Author Topic: Change company's 401k plan for lower expense ratio?  (Read 2888 times)

exitstrategy

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Change company's 401k plan for lower expense ratio?
« on: August 30, 2013, 07:01:23 AM »
I run a small company and a few years ago we instituted a 401k plan as an employee benefit (that I also take advantage of, as an owner/employee).  I was advised by my "Financial Advisor" which company and funds to put in the plan.  I thought I was doing a lot of research and making sure that the plan would be good for me, good for employees and good for the company...but there were so many decisions to make, I recognize now that I was steered into funds that are not the best.  Basically, they are R shares (so the advisor gets a cut), plus they are obviously mutual funds (so the mutual fund company gets a cut).  So while they may not have astronomically high expense ratios (I've seen worse), they are high enough that they wouldn't be what I'd choose...the average total expense ratio is about 3%.

My problem is this...it seems like a giant pain to move the plan to a new company: my "adviser"(of course) strenuously opposes it, my employees will be freaked out if I start making huge changes to a very new plan, and there's probably a risk I'll just end up in another plan with similar expense ratios.   Does anyone here know whether (and how) I can cut my advisor out of this loop and negotiate fund selection directly with the mutual fund company?   Or would you recommend I just take the plunge, admit the error to employees, and roll the whole thing to someplace like Vanguard?  Or is it possible to take a chicken-hearted approach, and can I roll my 401k to a personal IRA with lower expenses?  (I'm not even sure if the latter is legal.)

Thanks for any advice...much appreciated!

matchewed

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Re: Change company's 401k plan for lower expense ratio?
« Reply #1 on: August 30, 2013, 07:13:58 AM »
Is your "Financial Advisor" actually your financial advisor or are they someone who works for the company the plan is administered by?

If it is someone who works for the company the plan is administered by I would consider contacting a Vanguard or Fidelity and inform them that you own a business and have them walk you through the process. Also http://www.irs.gov/Retirement-Plans/401%28k%29-Resource-Guide read all the sections under the Plan Sponsor, do some research on this, as an employer and participant it would be good for you to get a better grasp on this.

I'm not a manager by far but I would create or have the new company who administrates the plan create some scenarios. Be open that you are looking for other options which will have reduced fees and costs, transparency will be key so maybe have a small committee with various employees be included in this process.

ioseftavi

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Re: Change company's 401k plan for lower expense ratio?
« Reply #2 on: August 30, 2013, 07:16:33 AM »
I run a small company and a few years ago we instituted a 401k plan as an employee benefit (that I also take advantage of, as an owner/employee).  I was advised by my "Financial Advisor" which company and funds to put in the plan.  I thought I was doing a lot of research and making sure that the plan would be good for me, good for employees and good for the company...but there were so many decisions to make, I recognize now that I was steered into funds that are not the best.  Basically, they are R shares (so the advisor gets a cut), plus they are obviously mutual funds (so the mutual fund company gets a cut).  So while they may not have astronomically high expense ratios (I've seen worse), they are high enough that they wouldn't be what I'd choose...the average total expense ratio is about 3%.

My problem is this...it seems like a giant pain to move the plan to a new company: my "adviser"(of course) strenuously opposes it, my employees will be freaked out if I start making huge changes to a very new plan, and there's probably a risk I'll just end up in another plan with similar expense ratios.   Does anyone here know whether (and how) I can cut my advisor out of this loop and negotiate fund selection directly with the mutual fund company?   Or would you recommend I just take the plunge, admit the error to employees, and roll the whole thing to someplace like Vanguard?  Or is it possible to take a chicken-hearted approach, and can I roll my 401k to a personal IRA with lower expenses?  (I'm not even sure if the latter is legal.)

Thanks for any advice...much appreciated!

3% is astronomically high dude.  I would suspect that you are dealing with an advisor from an insurance company or a VERY expensive financial services firm.

Depending on the number of employees, you should look into setting up the 401(k) with a discount broker such as Vanguard, Schwab, or Fidelity.  All are excellent choices, but most of them target businesses with 20 employees or more - smaller than that, the recordkeeping expenses get way too high.  In all cases, you'll cut your average expense ratio down to 1% or less for mutual funds (much more, if you do index funds only with Vanguard).

How many employees do you have?  Also, to answer your question - It is very unlikely that you can negotiate directly with the fund company and cut your advisor out of the loop.  The 3% you are being charged supports that business model and the fund company runs its business so that the advisor is "your guy". 

Your best bet is to change providers.  It will be a moderate pain in the ass, but you will save a fortune.  Take whatever your total assets in the 401(k) plan for all employees and multiply it by 2%.  That is how much you'll save in the first year, and it'll only grow from there.

Ipodius

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Re: Change company's 401k plan for lower expense ratio?
« Reply #3 on: August 30, 2013, 07:23:34 AM »
Ouch ... that is really, really high. It's definitely worth changing. Even if it's a lot of work, if you worked it out you are getting paid thousands of an hour to do it, purely based on your own retirement!

You'll want to find a fee-based financial advisor (someone who you pay X dollars per hour, not someone who charges you X % on your investment) and find a much cheaper plan. No experience personally, but something like this is a good place to start:

https://www.ricedelman.com/cs/invest_with_edelman/the_edelman_401k

Good job on spotting it, and being willing to change! Many people end up ignoring this type of thing, or being aware of it but not making a change.

exitstrategy

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Re: Change company's 401k plan for lower expense ratio?
« Reply #4 on: August 30, 2013, 07:45:39 AM »
Thanks for all the great input so far...both the concrete starting places, and also for the encouragement to act (and not be strong-armed by the advisor).

To answer questions/provide details:
- only 6 people in the plan, so yes...below threshold of some options.
- financial advisor is an outside professional.  charges % under advisement (ugg).  In his defense, he's done a very good job with our personal SEP plans in the past...at the time, it seemed worth his fees (1.5% on the personal accts).  Now that I'm educating myself, I know I have other options.  He's a nice guy...I just need to rip the band-aid off and part ways.   You're totally right, it will cost me tens of thousands of dollars if I don't. 

I'm stunned and appalled the more I learn about 401ks, and the way they rip off employees (and employers...I hate seeing our company match eaten away by expense ratios, too). 

GreenGuava

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Re: Change company's 401k plan for lower expense ratio?
« Reply #5 on: August 30, 2013, 11:05:26 AM »
at the time, it seemed worth his fees (1.5% on the personal accts). 

No one, except maybe Warren Buffet, is worth that much unless he's shielding you from behavioral problems.  Your expected return isn't much more than 8% nominal - he's taking 20% of your profits!  How much above a basic market index is the return from him going to be?  The odds that someone is going to beat the basic market by 1.5% or more over any long period of time is practically nil - and if you compute what fraction of your profits above a basic market index he's going to take, it's insanely expensive.