Author Topic: American Funds 401k 1.5% expense  (Read 5264 times)

forestj

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American Funds 401k 1.5% expense
« on: April 29, 2015, 04:36:52 PM »
In my current job's American Funds 401k offering, the expense ratios for funds typically don't go below 1%. It looks like American Funds doesn't really offer indexes, or if they do, the expense ratios are still high.

How should I react to this? I feel like I'm being gouged here, is there anything I can do about it?  I have the opportunity to put 25k per year into the account tax free. Is that worth the high expense ratios?

I calculated a few scenarios.

1. I pay less taxes, but I pay the 1% expense ratio.
2. I pay taxes, but I don't pay the 1% expense ratio.

I'm calculating the expense ratio as if it is a chunk off the average annual return. I have no idea if that is the correct method or what, I'm very new to all of these terms and how to think about them.

I made my equation like so:

(1-tax rate)*((1+arbitrary annual return - expense ratio)^years)

It seems like my tax rate doesn't really go down that much whether my taxable income is 70k or 45k -- only by about 5%. It looks like the 1% compounding expense ratio wipes out all tax savings in all reasonable scenarios.

However, this is not taking into account the fact that I can't (as far as I know) get my money into an equity or bond-exposed account in a pre-tax fashion any other way. Should I open an IRA, contribute the pre-tax maximum, then put my post-tax money into a taxable account? With expense ratios like these I'm not even sure if the 401k employer match is worth it (I think it maxes out at 2.5% of what I put in, plus a vesting scheme).
« Last Edit: April 29, 2015, 09:37:35 PM by forestj »

OneCoolCat

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Re: American Funds 401k 1.5% expense
« Reply #1 on: April 29, 2015, 04:39:12 PM »
The expense ratios at my job average 2.5%.  Its highway robbery.

KungfuRabbit

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Re: American Funds 401k 1.5% expense
« Reply #2 on: April 29, 2015, 04:55:47 PM »
Call your companies benefits center and complain.  And tell your coworkers to do the same.

if they are simply ignorant they may switch 401k providers, if they are "corrupt" (kickbacks, etc) they may not.  My company recently switched from a fund with ~0.75% expense ratio to one of the BlackRock Lifepath funds (which have a really bad rap on the forums and reviews saying they are 1%+ expense ratio, but we have a negotiated price index fund that is 0.18% expense which isn't bad at all). 

Otherwise honestly the benefits of 401k aren't THAT amazing if you minimize your tax loads in other ways, but i'd still argue it is worth it put in enough to get the company match (100% returns are hard to beat), but i would not max it out to federal tax limits. 

tommy murph

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Re: American Funds 401k 1.5% expense
« Reply #3 on: April 29, 2015, 04:56:26 PM »
That's really unfortunate your employer offers a crappy 401k plan. How big is your company? Is there a channel through which you can raise this up to management? Maybe start posting anonymous flyers around your officer letting your colleagues know their 401k is a rip off. I bet if you rally enough folks, you can make a ruckus!

MDM

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Re: American Funds 401k 1.5% expense
« Reply #4 on: April 29, 2015, 04:58:26 PM »
How should I react to this? I feel like I'm being gouged here, is there anything I can do about it?
You could talk with HR and find out who chooses the 401k administrator and talk with that person....

Quote
I made my equation like so:

(1-tax rate)*((1+arbitrary annual return - expense ratio)^years)

It seems like my tax rate doesn't really go down that much whether my taxable income is 70k or 45k -- only by about 5%. It looks like the 1% compounding expense ratio wipes out all tax savings in all reasonable scenarios.

However, this is not taking into account the fact that I can't (as far as I know) get my money into an equity or bond-exposed account in a pre-tax fashion any other way. Should I open an IRA, contribute the pre-tax maximum, then put my post-tax money into a roth? With expense ratios like these I'm not even sure if the 401k employer match is worth it (I think it maxes out at 2.5% of what I put in, plus a vesting scheme).
That seems the correct equation for starters.  Some thoughts:
  - If you file single, your tax rate won't change at all between a taxable income of 70k or 45k: it will be 25% of the $25K difference, or $6,250.
  - The full comparison you might want is from "before tax now" to "after tax in retirement".  In other words,
     - Start with $25K
     - Either pay taxes now and invest $18,750 in a taxable account, or don't pay taxes now and invest $25K plus the employer match into your 401k
     - Let the funds accumulate at the appropriate returns (higher in taxable) and pay some amount of yearly taxes on the taxable fund distributions
     - Withdraw funds and pay the taxes on the 401k at ordinary income rates and pay the taxes on the taxable appreciation at LTCG rates.

How does it look if you do that?  The answer will depend on the assumed returns, future tax rates, and number of years invested.

beltim

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Re: American Funds 401k 1.5% expense
« Reply #5 on: April 29, 2015, 05:02:16 PM »
MDM gives some great advice here.  What I'd add is that the "years" term in your equation is not "years to retirement" but is instead "years the money is in that plan."  So if you only expect to be there a few years, or if your plan allows in-service rollovers to an IRA, it might still be advantageous to invest in the 401k.

Don't forget about your ability to invest in an IRA.  The limits are lower, but you can choose your own investments.

James

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Re: American Funds 401k 1.5% expense
« Reply #6 on: April 29, 2015, 05:07:19 PM »
What are your rollover options? Some plans let you roll over your funds to an IRA at any time, so that makes it easy to just yearly roll the funds over. If you can't roll over early, you can at least roll over when you leave, so they won't be in the funds forever.


Take the tax advantage if it is worth it, but also work on getting the choices changed to have a low fee fund.


Finally, what exactly is the lowest fee fund? Often the fees will all be high except for a couple index funds. That way they can say they have funds as low as X, while most people use the higher fee funds because they don't know enough to look at fees. It doesn't take much, even one full index fund at low rate can be plenty, with your other funds handling the diversification.

The_Dude

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Re: American Funds 401k 1.5% expense
« Reply #7 on: April 29, 2015, 05:28:09 PM »
Either your 401k plan has high hidden fees baked into those expense ratios or the plan doesn't use The retirment share class for American Funds which should be 1/3 of what you are seeing. I'd complain to your employer.

forummm

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Re: American Funds 401k 1.5% expense
« Reply #8 on: April 29, 2015, 06:07:37 PM »
In addition to trying to get a better provider, you can just contribute now and enjoy the benefits of tax-free savings. You probably won't stay at that job forever, and you can just roll everything over to a nice, cheap Vanguard IRA when you separate. If you spend 5 years there and max out each year, it would cost you a grand a year (yuck!) at the end, but the tradeoff for that is tax-advantaged status for that $100k for as long as you leave it in the account.

forestj

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Re: American Funds 401k 1.5% expense
« Reply #9 on: April 29, 2015, 08:41:20 PM »
I guess I should have given more details about the company, its a small company, about 50 employees. I'm not sure if I can convince them to switch, mostly because I'm a relatively new hire, but I'll bring it up with the HR person to learn more about why they chose it and try to figure out who should be pushed on to change it.

I'm kind of curious to hear what other people have to say about their 401k plans. Who is it provided by? What kind of options do they have and what are the expense ratios?

Thanks MDM for the more in-depth analysis. That's the framework for comparison that I was looking for.

Edit: thanks everyone for the information and helpful replies
« Last Edit: April 29, 2015, 09:35:50 PM by forestj »

VasyaPupkin

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Re: American Funds 401k 1.5% expense
« Reply #10 on: April 29, 2015, 09:05:27 PM »
Had the same situation at work- other than one S&P500 fund at 0.39% everything was in 2-3%. After a lot of people complained, we are switching to VG :)
ERs will be in the range of fund expense+%0.06 or the like for some additional services. So under 0.2% for the majority of funds.

Dodge

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Re: American Funds 401k 1.5% expense
« Reply #11 on: April 30, 2015, 12:25:36 AM »
Think of it this way:

1.  You're getting something like a 30% bump from not having to pay taxes on the money.  Even with the 2% fee, it will take many years to get to break-even.

2.  If you leave the company before it gets to break-even, you transfer it to an IRA and you're ahead.  If they wise-up and offer a lower-fee option, you can move all your money to that fund, and you'll be ahead.  If you don't max out the $25,000, you will never get that back, your tax-sheltered pot will permanently be lowered, forever.  It's important to maximize your tax-sheltered pot for long-term growth, even if the options temporarily suck.

forummm

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Re: American Funds 401k 1.5% expense
« Reply #12 on: April 30, 2015, 07:49:13 AM »
I guess I should have given more details about the company, its a small company, about 50 employees. I'm not sure if I can convince them to switch, mostly because I'm a relatively new hire, but I'll bring it up with the HR person to learn more about why they chose it and try to figure out who should be pushed on to change it.

I think you might have more ability to get a policy changed in a small company than a large one. You might have to do a little legwork to provide them options. I would obviously recommend Vanguard if they serve clients of your company's size.

rmendpara

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Re: American Funds 401k 1.5% expense
« Reply #13 on: April 30, 2015, 02:18:07 PM »
Wow! 1.5%????

Most hedge funds charge 2% (plus an incentive fee), but that's an entirely different ballgame.

Totally unacceptable. Even Vanguard should be close to free for most employers, I think?

forestj

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Re: American Funds 401k 1.5% expense
« Reply #14 on: April 30, 2015, 07:54:06 PM »
Actually I just talked to them today and it sounds like they have been thinking about changing for a while.. I must have gotten it confused in my head with thier medical insurance provider.. I was remembering their happy satisfaction with their medical insurance having just switched over, and was projecting that attitude onto the 401k even though it wasn't really the case.

So, all in it is.