Putting money in 401k with very limited investment options vs buying etfs in brokerage account.

[u/kujorocks]

I work for a company that gives 3% of our salaries into 401k whether I contribute to 401k or not. I am in my late 30’s and I have been maxing out for most last 5 yrs. The investments in 401k are not cheap. The cheapest and only option we have is Fidelity Total stock market fund. The rest are target funds which i have no interest in it. Does it make sense to just put that savings into brokerage account and use ETF like SCHG and save there instead of contributing to 401k? I understand the tax benefits of 401k but thinking getting better returns and better options to invest might offset the tax benefits.

[u/CryptidHunter48]

If you think you’re good enough to not use the standard flow chart for money options then you’re good enough to figure the math for this out on your own. If you can’t figure it out on your own, then you should be using the standard flow chart

[u/toodleoo77]

Fidelity total market fund is a great option, you’re way overthinking this. I would be shocked if you came out ahead doing a brokerage account vs the 401k with the tax savings.

[u/kujorocks → u/toodleoo77]

SCHG is up 143% over last years vs 82% for fidelity total market. Ytd SCHG is up 39% vs 26 of Fidelity total market.

[u/toodleoo77 → u/kujorocks]

Past returns aren’t predictive of future returns. No one has a crystal ball. That’s why total market funds are so popular - just buy everything.

[u/Dr_Faceplant]

Double Check the details of your company’s plan. My employer uses Fidelity and we have a similar set of age based and low yield funds, but we can also choose to manage the funds ourselves within Fidelity’s ecosystem. That choice is basically a brokerage account.

[u/kaithagoras]

Fidelity total market fund is up 25% in the last year. Plus you got 100% match on 3%. Plus you're getting upfront tax benefits of 20%, 30%, maybe more depending on your income.

Figure out how much actual dollars you're saving between the match and the tax savings, then think to yourself "Can I beat that /outside/ of my 401k?"

I have a sneaking suspicion that the fees (that you inconveniently don't quantify with actual numbers) aren't nearly high enough to make this math equation work in your favor outside of your 401k. Unless your hope is to bet on individual stocks that beat the market, in which case, you will lose long-term regardless of matching, tax-savings, or fees.

[u/kujorocks → u/kaithagoras]

The reason for my post is I only invest in etfs and one of my favorite etf is SCHG, which is up 143% in last five years meanwhile Fidelity total stock fund is up 82% and 39% vs 26% ytd..so that’s what caused me to ask this question…if i invest in etf that consistently beats the broad market 5-10% or more on average…in long term i think I would be better off going with SCHG in brokerage…but I still have to do the math..

[u/kaithagoras → u/kujorocks]

Something you might want to consider if you're stuck on picking your own investments like SCHG would be to either open a Traditional IRA or Roth IRA and put 7k into one of those that you would've otherwise put in the 401k (or better yet, do both 401k and IRA if you can). This way you're still getting tax benefits that you wouldnt get from a brokerage account, it's still a retirement account so you're less likely to cash in on a whim, but you have more control over your investment options.

[u/ShadowHunter]

Fidelity total stock market index fund is all you need there.

[u/08b]

If those are low cost, what else are you looking for?

Target dates funds aren’t bad at all for a lot of people.

If you have some international option as well in addition to the total US market fund you’re in great shape.

[u/kujorocks → u/08b]

I am looking at over performance of SCHG which is 39% vs 26% ytd and 143% vs 82% 5 yr period. The over performance would offset all the tax savings.

[u/08b → u/kujorocks]

Focus on investing in the broad market and not past performance.

[u/milksteak122]

A total market fund is a good option. What is the expense ratio? Even with a high expense ratio, the tax benefits are too good to pass up. You obviously need to at least get the Match. But with pretax you can reduce your taxable income and save 22-24% (depending on your tax Bracket) on those contributions today. You will likely pay less tax on that money in retirement.

Do you already max out your Roth IRA? That’s an option to save.

A taxable brokerage is a good tool to use to have tax diversification in retirement, but it isn’t as powerful as retirement plans and should not be prioritized over them.

[u/kujorocks → u/milksteak122]

I am getting 3% of my salary regardless whether I contribute to 401k. I am maxing out my Roth IRA. Tax savings are good…but funds like SCHG are up 38% ytd meanwhile Fidelity total stock market is up 25%.

[u/milksteak122 → u/kujorocks]

You could for sure set aside some for your brokerage to put money in SCHG, or you could allocate Roth IRA funds.

But you also have hindsight with SCHG. It’s performing better than the total market recently, but that will not always be the case. The total market is a more reliable long term investment. I would still prioritize my 401k due to the tax savings you get and them having a total market option.

[u/kujorocks → u/milksteak122]

SCHG has been out performing the market since 2010…it’s not just recently. Last five yrs it’s up 143% vs 82% of Fidelity total market. That is a big out performance.

[u/apiratelooksatthirty]

Post a screenshot of your options. Your employer really should have more than one singular option other than target date funds. If that’s true, then you should talk to HR about additional investment options because that’s pretty bad. Your employer is a fiduciary on your 401k so they have certain duties to provide appropriate investment options.

[u/Big_Breath_2561]

It’s going to be hard to beat the tax benefits provided by a 401k.