Acceptable Expense Ratios in 401k?

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Acceptable Expense Ratios in 401k?

Postby rev316 » Sun Mar 17, 2013 5:20 pm

Hello. Longtime lurking Boglehead newbie here and I'm looking for some guidance on evaluating the expense ratios in my existing retirement portfolio.

My employer provided 401k portfolio has 2 Fidelity accounts, one is for profit sharing, and the other is for my contributions with a 30/70 split between two target date funds (5 years apart). Both of these target funds are listed with a 0.94% GER, and 0.71% management fee. Seems high? Given the annual advised return of 5%, by the retirement date I would of lost 8% of my earnings or "a retirement year" worth from these fees alone (if I did my math correctly).

What's a acceptable or typical ratio these days, and should I be strongly looking into alternatives?

Thanks!

Edit (added additional info):

- 6+ months emergency fund
- No debt
- Married Filing Jointly
- Late 20s
- Portfolio size is ~40K

Current Retirement:

Fidelity 401k Savings (contribution of 5% pre-tax and 5% roth):
* GER:0.94%, Management Fee: 0.71%
Fund #1 - TARGET DATE 2050 (70%), AAR:5%
Fund #2- TARGET DATE 2045 (30%), AAR:7%

Fidelity Profit Sharing (* No company match, but profit sharing):
* GER:1.03%, Management Fee: 0.79%
Fund #1 - Blended (100%), AAR:6.8%

Here's "some" of the account options.

Stocks/Benchmark:
Fidelity Growth Company Fund (Large Cap Growth) - GER:0.90%/Mang. Fee: 0.71%
Russell 1000 ® Index (Large Cap Blend) - GER:0.26%/Mang. Fee: 0.26%
Vanguard Institutional Index Fund Institutional Plus (Large Cap Blend) - GER:0.02%/Mang. Fee: 0.02%
Dodge & Cox Stock Fund (Mid-Cap Blend) - GER:0.52%/Mang. Fee: 0.5%
Russell 2000 Index (Small Cap Blend) - GER:0.52%/Mang. Fee: 0.52%
Russell 2500 Index (Small Cap Blend) - GER:0.03%
IMSCI All Country World ex-U.S (Foreign) - GER:0.54%/Mang. Fee: 0.54%
American Funds EuroPacific Growth Fund Class R-5 (Foreign) - GER:0.55%/Mang. Fee: 0.42%
ACWI EX US IMI (Foreign) - GER:0.10%
MSCI Emerging Markets (Emerging Markets) - GER:0.10%

Bonds:
PIMCO Total Return (Intermediate-Term) - GER:0.46%/Mang. Fee: 0.46%
Last edited by rev316 on Wed Mar 20, 2013 2:28 am, edited 3 times in total.
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Re: Acceptable Expense Ratios in 401k?

Postby Jeff7 » Sun Mar 17, 2013 10:07 pm

It could easily end up being more than 8%, though that largely depends on how many years we're talking about until the money is needed. Assume you've got a fund that's returning that 5% of assets per year, but it's charging an expense ratio that's 1% of assets. That seemingly small-sounding expense is actually eating 20% of that return. Here's a calculator to help demonstrate this.
And with that whole "past performance does not equal future returns" thing, there's no guarantee it'll keep doing 5% per year.

Besides that, I'm sure someone would come along to ask that you please check the guidelines in this thread for posting portfolio questions. With more information, others here can also provide additional advice.


Do you receive any kind of employer matching on the 401k plan?
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Re: Acceptable Expense Ratios in 401k?

Postby rev316 » Sun Mar 17, 2013 10:39 pm

Thanks Jeff. No match, but profit sharing in a separate account, 100% allocated into a diversified fund with even higher GER of 1.03%.
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Re: Acceptable Expense Ratios in 401k?

Postby Watty » Sun Mar 17, 2013 11:52 pm

Could you explain what you mean by "annual advised return of 5%" and "GER"?
Is the "GER" the expense ratio that people sometimes refer to as just "ER"?

I have a hard time believing that it is really an 8% cost per year that is so far out of line that the employer would be risking getting into trouble with their 401k because they have at least minimal fiduciary responsibilities when they set one up.

http://www.dol.gov/ebsa/publications/401kplans.html
Last edited by Watty on Mon Mar 18, 2013 12:08 am, edited 1 time in total.
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Re: Acceptable Expense Ratios in 401k?

Postby grabiner » Mon Mar 18, 2013 12:01 am

There are several levels of acceptable.

If your 401(k) expenses are higher than your IRA expenses, then you should contribute enough to the 401(k) to get the full employer match, and then max out an IRA (probably Roth) before contributing any more to the 401(k). Even a decent 401(k) is often in this situation, particularly in some asset classes; if your 401(k) offers Vanguard International Growth, you can save a bit on expenses by holding your international stock as Total International in your IRA instead.

It is rare (but unfortunately, not impossible) to have a 401(k) which is so bad that you should make taxable investments in preference to unmatched contributions. Take the product of the extra expenses of the 401(k) and the number of years you will stay there; my rule of thumb is that you should make 401(k) investments in preference to taxable investments unless that product exceeds 30%, which corresponds to about a 26% loss. For example, if your 401(k) has 1.70% expenses, and you can get 0.2% expenses in a taxable account, it's still worth contributing to the 401(k) unless you are confident you will spend more than 20 years with that employer. (When you leave the employer, you can roll your bad 401(k) into an IRA and get low expenses while keeping the tax deferral.)

No matter how bad your 401(k) is, you should always contribute enough to get the full employer match. If your employer gives you a 1-for-1 match, that's an immediate 100% return on your money, and the fees won't eat that up.

Also, check the options. Fidelity's target-date funds aren't the best, so if they aren't the only options in your 401(k), you might be able to do something better with other Fidelity funds. The Spartan index funds have extremely low costs.
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Re: Acceptable Expense Ratios in 401k?

Postby rev316 » Mon Mar 18, 2013 12:10 am

The "annual advised return of 5%" is the fund's advertised AAR.

GER is the "Gross Expense Ratio". Unlike net, it includes fee waivers or other expense reimbursements (this is how I understand it). I'm not sure if ER = NER here.
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Re: Acceptable Expense Ratios in 401k?

Postby rev316 » Mon Mar 18, 2013 12:45 am

Thanks Grabiner! Some comments and questions for you (so I understand).

I do not have an IRA, and there is no match but profit sharing that goes into a separate account. Unfortunately, I couldn't find a fund that offers the Spartan Index, but does have other options like Vanguard Institutional Index Fund (GER of 0.02%). Is it advisable to re-consider having myself vested completely in target funds? (I've also edited my portfolio break-down above to help provide more information).
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Re: Acceptable Expense Ratios in 401k?

Postby Mudpuppy » Mon Mar 18, 2013 3:41 am

rev316 wrote:Thanks Grabiner! Some comments and questions for you (so I understand).

I do not have an IRA, and there is no match but profit sharing that goes into a separate account. Unfortunately, I couldn't find a fund that offers the Spartan Index, but does have other options like Vanguard Institutional Index Fund (GER of 0.02%). Is it advisable to re-consider having myself vested completely in target funds? (I've also edited my portfolio break-down above to help provide more information).

If you can create your desired AA with funds that have a lower ER than the target date fund, you might want to go with that. You could get specific advice on how to do that if you make a list of the funds with low ERs.
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Re: Acceptable Expense Ratios in 401k?

Postby dbr » Mon Mar 18, 2013 9:37 am

rev316 wrote:The "annual advised return of 5%" is the fund's advertised AAR.

GER is the "Gross Expense Ratio". Unlike net, it includes fee waivers or other expense reimbursements (this is how I understand it). I'm not sure if ER = NER here.



I thought it was illegal for investment companies to promise performance, but maybe there is something in the weasel words "annual advised return" that skirts the law.

In any case those numbers should be taken as meaningless and replaced with a specification of what the stock and bond ratios are in the funds and what glide path will be followed as time goes on. If the funds have investments other than stocks and bonds, one should know what.
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Re: Acceptable Expense Ratios in 401k?

Postby grabiner » Mon Mar 18, 2013 8:37 pm

rev316 wrote:I do not have an IRA, and there is no match but profit sharing that goes into a separate account. Unfortunately, I couldn't find a fund that offers the Spartan Index, but does have other options like Vanguard Institutional Index Fund (GER of 0.02%). Is it advisable to re-consider having myself vested completely in target funds? (I've also edited my portfolio break-down above to help provide more information).


Post your full list of options. Institutional Index Plus is a great fund for that part of your investments, but for it to be part of a good portfolio, it needs to be accompanied by a bond fund, and a foreign fund, and preferable a small-cap fund. If you have good options for those classes (some of which may be in your IRA), then managing your own portfolio to include Institutional Index Plus will save you a lot in expenses compared to the Fidelity Freedom funds.
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Re: Acceptable Expense Ratios in 401k?

Postby Watty » Mon Mar 18, 2013 8:45 pm

dbr wrote:
rev316 wrote:The "annual advised return of 5%" is the fund's advertised AAR.

GER is the "Gross Expense Ratio". Unlike net, it includes fee waivers or other expense reimbursements (this is how I understand it). I'm not sure if ER = NER here.



I thought it was illegal for investment companies to promise performance, but maybe there is something in the weasel words "annual advised return" that skirts the law.

In any case those numbers should be taken as meaningless and replaced with a specification of what the stock and bond ratios are in the funds and what glide path will be followed as time goes on. If the funds have investments other than stocks and bonds, one should know what.



I'm wondering it that is some sort of annunity. I'm no expert but I am not famailar with the phrase "annual advised return" and when I Google with 401k it I'm not finding much other than this post.
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Re: Acceptable Expense Ratios in 401k?

Postby rev316 » Tue Mar 19, 2013 2:00 am

Nor am I, but try searching for "Average Annual Total returns as I see several hits on AAR alone. Nevertheless, here's how Fidelity lists it.

Average Annual Total returns (AAR) are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Life of fund figures are reported as of the commencement date to the period indicated. Total returns do not reflect the fund’s (%) sales charge. If sales charges were included, total returns would have been lower.



Edit: I've put the account options up-top and relabeled them to their equivalent benchmarks.
Last edited by rev316 on Wed Mar 20, 2013 2:15 am, edited 1 time in total.
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Re: Acceptable Expense Ratios in 401k?

Postby hoppy08520 » Tue Mar 19, 2013 8:16 am

This fund is the institutional share class reserved for large companies and institutions (foundations, universities, pension programs, etc.):

VANG INST INDEX PLUS (Large Cap Blend) - GER:0.02%/Mang. Fee: 0.02%

Is cheaper than what retail investors pay for VFINX (0.17%) which is the ordinary share class of this fund. The Admiral share class ($10,000 minimum holding) lowers the ER to 0.05%.

So, congrats, you have a great plan. The other choices in your plan that are index funds have similarly low expenses. I'd focus on those.

There is a chance that you're paying an assets under management fee that is a percentage of your overall balance that is on top of the fund expenses. But even if you are, that doesn't impact how you should choose your funds.
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Re: Acceptable Expense Ratios in 401k?

Postby ruralavalon » Tue Mar 19, 2013 8:24 pm

You have some very low expense choices in your 401k, which seem very promising, being :
VANG INST INDEX PLUS (Large Cap Blend) - GER:0.02%/Mang. Fee: 0.02%
BTC RUSSELL 2500 (Small Cap Blend) - GER:0.03%
BTC ACWI EX US IMI (Foreign) - GER:0.10%
BTC EMERGING MKTS (Emerging Markets) - GER:0.10%

Can you determine what "BTC" refers to? What are the ticker symbols for those 3 funds?

As mentioned already the "VANG INST INDEX PLUS" fund is an excellent choice, which you should use.

What fund company provides the "GLOBAL BOND FUND", and what is the ticker symbol?
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Re: Acceptable Expense Ratios in 401k?

Postby hoppy08520 » Tue Mar 19, 2013 8:57 pm

ruralavalon wrote:Can you determine what "BTC" refers to? What are the ticker symbols for those 3 funds?

BTC = BlackRock Trust Co.

These funds might be trusts and therefore there will be no ticker symbol. For those funds, if you can tell us the benchmark the fund follows then we might be able to give you more advice.
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Re: Acceptable Expense Ratios in 401k?

Postby grabiner » Tue Mar 19, 2013 9:33 pm

ruralavalon wrote:You have some very low expense choices in your 401k, which seem very promising, being :
VANG INST INDEX PLUS (Large Cap Blend) - GER:0.02%/Mang. Fee: 0.02%
BTC RUSSELL 2500 (Small Cap Blend) - GER:0.03%
BTC ACWI EX US IMI (Foreign) - GER:0.10%
BTC EMERGING MKTS (Emerging Markets) - GER:0.10%


This will cover your entire stock holdings at a very low cost, better than you can get as an individual investor in your IRA. The Russell 2500 is equivalent to Extended Market Index. The ACWI Ex US IMI (All Country World Index ex-US Investible Market Index) is equivalent to Total International. You don't even need the Emerging Markets Index unless you want to overweight emerging markets.

If your IRA isn't large enough for your entire bond allocation, you can use the PIMCO bond fund; the institutional shares at 0.46% are a good deal.
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Re: Acceptable Expense Ratios in 401k?

Postby chipmonk » Tue Mar 19, 2013 11:21 pm

rev316 wrote:Hello. Longtime lurking Boglehead newbie here and I'm looking for some guidance on evaluating the expense ratios in my existing retirement portfolio.

My employer provided 401k portfolio has 2 Fidelity accounts, one is for profit sharing, and the other is for my contributions with a 30/70 split between two target date funds (5 years apart). Both of these target funds are listed with a 0.94% GER, and 0.71% management fee. Seems high? Given the annual advised return of 5%, by the retirement date I would of lost 8% of my earnings or "a retirement year" worth from these fees alone (if I did my math correctly).
I'm all-but-certain that we work for the same company.

I agree that the default target-retirement-date funds have excessively high fees and hold a non-transparent hedge fund component; everyone who holds them is effectively subsidizing the zero-fee 401k's of everyone else at the company :-(.

On the plus side, our Fidelity 401k offers many other index mutual funds or index-tracking collective investment trusts at extremely low cost. There are many discussions of these on our internal message boards, where I recently outlined a strategy by which an employee could use these index funds to replicate the holdings of Vanguard's Target Retirement Funds, at the cost of some more maintenance effort (rebalancing and glide path towards retirement) but at a much lower cost (<0.10% ER) than Fidelity's funds. Feel free to send me a private message if you want me to send you the link.
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Re: Acceptable Expense Ratios in 401k?

Postby rev316 » Wed Mar 20, 2013 2:39 am

Great will do! Thanks for help, everyone. Given the listed alternatives with much lower fees (I've tried to re-add the benchmark counterparts, above), I've grown less than pleased with the TD type funds. I'm still having a hard time deciphering all the listed fees ratios and types (and more importantly, when they come into play). Is there a general rule of thumb to "look out for" or "equivalent as"? Trying to translate GER, NER, ER, Management Fees... :(
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Re: Acceptable Expense Ratios in 401k?

Postby hoppy08520 » Wed Mar 20, 2013 10:21 am

rev316 wrote:Great will do! Thanks for help, everyone. Given the listed alternatives with much lower fees (I've tried to re-add the benchmark counterparts, above), I've grown less than pleased with the TD type funds. I'm still having a hard time deciphering all the listed fees ratios and types (and more importantly, when they come into play). Is there a general rule of thumb to "look out for" or "equivalent as"? Trying to translate GER, NER, ER, Management Fees... :(

rev316, I hope chipmonk (your colleague) can help you decipher these terms for your own company plan. I've seen a lot of terms but usually you'll see something like "net expense ratio". This is typically what the participant (you) actually pays for the fund. Maybe "NER" is "Net Expense Ratio". I'm not an expert on this, but you'll often see a "Gross Expense Ratio" (GER) which might be higher than your "Net Expense Ratio".

At any rate, it seems that chipmonk has an ideal portfolio for indexers that lets you avoid the target date funds. It's unfortunate that a lot of plans have these expensive target date funds that they try to steer participants into. I can understand a slightly higher ER for target date funds but based on your post, it looks like the TD funds are FAR more expensive than a similar combination of index funds.

Interestingly, it was my own plan's expensive target date funds that eventually led me to Bogleheads. My plan's TD funds had a 1.0% ER. I discovered that I could use individual index funds and make my own TD plan for around 0.6%, a significant cost savings and probably a better portfolio. My first post on Bogleheads was to ask for advice on if I was doing right. That was more than a year ago.

Good luck.
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Re: Acceptable Expense Ratios in 401k?

Postby Beelzebozo » Sun Mar 24, 2013 5:45 am

The number you need to look for is Net Expense Ratio. Gross Expense Ratio is typically what's disclosed in the prospectus and Net takes into account temporary expense waivers that last for maybe 3 or 6 months. The difference between the two is typically minimal.

The "Management Fee" is typically a useless number. It supposedly refers to the amount of money going to the management team. However, it is not necessarily the number that Fidelity gets net of revenue sharing. Sometimes they keep more for document, legal, or other costs.

And just for fund, here is the summary of one of the most recent excessive 401(k) fee lawsuits yet. Your case reminds me of it because they got nailed for switching from Vanguard to Fidelity Target dates that had extra costs.

Fidelity ABB Lawsuit
http://www.workforce.com/article/201204 ... fee-cases#


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.
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Re: Acceptable Expense Ratios in 401k?

Postby chipmonk » Sun Mar 24, 2013 1:08 pm

hoppy08520 wrote:
rev316 wrote:Great will do! Thanks for help, everyone. Given the listed alternatives with much lower fees (I've tried to re-add the benchmark counterparts, above), I've grown less than pleased with the TD type funds. I'm still having a hard time deciphering all the listed fees ratios and types (and more importantly, when they come into play). Is there a general rule of thumb to "look out for" or "equivalent as"? Trying to translate GER, NER, ER, Management Fees... :(

rev316, I hope chipmonk (your colleague) can help you decipher these terms for your own company plan. I've seen a lot of terms but usually you'll see something like "net expense ratio". This is typically what the participant (you) actually pays for the fund. Maybe "NER" is "Net Expense Ratio". I'm not an expert on this, but you'll often see a "Gross Expense Ratio" (GER) which might be higher than your "Net Expense Ratio".

At any rate, it seems that chipmonk has an ideal portfolio for indexers that lets you avoid the target date funds. It's unfortunate that a lot of plans have these expensive target date funds that they try to steer participants into. I can understand a slightly higher ER for target date funds but based on your post, it looks like the TD funds are FAR more expensive than a similar combination of index funds.
By using a combination of the institutional index funds, an employee at our company can almost perfectly replicate the Vanguard Target Retirement (retail ER around 0.18%) funds at a total ER of around 0.04%. I sent an example of how to do this to the OP.

What's galling to me is that our 401k offers good low-cost index funds and collective investment trusts, but the default choice is a very high-cost Fidelity Target Date fund with an ER around ~.95%! :annoyed Basically, the low-information employees are getting fleeced and handing an enormous chunk of change to the plan administrators, while the savvy employees are getting our 401k subsidized by everyone else (which I guess is designed to keep us happy and quiet :D). While I am personally benefiting from this arrangement, I think it is violating the fiduciary principle of 401ks in which employers are supposed to be providing appropriate investment choices for all their employees. A default choice with an ER that's 80bp higher than it should be doesn't seem like an "appropriate" choice for anyone to me.
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Re: Acceptable Expense Ratios in 401k?

Postby Ice-9 » Sun Mar 24, 2013 1:14 pm

My employer also uses Fidelity, but when I inquired about a self-directed brokerage option, I was told we had Fidelity's BrokerageLink available at no extra cost. This turned out to be a great option, because it allowed me access without commission to both Fidelity's Spartan Index Funds and a good variety of iShares ETFs, from which I could shape a good, low-cost portfolio. Might be worth asking if this is available with your plan.
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