Author Topic: Why do companies offer 401K's with high annual fees?  (Read 7911 times)

decessus

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Why do companies offer 401K's with high annual fees?
« on: August 02, 2015, 12:02:15 PM »
I was doing a bit of startup job research and I saw some startups with 401K plans with high annual fees. Is there a reason why startups or companies wouldn't use someone like Vanguard (or some other low cost provider)? It seems like an easy win...Do companies get a kickback for going with a high cost provider? 

Reference: http://fortune.com/2012/06/25/is-your-401k-ripping-you-off/

matchewed

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Re: Why do companies offer 401K's with high annual fees?
« Reply #1 on: August 02, 2015, 12:08:25 PM »
Because sometimes (often) employers are just as financially ignorant as any other random ass person on the street?

pk_aeryn

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Re: Why do companies offer 401K's with high annual fees?
« Reply #2 on: August 02, 2015, 12:39:38 PM »
Anytime it's not one's own money, people don't care what it costs.


Bucksandreds

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Re: Why do companies offer 401K's with high annual fees?
« Reply #3 on: August 02, 2015, 12:40:06 PM »
Often times the employer gets a piece of the fees.

matchewed

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Re: Why do companies offer 401K's with high annual fees?
« Reply #4 on: August 02, 2015, 12:42:24 PM »
Often times the employer gets a piece of the fees.

Citation needed.

forummm

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Re: Why do companies offer 401K's with high annual fees?
« Reply #5 on: August 02, 2015, 01:00:30 PM »
Sometimes it's the employer's buddy that is the salesman. And maybe sometimes the employer just believes the sales job that the higher fees are there because the funds are better.

Roots&Wings

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Re: Why do companies offer 401K's with high annual fees?
« Reply #6 on: August 02, 2015, 01:44:33 PM »
I asked this question in our last 401k meeting and was told that “Vanguard costs less because their funds don’t perform as well, and we want the best service and performance for our company." Truly astounding!

nereo

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Re: Why do companies offer 401K's with high annual fees?
« Reply #7 on: August 02, 2015, 02:01:29 PM »
Often times the employer gets a piece of the fees.

Citation needed.
I've never heard of an employer getting some of the fees - is that even legal?

Mostly I think it comes down to ignorance and salesmanship.  Imagine you are a small HR department with 1-5 employees for a company with a few hundred people in it.  You're tasked with setting up your company's 401(k) plan.  You have no idea how to do this so you make a few calls to several companies with glossy pamplets showing healthy-looking 50-something retirees playing on their sailboat or hugging their grandkids.  A local rep (aka "wealth management planner") shows up and starts talking about weight-adjusted beta values, minimizing downside risk and forward looking metrics.  He shows you a few graphs showing the incredible wealth clients have accumulated over 40 years of investing (never once comparing it to the SP).  Perhaps this takes place at restaurant far nicer than you'd go to yourself.

You pick the guy who sounded the best because you honestlyt don't know any better, and because you have to pre-select 6 interviewees out of a stack of 100 and deal with johnny who is a good worker but won't stop making comments about sally's breasts and your assistant just gave his 2 weeks notice.

...at least, I imagine that's what happens a lot of the time.


matchewed

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Re: Why do companies offer 401K's with high annual fees?
« Reply #8 on: August 02, 2015, 02:19:34 PM »
Often times the employer gets a piece of the fees.

Citation needed.
I've never heard of an employer getting some of the fees - is that even legal?

Mostly I think it comes down to ignorance and salesmanship.  Imagine you are a small HR department with 1-5 employees for a company with a few hundred people in it.  You're tasked with setting up your company's 401(k) plan.  You have no idea how to do this so you make a few calls to several companies with glossy pamplets showing healthy-looking 50-something retirees playing on their sailboat or hugging their grandkids.  A local rep (aka "wealth management planner") shows up and starts talking about weight-adjusted beta values, minimizing downside risk and forward looking metrics.  He shows you a few graphs showing the incredible wealth clients have accumulated over 40 years of investing (never once comparing it to the SP).  Perhaps this takes place at restaurant far nicer than you'd go to yourself.

You pick the guy who sounded the best because you honestlyt don't know any better, and because you have to pre-select 6 interviewees out of a stack of 100 and deal with johnny who is a good worker but won't stop making comments about sally's breasts and your assistant just gave his 2 weeks notice.

...at least, I imagine that's what happens a lot of the time.

Don't know about the legality of it but that would be a major conflict of interest when deciding on your employee's compensation. Morally shit at the very least.

Goldielocks

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Re: Why do companies offer 401K's with high annual fees?
« Reply #9 on: August 02, 2015, 02:37:24 PM »
Really?  Seems obvious, because the sales person did a great job and likely made it very easy for the small business to set it up.  A small business is trying to do so many things at once that they are swamped and grateful when a benefit company makes it easy for them.   

Chances are vanguard has fewer sales people that actively seek out small businesses and require payroll or accounting or HR to provide more effort than these high rate firms.

It isn't the company that is paying for these high fees, remember, and just having a matching 401k is all most need to attract applicants and retain employees.

MDM

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Re: Why do companies offer 401K's with high annual fees?
« Reply #10 on: August 02, 2015, 03:04:15 PM »
I asked this question in our last 401k meeting and was told that “Vanguard costs less because their funds don’t perform as well, and we want the best service and performance for our company." Truly astounding!

Responses that come to mind include "everyone is entitled to his own opinion, but not to his own facts" and "in God we trust, all others bring data."

If asked for your data, you could do worse than starting with http://www.spindices.com/documents/spiva/spiva-us-year-end-2014.pdf.

libertarian4321

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Re: Why do companies offer 401K's with high annual fees?
« Reply #11 on: August 03, 2015, 02:11:20 AM »
If a small employer goes to someone like Vanguard, Vanguard will almost certainly charge the employer some amount of money to set up and administer the 401k.  It might not be a ton, but it will be something.

However, other high cost 401ks will tell the small business that they will run the 401k FOR FREE.  No cost to the employer.  This, of course, looks fantastic to the employer.  They can tell prospective employees that they have a 401K program, and it doesn't cost them anything.

Of course, because they make it "free" to the employer, they have to (Mod Note: See below) the employees with outrageous fees.

Happens all the time.  My current small company has a high cost 401k that costs the company nothing, but the employees are  (Mod Note: See below) It's so bad that I've considered not even participating, despite the many advantages of a 401K.  I'm quite sure this is common for most small, and even some larger companies.

Mode Note:
Forum Rule #6: "Use good taste." There's nothing wrong with using good, solid, hyperbole and exaggeration in a metaphor, but we expect our members to refrain from tasteless comparisons that are completely of proportion.  As an example, it not appropriate to compare rape, domestic assault, or genocide to unfair business practices that result in being overcharged for a service.
« Last Edit: August 03, 2015, 01:13:07 PM by swick »

Bucksandreds

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Re: Why do companies offer 401K's with high annual fees?
« Reply #12 on: August 03, 2015, 04:36:10 AM »
Often times the employer gets a piece of the fees.

Citation needed.

It comes back in the form of 'administrative cost' compensation. It just makes the cost for the employer nil. Your company would rather you pick up the costs to administer their program than them. To the other posters your company worth millions to billions of dollars is not ignorant to anything money related. They just don't care about you.

matchewed

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Re: Why do companies offer 401K's with high annual fees?
« Reply #13 on: August 03, 2015, 05:18:12 AM »
Often times the employer gets a piece of the fees.

Citation needed.

It comes back in the form of 'administrative cost' compensation. It just makes the cost for the employer nil. Your company would rather you pick up the costs to administer their program than them. To the other posters your company worth millions to billions of dollars is not ignorant to anything money related. They just don't care about you.

That is different than what you said. It is totally fine for a company to reduce the fees they have to pay. That does not equal getting a cut of the fees their employees pay.

ETA: Furthermore from what I can see it is employees who pay administrative fees, if there are any and it is not baked into the funds within the 401k plan.
« Last Edit: August 03, 2015, 05:37:48 AM by matchewed »

pbkmaine

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Re: Why do companies offer 401K's with high annual fees?
« Reply #14 on: August 03, 2015, 05:50:13 AM »
There is a cost to running a defined contribution plan, and the money has to come from somewhere. As an example, one of my clients was putting in a new plan with Vanguard, using mostly index funds. Vanguard charged participants a fee of $350 per year for administrative costs. As the plan got bigger, the fee decreased, and then gradually went away, because there were enough assets in the plan to cover the costs.

forummm

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Re: Why do companies offer 401K's with high annual fees?
« Reply #15 on: August 03, 2015, 07:28:52 AM »
There is a cost to running a defined contribution plan, and the money has to come from somewhere. As an example, one of my clients was putting in a new plan with Vanguard, using mostly index funds. Vanguard charged participants a fee of $350 per year for administrative costs. As the plan got bigger, the fee decreased, and then gradually went away, because there were enough assets in the plan to cover the costs.

$350/person?

maryofdoom

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Re: Why do companies offer 401K's with high annual fees?
« Reply #16 on: August 03, 2015, 07:48:34 AM »
Sometimes it's the employer's buddy that is the salesman.

At my previous job, the 401K guy was one of the president's basketball buddies. The rest of the office was only able to set up meetings with him once a year. When I finally had the chance to meet with him (no contributing in your first year of employment, plebs) he tried to steer me into annuities...plus he wanted to get his hands on all my existing accounts.

HAHAHA no.

pbkmaine

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Re: Why do companies offer 401K's with high annual fees?
« Reply #17 on: August 03, 2015, 07:59:13 AM »
$350 per person for a start up plan is not unusual. There are many costly requirements for defined contribution plans - filing, disclosures, education, mailings to participants. Most of the time these costs are buried by using actively managed funds with high fees. Some fund companies will waive fees if they expect that plan assets will build up quickly. Vanguard does not. In general, they charge you what it costs them.

Proud Foot

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Re: Why do companies offer 401K's with high annual fees?
« Reply #18 on: August 03, 2015, 09:09:46 AM »
As others have mentioned there is a cost to everything.  But there are a lot of things that will influence the amount of fee each participant is charged.  And you always have to consider the asset size in the plan.  I did not look but I am sure many of the big providers such as Vanguard have a minimum asset requirement for them to hold your plan.

Sibley

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Re: Why do companies offer 401K's with high annual fees?
« Reply #19 on: August 03, 2015, 09:33:41 AM »
At a previous company, the 401k was a guy who'd used to be a partner at the firm then left. Inside knowledge. It was eventually changed, but I suspect that the guy retired. Either that or the firm that merged in objected to the buddy-buddy aspect.

Currently, I'm stuck with Prudential at work and the website is so bad I can't even figure out how to check my allocations. Need to call them and get the walk through...

Bucksandreds

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Re: Why do companies offer 401K's with high annual fees?
« Reply #20 on: August 03, 2015, 10:06:00 AM »
Often times the employer gets a piece of the fees.

Citation needed.

It comes back in the form of 'administrative cost' compensation. It just makes the cost for the employer nil. Your company would rather you pick up the costs to administer their program than them. To the other posters your company worth millions to billions of dollars is not ignorant to anything money related. They just don't care about you.

That is different than what you said. It is totally fine for a company to reduce the fees they have to pay. That does not equal getting a cut of the fees their employees pay.

ETA: Furthermore from what I can see it is employees who pay administrative fees, if there are any and it is not baked into the funds within the 401k plan.

Not quite.  You kind of come off as an aggressive corporate HR type.   All I am saying is that the higher than necessary cost of the plans is because not all of that fee paid is going to Fidelity, American Funds, etc.  A portion of that is being sent back to the employer. Again the employer provides a 401K as a 'benefit' to the employee but when the employer wants the benefitee to subsidize the cost of said benefit to the benfitor, it's less of a benefit than it appears on the surface.

matchewed

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Re: Why do companies offer 401K's with high annual fees?
« Reply #21 on: August 03, 2015, 11:22:05 AM »
Often times the employer gets a piece of the fees.

Citation needed.

It comes back in the form of 'administrative cost' compensation. It just makes the cost for the employer nil. Your company would rather you pick up the costs to administer their program than them. To the other posters your company worth millions to billions of dollars is not ignorant to anything money related. They just don't care about you.

That is different than what you said. It is totally fine for a company to reduce the fees they have to pay. That does not equal getting a cut of the fees their employees pay.

ETA: Furthermore from what I can see it is employees who pay administrative fees, if there are any and it is not baked into the funds within the 401k plan.

Not quite.  You kind of come off as an aggressive corporate HR type.   All I am saying is that the higher than necessary cost of the plans is because not all of that fee paid is going to Fidelity, American Funds, etc.  A portion of that is being sent back to the employer. Again the employer provides a 401K as a 'benefit' to the employee but when the employer wants the benefitee to subsidize the cost of said benefit to the benfitor, it's less of a benefit than it appears on the surface.

Chill with the ad hominem. See rule #1 of the forums. Do you have evidence or proof that a portion of the fee goes back to the employer? If no I think you're wrong. All I did was ask for proof. You've provided none. It's pure conjecture and I have never heard of such a thing before.

pbkmaine

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Re: Why do companies offer 401K's with high annual fees?
« Reply #22 on: August 04, 2015, 03:16:22 AM »
For an employer to receive kickbacks from the plan would not only be a fiduciary breach but also contrary to ERISA.

BlueHouse

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Re: Why do companies offer 401K's with high annual fees?
« Reply #23 on: August 04, 2015, 06:12:56 AM »
I set up the 401k plan for my company. Among all the other administrative responsibilities, I was also setting up payroll and taxpay. The company I spoke to for payroll also did taxpay and also offered a 401k plan. I chose it because a one stop shop was easy and I didn't know or want to do more research. It costs 240/year to administer. A couple of years ago I decided to switch to a vanguard 401k, but before I did the switch, the payroll company told me about another option they offer that offers the funds I wanted. It was more money but had hundreds of funds available. I selected it with the caveat that they had to keep the price the same at 240/year. I'm sure that still costs more than vanguard would charge me, but I don't know how much (employee plan-not solo)

As the employer, I have the option to  pay all admin fees or to spread them across all employees and reduce their returns to cover the fees. Because I'm also an employee with a 401k, of course I don't want to reduce my returns so I have the company pay the full expense.

Bucksandreds

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Re: Why do companies offer 401K's with high annual fees?
« Reply #24 on: August 04, 2015, 06:38:43 AM »


As the employer, I have the option to  pay all admin fees or to spread them across all employees and reduce their returns to cover the fees. Because I'm also an employee with a 401k, of course I don't want to reduce my returns so I have the company pay the full expense.

This is what I'm talking about.  Structured wisely and the 'kick back' covers 'administrative costs' of the employer.  I never said that the employer gets a check entitled 'kick back.'  They get no bill ever and in some cases, they may even get cut a check to cover their 'costs.' The employer just gives a lesser benefit so as to make higher profit, overall.  Just google about the countless validated lawsuits over high fees related to 'custodial costs' paid for by the plans to the employer.  No one is dumb enough to hand envelopes of cash.  Shady stuff is done through structuring agreements using verbage to make it appear as something else.

matchewed

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Re: Why do companies offer 401K's with high annual fees?
« Reply #25 on: August 04, 2015, 06:43:28 AM »


As the employer, I have the option to  pay all admin fees or to spread them across all employees and reduce their returns to cover the fees. Because I'm also an employee with a 401k, of course I don't want to reduce my returns so I have the company pay the full expense.

This is what I'm talking about.  Structured wisely and the 'kick back' covers 'administrative costs' of the employer.  I never said that the employer gets a check entitled 'kick back.'  They get no bill ever and in some cases, they may even get cut a check to cover their 'costs.' The employer just gives a lesser benefit so as to make higher profit, overall.  Just google about the countless validated lawsuits over high fees related to 'custodial costs' paid for by the plans to the employer.  No one is dumb enough to hand envelopes of cash.  Shady stuff is done through structuring agreements using verbage to make it appear as something else.

Sigh...

No, what was said was - The employer or employee can incur the administrative costs.

What you said was -
Quote
A portion of that is being sent back to the employer.
and
Quote
Often times the employer gets a piece of the fees.

Which doesn't happen in either the employer or the employee incurring the costs. The employer in fact gets nothing. The employer either pays the fees or they don't. That is not a form of getting something. It's a form of not paying something.

ETA: There may be some instances of people doing illegal things with plans, but that is not commonplace. Your insistence that high 401k annual fees are because the employer is making money off of it is unsubstantiated still. Small instances of a thing does not mean it is the cause of the thing.
« Last Edit: August 04, 2015, 06:51:55 AM by matchewed »

mskyle

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Re: Why do companies offer 401K's with high annual fees?
« Reply #26 on: August 04, 2015, 07:33:58 AM »
When I started at my company, I was told they would rather have offered us a Vanguard plan but the fees to the company were too high (we're small), so they went with Fidelity which has mostly higher-fee funds but you can find the index funds if you look hard enough. We have a SimpleIRA, not a 401(k) - again, because we're too small for a good 401(k).
« Last Edit: August 04, 2015, 07:58:16 AM by mskyle »

NorCal

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Re: Why do companies offer 401K's with high annual fees?
« Reply #27 on: August 04, 2015, 07:48:54 AM »
There's a lot of misinformation here.  I'm on the 401k committee for my startup.

The low fee providers like Vanguard, Fidelity, and Schwab won't even talk to you unless you have $2M+ in assets in the 401k plan.  You have to build up plan assets before you can use these providers.  I believe the other comments that these providers charge large fees to employers with the smaller plans to be correct as well.

Pretty much all providers give access to different classes of shares based on the total plan size.  The plan I work with started with funds that have ~1.5% fees to start out.  We recently passed $1.5M in total plan assets, which now gives us access to slightly better funds.  Now we can get access to fund with ~1.2% fees.  The fees will get lower as the plan gets bigger.


Luck12

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Re: Why do companies offer 401K's with high annual fees?
« Reply #28 on: August 04, 2015, 08:47:14 AM »
I understand sometimes employer can't use a low cost provider like Vanguard, but there's still no excuse to not offer at least some Vanguard like index funds among the choices, but employers figure the masses are idiots (which is true) and won't complain and even if they did complain, the employers wouldn't care anyway.    Remember, most of HR and management don't give a shit about the rank and file unless giving a shit contributes to profitability. 
« Last Edit: August 04, 2015, 08:49:03 AM by Luck12 »