Author Topic: 401k expense ratios - should I convince my employer to change?  (Read 5802 times)

frugalnacho

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I am looking at my 401k account and the expense ratios seem insanely high to me.    They all range from 1.53% up to 2.65%.  The ones I am invested in are 2.15, 1.68, 2.06,and 1.66.   The company is mutual of omaha.

Would it be a good idea for my employer to change companies?  How should I go about convincing them these expense ratios are ridiculous and unnecessary? Any mustaches have some advice and guidance for me?


Cpa Cat

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #1 on: March 22, 2014, 05:29:45 PM »
Our company is Mass Mutual and the highest are around 1%, with the lowest being 0.08%.

So yes, yours seems expensive.

But I wouldn't know how to get them to switch!

plantingourpennies

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #2 on: March 22, 2014, 07:49:40 PM »
Talk to HR or CFO or whoever is in charge of this.  I did - asked for Vanguard funds.  Took time, but we got them.  Fees are slightly higher than purchasing directly through Vanguard, as Fidelity tacks on their own fees to manage our 401Ks for the whole company. 

FWIW, I'm in a small/medium enterprise - between 50-100 401K participants in the plan.  That is probably a big factor in how easy to change, or how much you can get lower costs.  Bigger plans have more negotiation room with the providers like Fidelity. 

Cheddar Stacker

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #3 on: March 22, 2014, 08:29:07 PM »
Your "Ace in the hole" is that whoever is in charge of running this plan has a fiduciary responsibility to run this plan properly for the employees. These are not proper investment options, and they are not fulfilling their fiduciary duty for you. I would not suggest it, but you can actually sue your employer over this.

You need to push very, very hard to get better investment options. You have leverage if you really need it, so push as hard as you can without losing your job. Your bosses will (check that, should) respect you for standing up for your rights and helping the entire company.

Another Reader

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #4 on: March 22, 2014, 08:37:23 PM »
With those ratios and an insurance company as a provider, you probably have some kind of annuity wrapper in there.  Read the plan docs to see exactly what this is before you approach your HR folks.  With knowledge of the product, you can have a polite and well-informed discussion about some alternatives to this product.  Some conservative employers are sold on the idea their employers will get a pension-like payout through the annuity.  You may need to counter that idea, but you don't want to lose your job over this.

frugalnacho

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #5 on: March 23, 2014, 09:18:45 AM »
The company is only about 10 employees and I have a personal relationship with both of the owners.  So having an open discussion with them will be easy.  I just want to make sure I am prepared and have the proper numbers before I initiate the discussion.  My concern is that I am being short sighted and overlooking something important, so I was hoping to get some advice from others before I started talking to them and offering alternatives.

2527

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #6 on: March 23, 2014, 09:48:02 AM »
If they won't change, check out how often you can do a rollover into an IRA with Vanguard. That minimizes your exposure to the high expense ratio.

Cheddar Stacker

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #7 on: March 23, 2014, 09:59:00 AM »
The thing you might be overlooking is that the plan administrators and investment advisors need to make money for their efforts. A fair price for this is somewhere in the $10,000-20,000 range annually for a competitive plan, and this would pay the advisors and the TPA (third party administrator). Their fees need to come from somewhere and the options are:

1) High expense ratios.
2) Fees directly to employer for plan administration.
3) Fees directly to employees for plan administration via your 401k balances.

A very high total 401K balance can help get the advisors paid fairly, even with low expense ratios. With only 10 employees in a small company the total assets under management is likely low, but if it's an established company with owners who have worked there a long time, their balances are likely pretty high.

If you change the available options to all index funds, the advisors will look elsewhere for their income, and they will charge more to the employer or the employees.

A clean break to a new 401k provider might be your best play, or to let your provider know you are considering looking elsewhere if they can't offer lower fee investments without a huge fee increase. This is a very competitive industry right now with the recent fee disclosure rules, so there are many providers out there who are hungry for your business.

If you can't change providers, at the very least get them to provide on super low fee index fund as an option. This is what my wife's plan does at a huge hospital. All expense ratios are between 0.75% and 2%, except for one large cap vanguard index with an ER of 0.05% or something like that. I have 70% of her 401k in that one fund.

Good luck.

frugalnacho

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #8 on: March 23, 2014, 10:24:08 AM »
The thing you might be overlooking is that the plan administrators and investment advisors need to make money for their efforts. A fair price for this is somewhere in the $10,000-20,000 range annually for a competitive plan, and this would pay the advisors and the TPA (third party administrator). Their fees need to come from somewhere and the options are:

1) High expense ratios.
2) Fees directly to employer for plan administration.
3) Fees directly to employees for plan administration via your 401k balances.

A very high total 401K balance can help get the advisors paid fairly, even with low expense ratios. With only 10 employees in a small company the total assets under management is likely low, but if it's an established company with owners who have worked there a long time, their balances are likely pretty high.

If you change the available options to all index funds, the advisors will look elsewhere for their income, and they will charge more to the employer or the employees.

A clean break to a new 401k provider might be your best play, or to let your provider know you are considering looking elsewhere if they can't offer lower fee investments without a huge fee increase. This is a very competitive industry right now with the recent fee disclosure rules, so there are many providers out there who are hungry for your business.

If you can't change providers, at the very least get them to provide on super low fee index fund as an option. This is what my wife's plan does at a huge hospital. All expense ratios are between 0.75% and 2%, except for one large cap vanguard index with an ER of 0.05% or something like that. I have 70% of her 401k in that one fund.

Good luck.

I'm not over looking it.  That is exactly what I think we should avoid.  What exactly are we (the employees at my company) paying them our hard earned money for?  What is the mutual of omaha fund providing that a cheaper, more efficient vanguard account can't provide?  Is their 2+% management fee really worth it? 

I vaguely remember when they were giving their sales pitch many years ago, and they explained why they were better than other investment firms because when the market tanks they are able to move their funds to safer, less volatile areas of the market to minimize loss, but put them back in to still get all the positive growth.  This sounds suspiciously like trying to time the market. 

Cheddar Stacker

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #9 on: March 23, 2014, 11:33:14 AM »
My concern is that I am being short sighted and overlooking something important, so I was hoping to get some advice from others before I started talking to them and offering alternatives.

The bold part above from your quote was the reason I used that terminology. I wasn't trying to imply you weren't considering this, just trying to make sure you know how the plan administrators are paid so you can prepare for the discussion.

The providers are required to disclose their fees. If they are > $20K all in, you're paying way too much and you should look around. I don't think you should pay for the services through high expense ratios, I think you should pay a flat fee to both the advisors and the TPA, somewhere in the $4-7K range to each for their professional assistance. Anything beyond that is too much.

What you are paying them for is:
-Plan document writing and compliance - setting up the plan and all its' rules, and amending the plan to keep up with new laws.
-Investment advice (what funds to put in the platform, and employee education).
-Compliance with ERISA requirements (the $17,500 limits, highly compensated employees % limits, testing for new and terminated participants). You need to comply with all the rules so your plan isn't disqualified.
-Quarterly and Annual reporting.

You should have low expense ratio options in your plan, but expect that either the employer or employee will then have to pay fees for plan administration. This is the best way to pay for a 401k IMHO. It keeps the costs reasonable.

frugalnacho

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #10 on: March 23, 2014, 12:54:43 PM »
Still seems like a glorified middle man that is taking far more than they are actually earning.  They aren't really providing anyone with any investing advice beyond the rudimentary stuff that is told to everyone (invest in the riskier funds if you have a long time until retirement, and shift it more towards the conservative funds the closer you are to retirement - for our account they have retirement date funds, ie retire in 2040 then invest in this account named "target date 2040").

I don't know what everyone else in the company has invested, but we only have 10 employees.  I'm sure the more senior guys have lots of money in their accounts, and I wouldn't be surprise if they have a million between the top 3 guys.  I don't have anywhere near that much, but I still don't like the idea of someone dipping their hands in and taking a 2% cut to manage it.

frugalnacho

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #11 on: March 23, 2014, 01:03:56 PM »
There are no low ER funds within our plan.  The lowest fund ER is 1.25% for "capital preservation" which has a 10 year performance rate of 0.5%.  Not really sure what that account is even for, unless you plan to retire and think the market is going to tank and you want to preserve your capital.  Wouldn't a 10 year performance rate of 0.5%, and a ER of 1.25% actually mean you would have lost money in that account, or does the 0.5% already account for the ER?  It doesn't really say here.  The lowest index fund has an ER of 1.53%.

2527

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #12 on: March 23, 2014, 02:47:43 PM »
I'm 99% sure, the stated performance is after expense ratios are taken out.  Of course, the lower the expense ratio, the less of a concern that is. 

Those are very high expense ratios.  See if you can roll the 401K over into an IRA.

frugalnacho

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #13 on: March 19, 2015, 12:08:29 PM »
After much discussion and urging my bosses finally started to look into the 401k and decided it's fees were too high.  So now they want to switch to merril lynch, because that is where one of the bosses has his assets, with a financial adviser there.

I have tried convincing him that paying a financial adviser 1% of your wealth to manage it is insanity.  I keep asking questions, and he is unable to provide me answers. 

How exactly has this financial adviser advised you and helped your assets?
What has your return been compared to the market? (he has not answered me, but it sounds like he significantly under performs the market every year.  In good times he doesn't seem to care, who cares that the market did 15%? I still got 13%, and 13% is good no matter how you slice it!)
If this financial adviser is so good at predicting which sectors will outperform the market....well then why does he need to charge you 1% of your wealth? Shouldn't he be swimming in his bank vault of gold coins?

I even tried graphing out side by side investments to show how even a 1% expense compounds over long periods of time.  Most people I show that graph to have a hard time believing it until they look into the math a bit and find out that compound interest is incredibly powerful.

The new plan will have lots of index funds and other funds with pretty reasonable expense ratios which is good, but my problem is that there is a straight up 1.2% fee just to be in the plan.  So even if I go with an index fund with an ER of 0% I am still getting gouged for 1.2%, and they feel this is not only acceptable but preferable to a low cost plan.   I feel like I have no real choice but to go along with it even though I know I am paying far out the ass for services I don't want/need.

I am going to see if I can roll over my 401k into my IRA when they switch plans.  Not sure how that will affect the plan, or if i'm even going to be allowed to to that, but I am going to try.  I suppose I can live with ongoing 1.2% fees for future investments if that's my only option, but I am having a hard time swallowing that I need to roll my $90k into the new plan and pay 1.2% of that amount, every year until I retire and can roll it over on my own terms.  That's tens of thousands of dollars.

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Re: 401k expense ratios - should I convince my employer to change?
« Reply #14 on: March 20, 2015, 05:05:35 PM »
Yep - That's how the game is played. The owner's guy usually ends up getting the account.