Author Topic: Need help crafting response to 401(k) management firm due to high fees  (Read 1347 times)

ysette9

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I sent off an email into the ether to complain about the high fees on the target date fund options in my company's 401(k) suite of investment options. After some poking around, I actually managed to get a real person on the other side of the veil to respond to me. It was a polite response that basically said "our TDFs use primarily actively managed funds, which is why the fees are higher than the Vanguard TDFs you compared them too. The goal of the active fund is to achieve higher returns than those of an index."

I'd like to compose a polite response that basically registers my opinion that this is probably hogwash, referencing solid academic research that most active funds under perform after accounting for fees. Can you point me in a good direction? I know I've heard of this so often it is taken as gospel, but I'd like a reference or two that can stand on their own.

Also, ideally I'd like to compare performance of a Vanguard TDF to our internal company one, except since it is internal to our 401(k) plan, there is no ticker symbol. Does anyone know a way around that problem? Thanks in advance for your input.
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Dicey

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #1 on: August 08, 2017, 06:35:53 PM »
I have nothing to add that's helpful, except to say that I read your letter on the other thread and thought it was a thing of beauty. Good for you for taking this on!
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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #2 on: August 08, 2017, 07:06:37 PM »
Rather than arguing with the management firm, who is in the business of employing people based on those fees, you might attack your HR instead and say, look, these fees are garbage. Can we get an option that has index funds available? They don't have to be vanguard, even if that's ideal.

Dollar Slice

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #3 on: August 08, 2017, 07:19:40 PM »
This might be a good reference source for you:
https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

Other thoughts - does your 401k give you numbers like YTD, 1-yr, 3-yr, 5-yr etc. returns? You can compare those to the same periods for index funds, maybe? And if they underperformed, you can call bullshit on them.

Also: Compare the fees from the 401k active funds to Vanguard's active funds. That would help prove that their high fees are not solely due to the active vs. passive debate, but are actually just gouging you. (Examples: STAR, Wellesley Income, Wellington, Windsor, US Growth, US Value... but there are lots of them, mostly with fees in the .20-.40% range. You can do a filter for index vs. active in their funds list.)
« Last Edit: August 08, 2017, 07:21:14 PM by Dollar Slice »
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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #4 on: August 08, 2017, 07:22:13 PM »
The same issue exists at my company and I've brought it up to HR a few times with no change. I'm not going to give up. Every public forum when they do financial education, I bring up how fees are eating up profits. I'm trying to get on the investment committe now, which includes a few employees, to effect change.

Indexer

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #5 on: August 08, 2017, 07:38:29 PM »
As it has been said, don't go to the management company, go to HR. Here, the following will get their attention.

Fidelity, an active fund management company, was sued by their own employees for this. http://money.cnn.com/2014/08/18/retirement/fidelity-lawsuits/index.html 

Let me repeat, Fidelity is an active fund management company with boatloads of money to spend on attorneys. If they can't justify expensive active funds in their 401k who can?

How about Wells Fargo? Oh no, also sued.  http://www.insurancejournal.com/news/national/2016/11/28/433221.htm

Or Boeing? https://www.bizjournals.com/seattle/news/2015/11/05/boeing-settles-retirement-plan-lawsuit-for-57.html

Even the great Jamie Dimon, JP Morgan Chase also sued: http://www.investmentnews.com/article/20170126/FREE/170129957/jpmorgan-sued-for-self-dealing-in-its-401-k-plan

What about Blackrock, they have index funds, they are the biggest fund company on Earth... sued. http://www.investmentnews.com/article/20170410/FREE/170419997/blackrock-sued-for-alleged-self-dealing-in-its-401-k-plan

The list goes on and on... but I saved the best for last.

Capital Group, the sponsor of American Funds, was sued for their 401k by their own employees. http://www.investmentnews.com/article/20170615/FREE/170619965/capital-group-the-sponsor-of-american-funds-sued-for-self-dealing-in

American Funds lives and breathes active management. They don't have index funds. They brag when they beat index funds, and they actually have a leg to stand on in a few of those cases. They normally do better than other active fund shops. They have funds that have been around since the great depression, pictures of return charts where a speck on a graph grows to be taller than the Statue of Liberty, and it represents your returns(I'm not making that up). They BELIEVE in active management. Their employees sued them.



Many active fund managers invest their own money in index funds.


letired

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #6 on: August 08, 2017, 08:06:31 PM »
h e l l y e s s s s s

I am bookmarking the heck out of this thread!

ysette9

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #7 on: August 08, 2017, 09:27:11 PM »
Thanks for the input. I started first with HR and they funneled me back the response from the investment management agency. They seem to be the middleman for passing along messages. They will see everything I have to say even if they aren't responding directly.

I'll check out the link tomorrow when I have more brainpower. The links on other companies getting sued is powerful and somethjhg I will include.

I looked up the prospectus statements of several TDFs and while they lost 5-year performance compared to a benchmark, they don't say what the benchmark is. It says right there though that the Morningstar ratings are 1-star and the performance is "low" or "below average". I'll point that out for lack of any better comparisons.
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ysette9

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #8 on: August 08, 2017, 09:29:13 PM »
And thanks for the compliment, Dicey. :)
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PizzaSteve

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #9 on: August 08, 2017, 11:09:34 PM »
As it has been said, don't go to the management company, go to HR. Here, the following will get their attention.

Fidelity, an active fund management company, was sued by their own employees for this. http://money.cnn.com/2014/08/18/retirement/fidelity-lawsuits/index.html 

Let me repeat, Fidelity is an active fund management company with boatloads of money to spend on attorneys. If they can't justify expensive active funds in their 401k who can?

How about Wells Fargo? Oh no, also sued.  http://www.insurancejournal.com/news/national/2016/11/28/433221.htm

Or Boeing? https://www.bizjournals.com/seattle/news/2015/11/05/boeing-settles-retirement-plan-lawsuit-for-57.html

Even the great Jamie Dimon, JP Morgan Chase also sued: http://www.investmentnews.com/article/20170126/FREE/170129957/jpmorgan-sued-for-self-dealing-in-its-401-k-plan

What about Blackrock, they have index funds, they are the biggest fund company on Earth... sued. http://www.investmentnews.com/article/20170410/FREE/170419997/blackrock-sued-for-alleged-self-dealing-in-its-401-k-plan

The list goes on and on... but I saved the best for last.

Capital Group, the sponsor of American Funds, was sued for their 401k by their own employees. http://www.investmentnews.com/article/20170615/FREE/170619965/capital-group-the-sponsor-of-american-funds-sued-for-self-dealing-in

American Funds lives and breathes active management. They don't have index funds. They brag when they beat index funds, and they actually have a leg to stand on in a few of those cases. They normally do better than other active fund shops. They have funds that have been around since the great depression, pictures of return charts where a speck on a graph grows to be taller than the Statue of Liberty, and it represents your returns(I'm not making that up). They BELIEVE in active management. Their employees sued them.



Many active fund managers invest their own money in index funds.
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ysette9

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #10 on: August 09, 2017, 02:05:33 PM »
I'm crafting my response and I'd appreciate any feedback on what I have so far.

Quote
Good afternoon,

I appreciate the time taken to listen to and respond to my concerns regarding expense ratios, especially those in the Target Date Funds (TDFs) offered in the COMPANY 401(k) savings plan. In summary, I understand that the reason given for the higher fees is that the Target Date Funds are actively managed with the goal of beating the market.

I’d like to express my concern with this strategy for several reasons: 1) overwhelming research that shows that active management underperforms market indices, 2) the specific underperformance of our TDFs as self-reported, and 3) the fiduciary responsibility of our 401(k) savings plan administrators.

1)   Underperformance of active management

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals." --Warren Buffett Berkshire Hathaway Annual Letter, 1996

Mr. Buffett’s recommendation is consistent with the great majority of academic research done on investment costs and index fund performance. When one looks at active funds, especially over longer time periods, they are much less likely to outperform a passive index fund. When one accounts for returns after fees and survivorship bias, the group of funds that outperform over the long term is very small . One can never know the future of market performance, but research has shown that fund costs is “the most dependable predictor of performance, and that is one variable that we can control.

2)   Underperformance of COMPANY’s Target Date Funds

Judging the performance of our specific Target Date Fund options on the COMPANY 401(k) savings plan is challenging given that these funds do not have a ticker symbol and do not disclose what benchmark they are compared against. Nonetheless, looking at the fact sheets available online through INVESTMENT MANAGING COMPANY we can see that the self-reported performance is less than stellar. Below are some of the TDFs available and their 5-year performance results, acknowledging that a 5-year period is short in the investing world, but that is the longest period for which data are available.

Target Date Fund   5-year performance compared to benchmark   Note
2020   Matches benchmark   Morningstar Rating – 2 stars;
Morningstar Return – Below Average
2025   Matches benchmark    Morningstar Rating – 1 star;
Morningstar Return - Low
2035   Slightly underperforms benchmark    Morningstar Rating – 1 star;
Morningstar Return - Low
2045   Slightly underperforms benchmark   Morningstar Rating – 1 star;
Morningstar Return - Low
2055   Slightly underperforms benchmark   Morningstar Rating – 1 star;
Morningstar Return - Low

The Morningstar website  provides definitions for their rating system and describes a 1-star fund as follows (emphasis added):

 “The 10% of funds in each category with the highest risk-adjusted return receive 5 stars, the next 22.5% receive 4 stars, the middle 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.”

We are seeing through the TDF’s self-reported performance that they are underperforming the benchmark and therefore not returning the higher-than-market returns that is the goal justifying the increased expense over a passive equivalent. In my mind this further justifies why COMPANY should offer passive funds instead of active.

3)   Fiduciary responsibility

The investment managers responsible for the COMPANY 401(k) plan have a fiduciary responsibility to offer the best interest of their employees per the federal Employee Retirement Income Security Act. Other large companies have found themselves the target of litigation due to having too many plan assets in high-cost actively managed funds when lower-cost, better-performing funds were easily available (Fidelity , Boeing , JP Morgan Chase , and many others). I trust that the managers at MANGING CO have the COMPANY employees’ best interest at heart. Given the overwhelming evidence that passive investing is superior in the majority of cases, I expect the management team to act on these data and provide fund selections that are most likely to provide the best value and performance in the future.

I have footnotes with references to various articles that i won't try to reproduce here, but thanks to those who helped with links above. Comments?
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bognish

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #11 on: August 09, 2017, 02:47:37 PM »
How big is your company, or more importantly how many of the employees are likely to be participants with large balances in the 401k plan?

If its a small company without much assets in the plan the company might not have many options for who is going to run the plan, what funds are available or what expense ratio is offered.

It could also be that your company is burying their administrative cost of running the plan in the fund expense ratio. The smaller the plan the bigger impact that will make on the expense ratio for the few employees participating.

I am on the investment committee for my company's plan and we recently changed 401k providers. We have a small plan and a small % of employees participate. We did not have many options for firms who wanted to  run the plan and until we get more assets in the plan the expenses will be relatively high. That said we do not have any 1 or 2 star funds.

ysette9

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #12 on: August 09, 2017, 03:03:15 PM »
We are a Fortune 100 company with many employees with a pretty high average balance according to Brightscope. There are other passive index fund options in our investment lineup that have really low expense ratios, so I am confident it can be done.
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Another Reader

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #13 on: August 09, 2017, 04:18:32 PM »
So the problem is the one target date fund?  You have lots of other choices with low fees?  Personally, I would not make a big fuss over this.  Construct your own allocation from the cheap funds and reallocate annually.  Not something to upset HR over in my book.  Bringing up lawsuits when a lot of the offerings are good makes you look like a bit of a complainer. 

ysette9

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #14 on: August 09, 2017, 05:30:17 PM »
It is all of the target date funds which represent about half of the offerings and is also the default choice if someone neglects to go in and actively make a choice. I can leave off the part about lawsuits because it is a bit direct, but I think it is important to make a stand. I was in these TDFs for years for convenience before I woke up and realized what is going on. Other people shouldn't pay the tax for being less educated or having less interest in personal investing than me.
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Indexer

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #15 on: August 09, 2017, 10:44:31 PM »
We are a Fortune 100 company with many employees with a pretty high average balance according to Brightscope. There are other passive index fund options in our investment lineup that have really low expense ratios, so I am confident it can be done.

I'm going to piggy back off Another Reader here. If they have low cost index options don't bring up lawsuits. The companies I referenced before who were sued were forcing their employees into high cost funds. Those employees didn't have the low cost option as a choice. They were being gouged because the employer didn't bother to shop around or worse forced them into their own high cost fund(self dealing), and that is a breach of fiduciary duty. If you have index funds that charge 0.1% or less then your employer did shop around, but that doesn't mean the whole lineup has to be low cost index funds.

I've seen plans where they have Vanguard funds as all the options for individual funds, but then had another companies' TDFs. I personally don't agree with it, but that's a difference in investment opinion. A difference in investment opinion isn't the same thing as a breach in fiduciary duty.

ysette9

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #16 on: August 10, 2017, 01:41:07 PM »
Thanks for the feedback. I've removed the bit about the lawsuits but kept the discussion about fiduciary responsibility. About to send it off now!
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Dicey

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #17 on: August 13, 2017, 02:23:26 PM »
Kudos to you and fingers crossed for everyone. Go, ysette9!
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ysette9

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Re: Need help crafting response to 401(k) management firm due to high fees
« Reply #18 on: August 14, 2017, 10:59:17 AM »
Thanks! I appreciate the armchair cheering section. :)
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