Evaluating the Impact of High 401(k) Fees on Rollover Decisions Using Excel

Understanding 401(k) Fees and IRA Rollovers

Rolling over an IRA into a 401(k) can provide strategic tax benefits, particularly if you plan to use the backdoor Roth IRA strategy. However, high administrative fees on your 401(k) plan can diminish your returns over time, so careful calculation is needed. This article will guide you through calculating the impact of these fees and help you evaluate if the rollover makes sense in your case. We will use Excel formulas to create an interactive model and provide a detailed scenario with calculations and results.

401(k) Fees, Roth Conversions, and Investment Growth

• 401(k) Administrative Fees: Many 401(k) plans charge annual administrative fees that are calculated as a percentage of your balance. These fees are charged on top of the fund expense ratios.
• Backdoor Roth IRA: A backdoor Roth IRA strategy allows high-income earners to contribute to a Roth IRA indirectly. By rolling over pre-tax IRA funds into a 401(k), the pro-rata rule for Roth conversions can be avoided, which helps reduce taxes owed on conversions.
• Investment Growth: The cumulative effect of 401(k) fees over time can be significant, especially if your investment grows at a steady rate. Calculating the break-even between fees and potential tax savings is essential to making an informed decision.

Step-by-Step Procedures in Excel

Step 1: Setting Up Your Variables and Data

In your Excel sheet, create the following headers in cells A1 to A10:

Step 2: Calculating the Annual Fees on 401(k)

In cell B5, calculate the Annual 401(k) Fees with this formula:

=A1 * A2

This formula multiplies the initial IRA balance by the annual fee percentage. For example, with a $300,000 balance and a 0.51% fee, the annual fee would be $1,530.

Step 3: Projecting Growth with Fees Applied

1. In Column C (labeled “Year”), list years 1 through 10.
2. In Column D (labeled “401(k) Balance”), use this formula to project the 401(k) balance with growth and fees applied:
   • • In D2:

   =A1 * (1 + A3) - $B$5

   • • In D3 and downwards:

   =D2 * (1 + A3) - $B$5

   This formula assumes that each year, the balance grows at 6% (A3) and is reduced by the 401(k) fee from B5.

Step 4: Setting Up the Alternative Scenario: Keeping the IRA

1. Column E (labeled “IRA Balance”): Project the balance of keeping the funds in the IRA with no annual fees applied.
   • • In E2:

   =A1 * (1 + A6)

   • • In E3 and downwards:

   =E2 * (1 + A6)

   This formula calculates the IRA balance assuming no administrative fees, which allows for the full 6% annual growth.

Step 5: Comparing Results

In Column F (labeled “Difference”), subtract the projected 401(k) balance from the IRA balance to see the cumulative impact of fees.

=E2 - D2

Copy this formula down for each year to show the yearly difference in balances.

Example Scenario and Results

With a starting balance of $300,000, a 0.51% 401(k) fee, and a 6% annual growth rate over ten years, you can see how much higher the IRA balance remains due to avoiding the annual fees.

Example Table

Other Approaches

• Partial Roth Conversions: Keep the IRA and perform partial Roth conversions each year, paying tax only on the converted amount. This can help you avoid high 401(k) fees while gradually transferring funds to a Roth.
• Invest in Low-Cost Index Funds in IRA: Many IRAs allow you to invest in low-cost index funds, which can offset the advantage of rolling over to a 401(k) with limited investment options.

Using Excel, you can clearly see that high 401(k) administrative fees have a significant impact on your returns over time. By comparing the growth of a fee-free IRA with the fee-burdened 401(k), you have data to support your decision on whether rolling over the IRA for backdoor Roth purposes outweighs the cost.
In your case, keeping the IRA may be financially favorable unless a lower-fee 401(k) option becomes available.