund. I know for others you suggested the S&P 500 Index Fund, however the Victory S&P looks to have a high expense ratio of .55%. My second thought was the Nasdaq-100 Index Fund but it has a ratio of .54%. I believe the lowest expense ratio index fund offered would be the I-Shares Dow Jones US Total Market Index at .20%.

    Should I put 100% of my investment for my 401k into the I-Shares Dow Jones US Total Market Index?

    Any help would be much appreciated.

    • jlcollinsnh says

      Personally, I would go with the low cost, total stock market option. As you deduced.

      Say hi to your dad. 😉

      • Caroline says

        Thank you for your response! My dad is ecstatic you responded. You are fantastic and I love reading your blog. Thank you for taking time to teach and share your wisdom.

  66. Lloyd says

    Thanks for this great info on 401k’s. My company offers a pretty generous match. 100% up to the first 6% of my contribution. The only thing is it is in company stock.
    Not sure but I don’t think I seen any comments on this topic.
    Its a very solid company, a household name in fact, its just that.. following the advice of your blog and others, it seems I should be getting away from individual securities. What advice would you have for someone in this situation. Should I still contribute and if so is it ok to hold this one stock? Any thoughts would be appreciated.

    • jlcollinsnh says

      Acquiring stock in the company you work for can be a very risky business. It ties your employment and investment to one source.

      Company 401k matches are wonderful things, and yours is a good one. Other than being tied to your company stock.

      Balancing those two opposing features, is something only you can decide.

      I would look closely at how quickly I could roll out of the company stock and into something more broad based. And I would do that each time I could.

  67. kenmorem says

    thanks for this eye opener. my company is using a place that had low cost vanguard as the default funds. at the turn of the year, they autoconverted my VTSAX into FSTVX, the equivalent fund at fidelity. based on your writing above with all the hidden fees, am i getting screwed with the fidelity fund?

    • jlcollinsnh says

      I’d be a bit ticked that they auto-converted my fund without my say so, but FSTVX should be fine.

      When you leave the company, you can roll your 401K into an IRA and choose whatever fund you prefer.

      • kenmorem says

        thanks for the timely reply. is the FSTVX functionally equivalent to VTSAX? fees and performance? i thought VG had less buy/sell costs in addition to the unique structure their funds have over all other funds.

  68. Big D says

    I wish there was a way to turn off alerting for comments for this page. I receive an alert email for this page’s comments every so often, and in the email I click on the link after the text “To manage your subscriptions or to block all notifications from this site, click the link below:”, but it brings me to a blank page titled “Comment Manager”. I’ve tried both Safari and Chrome browsers on MacOS (with blockers disabled) and Edge browser on Windows 10.

    I imagine you need to upgrade your WordPress subscription plugin.

    This was the only way I could think of to bring it to your attention. Thanks!

    • jlcollinsnh says

      I’ve sent this to my tech team and we’ll see what they suggest. Meanwhile, perhaps another reader can help.

  69. Ykaur says

    Love your Stock Series, Mr. Collins! Because of you, I opened up a Vanguard VTSAX, which I contribute to every month. My goal is to contribute at least $10,000/yr for 10+ years. My question is that I work for the State of California and contribute to a Savings Plus 401K plan with no match. I am in the 25% tax bracket. I would like to have my 401K plan invest in VTSAX, but the only way that could be done is if I open up a Personal Choice Retirement Account (PCRA) with Charles Schwab and pay $50/per every VTSAX purchase/transaction, which could add up to $600/yr and $6,000 over 10 years, assuming I contribute every month. I can buy other mutual funds through Charles Schwab that do not have the $50/transaction fee.

    Under my current 401K plan with Savings Plus, I pay a $1.50/mo administration fee, and .028% fee specific to the fund. My 401K is invested in one fund called the Target Date Fund for 2040, but there are several thousand funds invested within that, so I’m unclear about what the actual fee amount is.

    Do you have any thoughts about which option would be better?

    • jlcollinsnh says

      Hi Ykaur,

      Thanks for your comment!

      Mr. Collins is currently traveling and unable to respond just now.

      We find for most questions, he has already covered the topic. Using the Search button might very well provide your answer. If not, please post your question again after October 15, 2019.

  70. Raraculus says

    I know you wrote this, what, 6-7 years ago… You just never know what reader may stumble upon your blog and find relevant and concise information suited for their retirement issues!

    Thank you for writing this! I have a 401(k) plan at work, but it has fees. I’m looking at one that has a wrap fee of .50, charged annually, and it was enough to make me hesitate. I’m also in a middling tax bracket. Your article clarified a lot of thoughts I had about funding my 401(k) beyond the employer match.

  71. MagniFIMoney says

    Wow, that’s scary and relieving at the same time. Even more reason to stuff mone into Vanguard funds, and be ina government job where you can access and use the Thrift Savings Plan, which boats fees as low as Vanguard on its fund options.

    Time to re-access the 401(k) for most people I think.

  72. Natalie says

    What a great post! I was considering investing in my work’s 401k plan, but I’m not so sure anymore. I am single, without children, and am in the 22% tax bracket. My company’s 401k plan offers both Fidelity and Vanguard investment options and a 50% match up to the first 3% of contributions. FXAIX is offered, but not VTSAX and the index funds they offer through Vanguard have higher expense ratios (>.05%).

    Another thing to note is that my company’s vesting schedule is 5 years. I have been working for them for 18 months and am not confident I will stay for 5 years.

    In my mind, I believe I would be much better off taking the money I would invest in a 401k and investing it into my Roth IRA through Vanguard instead. What are your thoughts?

  73. Dana says

    I have a company 401k account with Vanguard where I’ve only been selecting the Target Retirement Trust Plus fund based on my potential retirement year because I didn’t know what else to pick. After reading your blogs on Index Fund, I’ve been more interested in finding out what other fund options I have to choose from. I found they offer Company X Stock Index Fund and Company X Bond Index Fund. Company X is the name of the company that I work for. My question is would it be better to pick the Company X Stock or Bond Index fund instead of staying in the Target Retirement Trusts fund?

  74. Mehari Kassa says

    Thank you for your site! I’m just getting into understanding stocks and you and Mr. Money Mustache are helping me forge a plan. Question: I just started a new job and considering rolling over my 403(b) funds. My new company uses Fidelity but they have Vanguard TRFs as an option (I’m selecting these purely for the match for now). How can I determine the difference between rolling my old funds into my job’s plan vs directly into a Vanguard IRA TRF?

  75. Carey says

    Hi Mr. Collins,
    Thank you for all of the insightful advice you’ve provided in your book, on your blog, and on the ChooseFI podcast. I truly appreciate your insights and how they might help me and my husband to achieve FI.

    My husband and I are educators in the state of Hawaii and have the option to contribute to a 457 Plan called an Island Savings Plan –

    Vanguard is offered, but not a pure VTSAX option. Do you think we should invest in one of the Vanguard Target Retirement Trusts II options that are offered? It looks like the fees are .075 for the account plus a .085 “plan administrative and recordkeeping fee.” We also have 403(b) options, but I suspect the fees might be even higher.

    My husband and I are 45 and 49 years old and hope to retire in about 10 years.

    Thanks so much for your help.

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