Advice on 401K plan getting more fund choices

[nbrege]

This is my first post here so go easy on me! I would consider myself an intermediate-level investor, been been doing it off & on over the past 20+ years, mostly mutual funds at first, then some stocks & now mostly ETFs. I am seeking some advice regarding my companys 401K plan. The choices in our plan are very poor in my opinion, from only one fund family (American Funds) ... 6 equity funds & 2 bond funds. My biggest problem with them is the ridiculously high expense ratios ... from .63% up to 1.14%. Our plan is administered through our local Edward Jones branch who set up everything & chose (or maybe just recommended) the funds we currently have. I would like to have more/better choices than what we currently have. I would love to have a good selection of low-cost index funds to choose from. I am seeking advice on how I would go about making that happen & how I would approach our HR people and/or 401K committee to propose something. I am hoping that maybe someone here has done something like this before. I am not sure how everything works under the hood of our plan or if more choices can even be added. Is it possible that Edward Jones might have it set up so that we are locked into the American Funds family & we are contractually bound to use only their funds? It wouldn't surprise me to find out that they would do something underhanded like that. I know that they get a commision from American Funds. I just feel like they are ripping us off & laughing all they way to the bank & it just makes my blood boil. With the high ER's & the 1, 3 & 5 year returns lagging their benchmarks, I know that there are better options out there. Any advice on how to proceed would be immensely appreciated. Thank you.

[Duckie]

See How to Campaign for a Better 401k Plan. At the bottom are links to previous forum discussions about this topic.

[hoppy08520]

Is it possible that Edward Jones might have it set up so that we are locked into the American Funds family & we are contractually bound to use only their funds? It wouldn't surprise me to find out that they would do something underhanded like that. I know that they get a commision from American Funds.

As I understand it, that's how it works.

EJ has various fund families they work with that provide EJ with kickbacks for using their funds, which is how they get paid.

As long as you have EJ, you won't be able to get index funds in your plan, or if you do, they'll slap a 0.5% or more surcharge on them because (as mentioned above) that's how they get paid. Which pretty much defeats the whole purpose of index funds.

[nbrege]

As long as you have EJ, you won't be able to get index funds in your plan, or if you do, they'll slap a 0.5% or more surcharge on them because (as mentioned above) that's how they get paid. Which pretty much defeats the whole purpose of index funds.

That's what I was afraid of. Do I have any other options, besides finding a new job? Are their any independant 401K plans that I can rollover into or am I stuck with our employer sponsered plan?

[lawman3966]

As long as you have EJ, you won't be able to get index funds in your plan, or if you do, they'll slap a 0.5% or more surcharge on them because (as mentioned above) that's how they get paid. Which pretty much defeats the whole purpose of index funds.

That's what I was afraid of. Do I have any other options, besides finding a new job? Are their any independant 401K plans that I can rollover into or am I stuck with our employer sponsered plan?

Unfortunately, the answer is that you're usually stuck. Unless you're approaching age 59 1/2, or your plan allows in-service rollovers (which is rare to my knowledge), you will have to leave your employer to roll the money out of the current plan.

The only other alternative I'm aware of is having your employer move your plan to another 401K provider, rather than attempting to tweak the offerings by your current provider. The high-fee providers want to keep the fee income that you're trying to avoid spending, and set the system up to protect their interests. Lobbying for a change in providers is difficult, but could be worth the effort if you think your HR department will listen.

My current employer adopted a low-fee plan (with Employee Fiduciary) that has no adviser from the outset of this firm, and so far no one has a problem with it. One employee asked how the Vanguard Target Date Funds worked, and that's it. Luckily, we are a small group (12 people total), are very new, and I spoke to the 401K committee during the first week we were formed. That way, instead of switching providers later, we started out with a low-fee provider in the first place.

[downshiftme]

As long as your company plan is with Edward Jones are you stuck with poor choices. If this is a tiny employer they may think they have limited ability to get a plan with a better provider. This is usually not true, but the Edward Jones rep might also be someone's son-in-law, so maybe you are stuck.

If you find out if some higher ups who have been with the company are in the plan, you can try to point out to HR how much the extra costs are for each participant with significant balances, and even without knowing the specifics point out that managers with long tenures and high balances are paying thousands in unnecessary fees. Sometimes it helps to mention this to a higher up if you have a possible conversational relationship with someone. Sometimes it helps to give HR a list of possible better providers, or volunteer to be on a 401k search committee the "next time" they look for a better plan.

More often than not, you have little influence except that if your balance gets high enough, the cost of staying employed there is too great and can push you to find a new job. Then you can rollover to an IRA.

[nbrege]

Thanks for all the info. I just wanted to get your opinion on a few more things. First of all, would you consider 6 equity & 2 bond funds to be a low number? How many choices does the "average" 401K plan have? Also, are the ER's ridiculously high for a 401K plan or are they fairly typical? The ER's for the equity funds are .63, .71, .80, .82, .84 & 1.14%. I got those from the AF website. Also, our company size is 250-300 employees. Thanks again.

[hoppy08520]

I just wanted to get your opinion on a few more things. First of all, would you consider 6 equity & 2 bond funds to be a low number? How many choices does the "average" 401K plan have?

I'm not going to claim to be an expert on 401(k) plans, but I've seen many many posts here on this forum and if they're a representative sample, then 8 funds is a small number.

But I wouldn't judge a plan based on the number of funds. The Federal government's Thrift Savings Plan, for example, has just five core funds but it's the best plan out there because it has such low expense ratios: 0.025% -- that's 30 times lower than the funds in your plan.

When I see a plan with many funds here, we Boglheads just skip over 90% of them anyway and zero in on the lower-expense index funds. I don't really care how many bad funds a plan has--we usually just look for the two or three good funds.

Also, from what I've read, there seems to be a trend toward plans having a smaller number of core funds, as opposed to having dozens of dozens of funds. The reason for that is the participants get overwhelmed by the choices and often don't choose well.

Also, are the ER's ridiculously high for a 401K plan or are they fairly typical? The ER's for the equity funds are .63, .71, .80, .82, .84 & 1.14%. I got those from the AF website. Also, our company size is 250-300 employees. Thanks again.

First of all, make sure you have the ER's right. You say you got them from the AF website. Make sure you get these numbers from your own plan literature as each 401(k) plan negotiates the ERs and they can be different from one plan to the next.

Also, you should find out if participants are paying ONLY what's in the published fund expense ratios, or if you're also paying additional fees on top of the fund ERs. For example, many plans might charge participants a accounts under management (AUM) fee of 0.25% or more.

If those ERs you listed are your complete, all-in expenses, then the next question is "are they fairly typical?" You have to ask if they're fairly typical for your size of company -- or more precisely, for the amount of your company's assets under management. Plans at smaller companies are, generally, more expensive than those at bigger companies. See this post for more: viewtopic.php?t=109902#p1598800. If those ERs you listed are your all-in expenses, then for a 250-300 person company, you're probably around average, maybe even a tiny bit better than average. Looking at p. 24 of the Deloitte survey, you plan probably has between $10M - $100M (a huge range) and those plans had an average all-in participant expense of 0.62% - 1.23%.

[nbrege]

Thanks again hoppy for all the good info. Let me ask you this if I may ... exactly what questions should I be asking my employer to determine if my plan is lousy or just typical? I know I should ask about all the expensives & hidden fees, but is there anything else you would want to know if it were your plan? I think the first thing I need to do is to determine how good or bad our plan is, so that I can decide if I should just accept it as it is or push for change. Thanks...

[Beelzebozo]

If you let me know the total assets in the plan and the number of participants with balances, I can give you an idea of what constitutes competitive pricing in the overall market. A list of tickers on your fund list will determine what your overall fees are. It's likely that you aren't paying any fees in addition to what's in the expense ratios, that's how EJ & AF normally work together.

AF does have a platform where you can get non-proprietary funds but there's 95% chance you're locked in at this point. I don't know if switching to it would necessitate dumping the EJ broker. However, it's probably just as easy to do an RFP and switch to a new provider. AF is pretty backwards.

By the way, that AF broker technically did not pick those funds. Since legally he was only providing "advice incidental to the sale of the plan", your employer is responsible for the fund choices. It's highly unlikely the EJ broker deals with many retirement plans or has much expertise. Edward Jones is typically thought of as the short bus of the financial advisory firms.



Disclosure: I work within the retirement plan industry and over just the past year have analyzed more plans than almost anyone in the nation. I am an Investment Advisor Representative of a fee-only Registered Investment Advisory firm and receive no compensation from plan providers nor investment companies. This post is for education purposes only and should in no way be considered investment advice or a solicitation of business.