Author Topic: Fidelity A shares, C shares and T shares - front loads and expense ratios, oh my  (Read 8569 times)

bittheory

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Alright mustachians. Last last year I signed up for my company's SIMPLE IRA program. The Fidelity advisor who helped me recommended an A share between the three choice, A, C or T. Those are the only 3 options available to me. Now that I'm a little more financially literate thanks to MMM, I'm seeing why an A share might be a bad idea and why that advisor recommended it. High (5.75%) load fees, yet a lower expense ratio, but despite the comparatively lower ER, I'm not seeing how it's worth it. Ever. Help talk me into it, or out of it.

Here's the math:

A: 5.75% front load, 1.01% ER
C: no load, 1.76% ER
T: 3.50% front load, 1.26% ER

I do plan on sticking around at this job for a while, which is why A shares were recommended, but I hate knowing I'm paying 5.75% on it. I have no idea what I'm doing and wish my employer offered Vanguard, but that's not the case. Help!

johnny847

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It depends on how long is "a while". I can help you through the math, but before I write up a post about that....

1) Man what shitty offerings. It's common to see funds with these kinds of expense ratios, but for these to be your only options?? There's literally no other funds in the Simple IRA?? You have my sympathies.
2) Do all three offerings share the same underlying assets? (If so, they would perform the same before expenses and load fees).

bittheory

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I'd say a while is 3-5 years longer. In which case A shares might not be right.

Here's a link to the funds I have available. http://fundresearch.fidelity.com/mutual-funds/ira-funds-by-family?fundFamily=Fidelity


Tyler

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Frankly, with that level of ERs you might also want to run the math on whether contributing to the company IRA even makes sense at all.  Another option is to simply max out your own personal IRA and invest the difference in a taxable account.  You'll have the option of choosing very low ER funds in both, and depending on your personal income and tax situation you may just come out ahead. 

bittheory

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Frankly, with that level of ERs you might also want to run the math on whether contributing to the company IRA even makes sense at all.  Another option is to simply max out your own personal IRA and invest the difference in a taxable account.  You'll have the option of choosing very low ER funds in both, and depending on your personal income and tax situation you may just come out ahead.

I'd considered that, but my income is fairly high, and I pursue a strategy of reducing my AGI with a combination of my SIMPLE contributions as well as personal tIRA. I will be maxing my tIRA regardless. Plus, isn't it not a great idea to say no to any kind of retirement plan when your employer matches?

But you're right, these ERs are just outrageous. And after digging around some of the other options, the ERs aren't much better.

Frankies Girl

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Your adviser is really, really awful. If you are able to get into any of the Spartan index funds from that link you just posted, then those are the ones to go for. In which case, the adviser should be ignored and told to fuck off (nicely, but still). Because the only reason to tell you to invest in those horrible loaded funds when you have those others available is for them to make a commission - because they are awful, terrible choices all the way around. So yeah, they suck.

My recommendations are the following:

FOR STOCK ALLOCATION:
Spartan® Total Market Index Fund - Investor Class -  Symbol: FSTMX
If you don't have enough funds to get their Advantage class

If you do have the 10K minimum, then go with instead:
Spartan® Total Market Index Fund - Fidelity Advantage Class - Symbol: FSTVX

FOR BOND ALLOCATION (if any wanted):

Spartan® U.S. Bond Index Fund - Investor Class - Symbol: FBIDX

Or if you have the 10K for this too go with the Advantage class:
Spartan® U.S. Bond Index Fund - Fidelity Advantage Class -  Symbol: FSITX

I invest in Spartan funds with Fidelity and am very happy with them. That being said, you do have to watch out for horrible sales reps, like what it appears you have currently.

You'll need to figure out your risk level, what asset allocation you want (how much stock holding, bond holdings, etc that you want in your portfolio). So if you're at the beginning of your investing life, then going something like 75% stock/25% bond or even a bit higher (90/10?) depending, as long as you don't panic seeing the investments go down sharply during corrections/crashes. But this is definitely something you'll need to figure out for yourself.

The two funds above should be all you need for basic couch potato index investing. Both are extremely low expense ratio and will give you the broadest mix of funds without concentrating you too much in any one area. And they are good funds comparable with Vanguard's index funds.



Recommended reading:

http://jlcollinsnh.com/stock-series/

https://www.bogleheads.org/wiki/Investment_policy_statement
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Fidelity


« Last Edit: November 04, 2015, 03:49:56 PM by Frankies Girl »

bittheory

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I uncovered a handy link explaining the pricing schedule for the A, C and T shares. Can someone rationalize why I wouldn't just convert to a C?

https://advisor.fidelity.com/static/common/rdcontent/73_26.shtml


Also, the definition of C share from Investopedia (below) is helpful. And since I plan on being at my company for well over another year, this would most likely be the best choice from my POV. Thoughts?

Quote
A class of mutual fund with a level load. Class C shares don't have front-end loads, but have small back-end loads that are typically around 1% and may vanish once the shares have been held for a year. They have lower expense ratios than class B shares, but higher expense ratios than class A shares. Class C shares can be a good option for investors who will sell after a relatively short period, but will hold the shares for at least a year.


bittheory

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Your adviser is really, really awful. If you are able to get into any of the Spartan index funds from that link you just posted, then those are the ones to go for. In which case, the adviser should be ignored and told to fuck off (nicely, but still). Because the only reason to tell you to invest in those horrible loaded funds when you have those others available is for them to make a commission - because they are awful, terrible choices all the way around. So yeah, they suck.

My recommendations are the following:

FOR STOCK ALLOCATION:
Spartan® Total Market Index Fund - Investor Class -  Symbol: FSTMX
If you don't have enough funds to get their Advantage class

If you do have the 10K minimum, then go with instead:
Spartan® Total Market Index Fund - Fidelity Advantage Class - Symbol: FSTVX

FOR BOND ALLOCATION (if any wanted):

Spartan® U.S. Bond Index Fund - Investor Class - Symbol: FBIDX

Or if you have the 10K for this too go with the Advantage class:
Spartan® U.S. Bond Index Fund - Fidelity Advantage Class -  Symbol: FSITX

Agree, my experience has been very unpleasant. Unfortunately, the link I provided actually contains more funds than what I have available. I can send you a PDF of the funds I have available. I scanned it and there are no Spartan funds, sadly.

Frankies Girl

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Well, darn. Because the Spartan funds are the best that Fido offers... might be worth it to ask if they could be included in your workplace plan (have to speak to the plan administrator).

It would be helpful for others also if you could post here the list of funds actually available for you. I think you can attach a pdf (or at least a screenshot) or else just type them out (ticker symbols are VERY helpful).


bittheory

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Darn indeed. I don't have the ticker symbols, and I'm not sure I have the patience to type them out, but here is a link to a PDF of my options. I appreciate everyone for helping. At first, I thought it'd be crazy to cancel this plan since I get a 3% match, but now I'm thinking it might not be so crazy. Would appreciate everyone's opinion. Hoping to have this resolved by the end of the week, which either means I'm telling Fidelity to exchange, or telling them to suck it.

https://drive.google.com/open?id=0B5wu0j8pzuVacU5LbnZ1VWtraFU


Tyler

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I'd considered that, but my income is fairly high, and I pursue a strategy of reducing my AGI with a combination of my SIMPLE contributions as well as personal tIRA. I will be maxing my tIRA regardless. Plus, isn't it not a great idea to say no to any kind of retirement plan when your employer matches?

Think of it this way -- with a 3-6% front load the employer contribution is likely completely negated.  YMMV, but not every fund is a good deal. 

bittheory

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I'd considered that, but my income is fairly high, and I pursue a strategy of reducing my AGI with a combination of my SIMPLE contributions as well as personal tIRA. I will be maxing my tIRA regardless. Plus, isn't it not a great idea to say no to any kind of retirement plan when your employer matches?

Think of it this way -- with a 3-6% front load the employer contribution is likely completely negated.  YMMV, but not every fund is a good deal.

My thoughts exactly. However, a C share has no "front load." Am I correct in that assessment? Thoughts. Right now I think I either have to close the plan, or convert to a C share.

johnny847

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From the Bogleheads wiki:
Quote
A reasonable rule-of-thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds one and a half times your combined federal and state tax rates on qualified dividends over your working career. That is, if you pay 1.70% expenses rather than 0.20%, and you pay 15% federal tax on qualified dividends, plus 5% state tax, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years for a net loss of 30% (actually 26% because of compounding). If you pay no state tax, you should still invest in the plan unless you are reasonably certain you will stay more than 15 years.

The reason for the rule of thumb is that a long-term investment, even in a tax-efficient stock fund, is likely to lose more than your tax rate to taxes. You will pay tax every year on the dividends, continue to pay that tax after you leave the employer, and then pay capital-gains tax on most of the investment value when you sell the fund over the course of your retirement. (And if you retire in a 15% tax bracket and thus pay no capital gains on the fund sale, the lower tax bracket will also reduce the tax due on withdrawals from a 401(K), for a comparable tax savings.) [note 1]

If you post your actual marginal income tax rates OP, I don't mind showing all the calculations for you. I've kinda wanted to have a post written about this so that I can refer back to it in the future. This is a somewhat common question.


Now you may end up deciding not to invest in your SIMPLE IRA, but I think answer your question of which share class to choose (in the event you do decide to continue to invest in your SIMPLE IRA) is an interesting one.

I've attached a graph. It plots the proportion of money retained after fees vs time.
The intersection point is at the end of the 8 year mark.

How I derived this:

l = load fee
r = raw return, before expenses and fees
e = expense ratio
y = years
FV = future value
PV = Present Value

---
<First a bit of an aside>

Most people like to say Oh if the underlying assets grow 6%, and my fees are 1%, then I see 5% growth. This is almost true, but not quite.
What most people are saying is
FV = PV * (1+r-e)^y

The correct answer is
FV = PV * [(1+r)*(1-e)]^y. = PV*(1 +r -e - re)^y
But re is negligible compared to e or r except for very rare circumstances. So normally we ignore this and just use the first formula. However I will be using the second formula as it makes analysis easier.

<end aside>

When we have funds with load fees, our FV equation is now
FV = PV * (1-l) * [(1+r)(1-e)]^y

We can rewrite this as
FV = (1+r)^y * PV * (1-l)*(1-e)^y

I did this because r, the raw return, is the same for all three share classes of the same fund.
I plotted

(1-l)*(1-e)^y

for your three funds. This represents the proportion of your money retained after fees. Hence, you want this number to be as high as possible.

Their fees will become equal at the end of year 8. So if you expect to stay at this company for less than eight years, you should use class C shares, and just rollover your 401k to an IRA at a place such as Vanguard where you can invest in low cost index funds.
If you expect to stay at this company for more than eight years, you should use class A shares.

Frankies Girl

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I looked at the pdf in your post, but I'm out of my depth on choosing loaded funds so don't feel real comfortable advising you on them. For all I know, the adviser might have given you the best they could so I reserve judgement of whether they are a good or bad adviser at this point. ;)

But I really hope you get some of the investing experts to reply as I know there are some really savvy folks on here that can help you figure this out.

Good luck!

bittheory

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Wow. What a well-thought and detailed response, Johnny. You rule. And you made a chart. The Bogleheads rule of thumb I believe says I should keep this plan, but I'd like your and everyone else's opinion, if possible.

I confirmed that if if I switched to a class C share, my new total expenses would be 1.76%. Still really, really, ridiculously high. There's absolutely nothing I can do about that though.

I am in the 25% tax bracket.

Another reason I think I'd prefer to keep the plan is to reduce my AGI, thus giving me the ability to max my and my spousal tIRAs. I may not be looking at the big picture, but is that a foolish move? Should I seriously consider ditching this plan entirely, only doing tIRA and put 10% into a my brokerage?

From the Bogleheads wiki:
Quote
A reasonable rule-of-thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds one and a half times your combined federal and state tax rates on qualified dividends over your working career. That is, if you pay 1.70% expenses rather than 0.20%, and you pay 15% federal tax on qualified dividends, plus 5% state tax, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years for a net loss of 30% (actually 26% because of compounding). If you pay no state tax, you should still invest in the plan unless you are reasonably certain you will stay more than 15 years.

The reason for the rule of thumb is that a long-term investment, even in a tax-efficient stock fund, is likely to lose more than your tax rate to taxes. You will pay tax every year on the dividends, continue to pay that tax after you leave the employer, and then pay capital-gains tax on most of the investment value when you sell the fund over the course of your retirement. (And if you retire in a 15% tax bracket and thus pay no capital gains on the fund sale, the lower tax bracket will also reduce the tax due on withdrawals from a 401(K), for a comparable tax savings.) [note 1]

If you post your actual marginal income tax rates OP, I don't mind showing all the calculations for you. I've kinda wanted to have a post written about this so that I can refer back to it in the future. This is a somewhat common question.


Now you may end up deciding not to invest in your SIMPLE IRA, but I think answer your question of which share class to choose (in the event you do decide to continue to invest in your SIMPLE IRA) is an interesting one.

I've attached a graph. It plots the proportion of money retained after fees vs time.
The intersection point is at the end of the 8 year mark.

How I derived this:

l = load fee
r = raw return, before expenses and fees
e = expense ratio
y = years
FV = future value
PV = Present Value

---
<First a bit of an aside>

Most people like to say Oh if the underlying assets grow 6%, and my fees are 1%, then I see 5% growth. This is almost true, but not quite.
What most people are saying is
FV = PV * (1+r-e)^y

The correct answer is
FV = PV * [(1+r)*(1-e)]^y. = PV*(1 +r -e - re)^y
But re is negligible compared to e or r except for very rare circumstances. So normally we ignore this and just use the first formula. However I will be using the second formula as it makes analysis easier.

<end aside>

When we have funds with load fees, our FV equation is now
FV = PV * (1-l) * [(1+r)(1-e)]^y

We can rewrite this as
FV = (1+r)^y * PV * (1-l)*(1-e)^y

I did this because r, the raw return, is the same for all three share classes of the same fund.
I plotted

(1-l)*(1-e)^y

for your three funds. This represents the proportion of your money retained after fees. Hence, you want this number to be as high as possible.

Their fees will become equal at the end of year 8. So if you expect to stay at this company for less than eight years, you should use class C shares, and just rollover your 401k to an IRA at a place such as Vanguard where you can invest in low cost index funds.
If you expect to stay at this company for more than eight years, you should use class A shares.

Scandium

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A point in the favor of the no-load, high ER fund is the fact that it might change in the future (you can hope). My fund selection here has changed 3 times in the 6 years I've been here. There is the chance you might convince your HR department to request index funds. But since they probably got a really sweetheart deal on the admin fee from Fidelity by screwing their employees it might be unlikely to change.

I don't remember the exact ER cutoff, but I think it still makes sense to max it out for the 25% tax savings. Especially since you may get better funds in the future, or you might leave and be able to roll it to Vanguard.
More in depth discussion:
http://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/

I'll quote

Quote
Assume two investors make $80,000 per year.  Investor A decides to max out his 401(k) with $17,500 every year and invests his 401(k) money in the Fidelity fund with the awful fees mentioned in the post (3.5% front-end load and 1.32% expense ratio).  Investor B does not contribute to a 401(k) and instead invests his money in a Vanguard taxable account with an expense ratio of 0.05%.

Thanks to the fact that 401(k) contributions are pre tax, Investor A’s taxable income decreases from $80,000 to $62,500.  This means that he only has to pay $9,225 in federal tax instead of the $13,600 that Investor B has to pay.

Due to the front-end load of the 401(k) fund, Investor A’s $17,500 contribution would actually only buy him $16,888 worth of shares.  Combining that with the tax savings I already mentioned, however, means his $17,500 401(k) contribution would actually fetch him $21,263 worth of shares ($16,888 into his 401(k) and $4,375 of tax savings into his taxable account).  Compared to Investor B’s $17,500 contribution, Investor A is able to invest $3,763 more every year.  These additional contributions definitely add up and more than cover the higher 401(k) fund expenses.

PathtoFIRE

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Your link to the available funds PDF shows quite a few funds, but without know the ERs and loads, it's difficult to say which to choose. With that said, the few that caught my eye are:
FA Total International Equity
FA Large Cap
FA Total Bond
The Freedom Fund series

The first three would mimic the 3-fund portfolio that is widely recommended (I didn't see an obvious total US stock fund, so chose the one closest to the SP500). I'm not necessarily recommending these, but I would research these more, and see what the no-load ER is for each. If unacceptable, I would branch out from there.

The Freedom Fund series would give you a diversified mix of US equities, international equities, and bonds. These types of funds are very popular for achieving instant diversification which requires no additional input from you, as well as a downward gliding stock/bond ratio over time. Usually a similar mix of funds chosen separately will have a little lower ER, but I'd see what the no-load ERs are for these. You can pick the date, but I would recommend just chosing the one with the asset mix that best fits your risk tolerance level.

bittheory

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Your link to the available funds PDF shows quite a few funds, but without know the ERs and loads, it's difficult to say which to choose. With that said, the few that caught my eye are:
FA Total International Equity
FA Large Cap
FA Total Bond
The Freedom Fund series

The first three would mimic the 3-fund portfolio that is widely recommended (I didn't see an obvious total US stock fund, so chose the one closest to the SP500). I'm not necessarily recommending these, but I would research these more, and see what the no-load ER is for each. If unacceptable, I would branch out from there.

The Freedom Fund series would give you a diversified mix of US equities, international equities, and bonds. These types of funds are very popular for achieving instant diversification which requires no additional input from you, as well as a downward gliding stock/bond ratio over time. Usually a similar mix of funds chosen separately will have a little lower ER, but I'd see what the no-load ERs are for these. You can pick the date, but I would recommend just chosing the one with the asset mix that best fits your risk tolerance level.

I'm currently invested in the Freedom fund. Target-dated funds are the best option for my style. No low cost index funds are available. Most likely for a reason. That reason is purely financial, for Fidelity.

After a lot of consideration and questioning and reviewing the comments on this thread, I'm going to convert my Freedom Fund from an A share to a C share, thus reducing my fees from nearly 7% to 1.7%. Still high, but I need to take advantage of the company match and the lowered AGI. There's a chance I'll be here for 8 years, but that's relatively low. I have plans to go freelance in 4 years.

Again, thank you everyone for the help and analysis. I'm currently trying my best to sell my HR manager on using Vanguard instead of Fidelity. I'm assuming they got a sweetheart deal with Fidelity, so it might be a lost cause, but hey, why not.

Tyler

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Again, thank you everyone for the help and analysis. I'm currently trying my best to sell my HR manager on using Vanguard instead of Fidelity. I'm assuming they got a sweetheart deal with Fidelity, so it might be a lost cause, but hey, why not.

FWIW, the problem is not Fidelity but the fact that you're locked into the "Fidelity Advisor" service by your company.  Fidelity is an excellent company with many low-cost index funds just like Vanguard.  I've used them for many years and am happy with their service and options.  Just getting access to the Spartan funds will fix your problem, and FSTMX is a very common option in most Fidelity 401ks. 
« Last Edit: November 05, 2015, 10:29:39 AM by Tyler »

bittheory

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Again, thank you everyone for the help and analysis. I'm currently trying my best to sell my HR manager on using Vanguard instead of Fidelity. I'm assuming they got a sweetheart deal with Fidelity, so it might be a lost cause, but hey, why not.

FWIW, the problem is not Fidelity but the fact that you're locked into the "Fidelity Advisor" service by your company.  Fidelity is an excellent company with many low-cost index funds just like Vanguard.  I've used them for many years and am happy with their service and options.  Just getting access to the Spartan funds will fix your problem, and FSTMX is a very common option in most Fidelity 401ks.

Any recommendations on how to do that? Talk to my HR department, or talk directly with Fidelity? I'm thinking it will be a lost cause, because the Fidelity Advisor model is clearly a money maker for their company. Why would they ever offer low-cost index funds when they can charge 6X the amount?

Tyler

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Corporate 401k plans are ultimately a company decision.  I would ask them about offering a "brokerage window" option in addition to the current selection.  That will allow you to purchase any mutual fund or ETF offered by Fidelity. 
« Last Edit: November 05, 2015, 12:06:30 PM by Tyler »

bittheory

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UPDATE:

Now contributing 100% into the C class Freedom fund. Was not able to exchange from A to C, so that's going to sit there until the account is closed.

Changed my contributions from 7% to the 3% match. I'll be contributing the difference into my Vanguard brokerage account. In addition to maxing my and my spousal tIRA, I'm hoping to reach 25% savings into Vanguard next year.