Author Topic: How "Bad" are these Expense Ratios/Selections - American Funds  (Read 4192 times)

jeff2017

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How "Bad" are these Expense Ratios/Selections - American Funds
« on: December 21, 2017, 09:12:59 AM »
These are my what make up my existing 401K, in order of greatest to least in terms of my asset allocation. The first two positions (RLBBX & RAFBX) make up the vast majority of the portfolio.

American Balanced Fund - R-2 (Ticker = RLBBX) ... Annual Expense Ratio = 1.37% ... Average Annual Returns - YTD Return = 14.15%, 1 Year = 14.25%, 5 Years = 10.14%, 10 Years = 6.34%

AMCAP Fund - R-2 (Ticker = RAFBX) - Annual Expense Ratio = 1.46% ... Average Annual Returns - YTD Return = 21.24%, 1 Year = 20.84%, 5 Years = 14.74%, 10 Years = 7.97%

New World Fund - R-2 (Ticker = RNWBX) - Annual Expense Ratio = 1.79% ... Average Annual Returns - YTD = 30.18%, 1 Year = 29.64%, 5 Years = 6.09%, 10 Years = 2.2%

SMALLCAP World Fund - R-2 (Ticker = RSLBX0 - Annual Expense Ratio = 1.80% ... Average Annual Returns - YTD = 25.03%, 1 Year = 25.15%, 5 Years = 12.25%, 10 Years = 5.34%

Vanguard is not an option, but curious to hear your thoughts on this.
« Last Edit: December 21, 2017, 09:21:17 AM by jeff2017 »

Travis

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Re: How "Bad" are these Expense Ratios - American Funds
« Reply #1 on: December 21, 2017, 09:21:28 AM »
Did you mean to include an attachment?

acroy

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #2 on: December 21, 2017, 09:25:48 AM »
The expense ratios are pretty awful... They should have an s&p500 index fund, super cheap. Good luck!

JackieTreehorn

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #3 on: December 21, 2017, 09:27:20 AM »
Appear to be about as bad as it gets.  Can't believe there are funds that still have fees that high.  Prob 10x-20x what vanguard charges.  Unbelievable.

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #4 on: December 21, 2017, 09:29:04 AM »
This is the unfortunate responses I expected. For full clarity, I'll attach all of the existing investment options. Expense Ratios are ridiculous across the board comparatively speaking...

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #5 on: December 21, 2017, 09:30:25 AM »
Here you go.

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #6 on: December 21, 2017, 09:30:54 AM »
2/6

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #7 on: December 21, 2017, 09:31:48 AM »
3/6

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #8 on: December 21, 2017, 09:32:07 AM »
4/6

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #9 on: December 21, 2017, 09:32:24 AM »
5/6

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #10 on: December 21, 2017, 09:32:39 AM »
6/6

Travis

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #11 on: December 21, 2017, 09:49:45 AM »
Par for course for America Funds.  Not even worth smelling, let alone giving them your money.

Caoineag

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #12 on: December 21, 2017, 09:53:37 AM »
Wow, this is the first time I felt like my 401(k) was not that bad. And our firm has gone after the fees twice since then to get things cheaper. Heck, you are making me feel good about my HSA options now as well. That said, if like me you are saving 25% on the taxes, its still better to use the 401(k) than not. You just have to make sure to roll to an IRA as soon as you leave that job. Do you at least get a match (I get none)?

And to answer your question. The only way to get worse than that is to also pay a front and back load in addition to the expense fee. That said, given that these are expensive American Funds you might be paying those as well...Are the fund expenses the only expenses that come out of your 401(k) or are there more fees (my 401(k) has"other" fees in addition to the fund expenses).

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #13 on: December 21, 2017, 11:40:36 AM »
Wow, this is the first time I felt like my 401(k) was not that bad. And our firm has gone after the fees twice since then to get things cheaper. Heck, you are making me feel good about my HSA options now as well. That said, if like me you are saving 25% on the taxes, its still better to use the 401(k) than not. You just have to make sure to roll to an IRA as soon as you leave that job. Do you at least get a match (I get none)?

And to answer your question. The only way to get worse than that is to also pay a front and back load in addition to the expense fee. That said, given that these are expensive American Funds you might be paying those as well...Are the fund expenses the only expenses that come out of your 401(k) or are there more fees (my 401(k) has"other" fees in addition to the fund expenses).

I'll have to double check, but I'm pretty sure there is front end load as well... On a scale of 1-10, is it fair to say these options are a 10/10 horrible?

Caoineag

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #14 on: December 21, 2017, 12:59:47 PM »
Yes, these would be 10/10 horrible.

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #15 on: December 21, 2017, 01:19:36 PM »
To enact a change in the 401K, I really need some help with how to best explain, using numbers, exactly how bad this is and would be eternally grateful to any fellow mustaches who could lend a helping hand.

The situation is we are a small company and have 3 people that contribute to the 401K. The owner (who contributes a full $18K) and I will max this year and the third will have smaller contributions. The owner doesn't see the reality longterm of these large fees, but I think if I present a very numbers-based argument, a switch could occur.

I spoke to Vanguard in August to try and get this clarity, but the biggest drawback is that they charge a flat $3,475 annually that stays the same until a company exceeds 15 employees (same annual fee if you have 3 employees or 14) and they also mentioned a $1,500 one-time conversion cost.

Explaining to the Owner that any change will have these costs is where I am stuck. For him personally, all he sees is he is deferring $18K and doesn't give a ton of thought to the fees involved.

While Vanguard is ideal, maybe there is another alternative that would have less annual fees for a small company like ours?

On that note, this could be a whole different thread of "What is the best 401K Provider for a company with 5 or less employees?"

« Last Edit: December 21, 2017, 01:53:54 PM by jeff2017 »

Travis

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #16 on: December 21, 2017, 01:45:44 PM »
I can't speak for the company 401k issue, but to demonstrate to your boss how the fees affect returns, go to an online interest calculator.  Show him what 7% returns look like over 10 years, then show him what 5.5% returns look like.  The difference in the two numbers is what is eaten by the fund in maintenance fees.  If there's a front load it is even worse, but I can't think of a quick calculation to demonstrate that.

Proud Foot

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #17 on: December 26, 2017, 09:05:57 AM »
Yes those are high ER's which American Funds are known for, as well as front loads. However I do not believe they charge a purchase/sales load on the retirement class funds. It looks like you only have the R-2 shares. Talk with your administrator to find out what it would take to change that so you could access the R-5 or R-6 class shares as those have lower ER's and not having extra cost to change providers. For reference your AMCAP Fund R-2 (RAFBX) has an ER of 1.46% while the R-5 and R-6 shares have ER's of 0.41 and 0.36 respectively. Here is what the prospectus ways with regards to purchasing R Shares:

Quote
Purchase of Class R shares (pg16) Class R shares also are generally available only to retirement plans for which plan level or omnibus accounts are held on the books of the fund. Class R-5E, R-5 and R-6 shares are generally available only to fee-based programs or through retirement plan intermediaries. In addition, Class R-5 and R-6 shares are available for investment by other registered investment companies approved by the fundís investment adviser or distributor

The owner might not care about the fees to change plans, but showing the effect of a 1% decrease in ER's by changing fund classes might help him. Particularly if there is not any additional cost to the company to offer those classes (I do not know American Fund's requirement for each class).

Retire-Canada

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #18 on: December 26, 2017, 09:36:16 AM »
To enact a change in the 401K, I really need some help with how to best explain, using numbers, exactly how bad this is and would be eternally grateful to any fellow mustaches who could lend a helping hand.



There are lots of charts like this ^^ available online. Just google them and pick one you like.

If you saved $10K/yr for 30yrs with a 7% after inflation return you'd get:

- 0% Fees = $1,016,000
- 1% Fees = $837,000
- 2% Fees = $694,000
- 3% Fees = $578,000
- 4% Fees = $486,000

MDM

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #19 on: December 26, 2017, 11:58:25 AM »
I can't speak for the company 401k issue, but to demonstrate to your boss how the fees affect returns, go to an online interest calculator.  Show him what 7% returns look like over 10 years, then show him what 5.5% returns look like.  The difference in the two numbers is what is eaten by the fund in maintenance fees.  If there's a front load it is even worse, but I can't think of a quick calculation to demonstrate that.
To enact a change in the 401K, I really need some help with how to best explain, using numbers, exactly how bad this is and would be eternally grateful to any fellow mustaches who could lend a helping hand.
<snip>
There are lots of charts like this ^^ available online. Just google them and pick one you like.

If you saved $10K/yr for 30yrs with a 7% after inflation return you'd get:

- 0% Fees = $1,016,000
- 1% Fees = $837,000
- 2% Fees = $694,000
- 3% Fees = $578,000
- 4% Fees = $486,000

+1 to both the above. 

To account for a load, multiply the final non-load amount by (1 - load).

Yet another way to make your point is to look at percent of earnings one loses to high expense ratios.  Compare
a) =FV(rate,nper,-pmt)-pmt*nper
vs.
b) =FV(rate-1.5%,nper,-pmt)-pmt*nper

E.g., for
rate = 5%
nper = 30
pmt = $10000
one gets a = $364,388 and b = $234,295.

Then calculate b/a = 64%, which is the ratio one has with the high expense ratio funds vs. what one would have had with low expense ratio funds.

Of course, that assumes the returns before fees are equal.  Turns out this is a reasonable assumption, despite high fee fund sales pitches that claim otherwise.  See SPIVA for more.


uwp

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #20 on: December 26, 2017, 02:20:11 PM »
I spoke to Vanguard in August to try and get this clarity, but the biggest drawback is that they charge a flat $3,475 annually that stays the same until a company exceeds 15 employees (same annual fee if you have 3 employees or 14) and they also mentioned a $1,500 one-time conversion cost.

Explaining to the Owner that any change will have these costs is where I am stuck. For him personally, all he sees is he is deferring $18K and doesn't give a ton of thought to the fees involved.

American Funds is rolling up the costs of setting up/maintaining the plan into the internal fees.  If someone is complaining about the expense ratios on funds in their small company 401k, usually this is why.  Yes it sucks, but the other option is no 401k plan. 

Showing your boss charts of the growth of investments before and after a 1.5% expense ratio isn't going to change their mind when the other option costs them $5,000 in year one, and $3,500 every year after.   The boss is looking at their own chart of $3,500/year compounded at 10%.



Frankies Girl

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #21 on: December 26, 2017, 03:38:12 PM »
https://www.pbs.org/wgbh/frontline/film/retirement-gamble/
^a great Frontline documentary about how basic investing with low fee funds is (obviously) a better path, and how stupid investment groups with their high fees/loads can rob you of SO MUCH MONEY.

If your boss won't watch it, I'd suggest watching it yourself so you can explain how this works.

Indexer

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #22 on: December 26, 2017, 03:56:57 PM »
How bad is this plan?

FYI:  American funds was sued by their own employees for a similar plan.

http://www.investmentnews.com/article/20170615/FREE/170619965/capital-group-the-sponsor-of-american-funds-sued-for-self-dealing-in

You don't need a Vanguard 401k plan. You need a 401k that includes a lower cost option. I've seen 401ks and 403bs that have insane expenses and then one or two index funds charging 0.5% or less. It's still expensive, but it's a lot lower than 1.37%.
« Last Edit: December 26, 2017, 03:59:14 PM by Indexer »

Radagast

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #23 on: December 26, 2017, 07:20:36 PM »
Probably the definitive links on the topic:
https://www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan
https://www.bogleheads.org/wiki/Setting_up_a_401(k)_plan

It might also be worth it to try for a Simple IRA. Your contribution is reduced to $12,500 + 3% match, but they are really cheap.

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #24 on: January 03, 2018, 05:38:32 PM »
A lot of helpful replies, thanks to all.

The topic was brought up again today and went through some of the future value calculations which was productive.

As a next step, I need to do the homework/talk to different 401K providers to potentially find a new plan.

Vanguard, unfortunately, was not a very good fit for a tiny company like ours from a fee perspective as they have an annual fee of $3,500 to cover up to 15 employees as we are only a handful (what they told me in August 2017).

Any specific recommendations from the forum?

MDM

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #25 on: January 03, 2018, 05:58:02 PM »
Any specific recommendations from the forum?
Not a recommendation, because I have no firsthand knowledge, but you might look at 401(k) Plans for Small Businesses with Employee Fiduciary to see what they offer.
« Last Edit: January 03, 2018, 09:15:18 PM by MDM »

Radagast

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #26 on: January 03, 2018, 09:03:31 PM »
MDM and my previous post had some specific recommendations.

Simple IRA's are cheap but with lower contribution limits. My company uses Schwab, I think they might be the best choice for a simple IRA because you have full access to all products and brokerage, including the very low ER ones, even with just enough money to buy a share or $100 to open a fund.

https://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/simple_ira

Vanguard has one too. The fees seem higher, and apparently you can't invest in Admiral shares. Not sure about ETF's, I just heard of this. https://forum.mrmoneymustache.com/investor-alley/i-don't-understand-the-best-way-to-move-out-of-target-retirement-funds/
https://investor.vanguard.com/what-we-offer/small-business/simple-ira


jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #27 on: January 03, 2018, 11:34:51 PM »
MDM and my previous post had some specific recommendations.

Simple IRA's are cheap but with lower contribution limits. My company uses Schwab, I think they might be the best choice for a simple IRA because you have full access to all products and brokerage, including the very low ER ones, even with just enough money to buy a share or $100 to open a fund.

https://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/simple_ira

Vanguard has one too. The fees seem higher, and apparently you can't invest in Admiral shares. Not sure about ETF's, I just heard of this. https://forum.mrmoneymustache.com/investor-alley/i-don't-understand-the-best-way-to-move-out-of-target-retirement-funds/
https://investor.vanguard.com/what-we-offer/small-business/simple-ira

Thanks. I looked into Simple IRAs, but my biggest drawback was the lower contribution limit compared to alternatives like a 401K.

My biggest objective would be to defer as MUCH income as possible at this younger stage of my life. The SEP IRA seemed like a great way to do this, but the contingency of "employer's contribution rate MUST be the SAME for all eligible employees" causes some problems as there are 4 total employees, each of which would view this quite differently (2 ultra savers).

The biggest question I have yet to solve is the alternative ways to defer > the typical $18K from a 401K... A rather "out there" thought process, although it seems too "easy" so I would guess this would not work, would be to restructure from being a W2 employee to a solo entity (assuming comparable comp structure for both of us involved), create a SEP IRA for myself personally and receive "revenue/income" from my current employer. In our specific line of work, there is minimal cost (office/consulting job) as well which should help w/ the contribution limit of "the lesser of 25% of employee income or $54,000". Is something like what I am referencing even possible?

jeff2017

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Re: How "Bad" are these Expense Ratios/Selections - American Funds
« Reply #28 on: January 03, 2018, 11:38:21 PM »
Any specific recommendations from the forum?
Not a recommendation, because I have no firsthand knowledge, but you might look at 401(k) Plans for Small Businesses with Employee Fiduciary to see what they offer.

Thanks MDM. I have never seen this website before, but will review in more depth in the AM.