How to pitch better 401K to Employer??? Ours is pretty bad.

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StevenNJ1
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How to pitch better 401K to Employer??? Ours is pretty bad.

Post by StevenNJ1 »

I have no idea how the 401K works for or against an employer. Who pays or benefits, etc. However, our 401K is with company American Funds and it's pretty bad. Not only is selection bad but average expense is at around 1.50%.

Spoke to our head of accounting and she suggested to get some info to pitch to CFO. So .... how does this whole thing work?
thanks in advance.
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ogd
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by ogd »

There is a good Wiki on this: http://www.bogleheads.org/wiki/How_to_C ... _401k_Plan .

Just so they don't think what got you started is a fringe opinion from some website (remember you're up against some slick salesmen), I'd also mention I'd seen the Frontline documentary "The Retirement Gamble" which is mainstream, and talked to some (unnamed) friends who have much cheaper plans and are very happy with it.

Good luck winning the good fight!
Stan Dup
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by Stan Dup »

The simplest solution is to ask for some low-ER funds be added to the existing mix. Like the Vanguard funds that make up a 3-Fund Portfolio. That way the 401k provider is not threatened, and those in the know will be able to save money.
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti
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StevenNJ1
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by StevenNJ1 »

Stan Dup wrote:The simplest solution is to ask for some low-ER funds be added to the existing mix. Like the Vanguard funds that make up a 3-Fund Portfolio. That way the 401k provider is not threatened, and those in the know will be able to save money.
nice .... we're actually going to point this out to the CFO on Monday. Good point about adding a few extra funds instead of completely leaving the "provider".

thanks
Ericson32
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by Ericson32 »

Hi StevenNJ1,

Just a few weeks ago, I emailed my company's HR Benefits Coordinator and requested that they add Vanguard's Total Stock Market and Total International Stock Market funds to our 401k plan - the plan already has Vanguard's Total Bond Market fund, albeit VBMFX (investor shares) instead of VBTLX (admiral shares). I wonder if all 401k plans need to use the investor share funds for some reason instead of the admiral share funds. Anyone know? The Benefits Coordinator replied the same day and seemed quite sincere about being open to discussing adding these funds at the next open enrollment. I thanked her for using Vanguard as our plan administrator and told her I would be in investing heaven if they would add these two funds. :D

If your company has a Benefits Coordinator, I recommend sending a well reasoned email to this person showing how the addition of these funds would benefit all of the employees, then start hounding them, like I'm going to. :wink:

Cary
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ruralavalon
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by ruralavalon »

Ericson32 wrote:Hi StevenNJ1,

Just a few weeks ago, I emailed my company's HR Benefits Coordinator and requested that they add Vanguard's Total Stock Market and Total International Stock Market funds to our 401k plan - the plan already has Vanguard's Total Bond Market fund, albeit VBMFX (investor shares) instead of VBTLX (admiral shares). I wonder if all 401k plans need to use the investor share funds for some reason instead of the admiral share funds. Anyone know? The Benefits Coordinator replied the same day and seemed quite sincere about being open to discussing adding these funds at the next open enrollment. I thanked her for using Vanguard as our plan administrator and told her I would be in investing heaven if they would add these two funds. :D

If your company has a Benefits Coordinator, I recommend sending a well reasoned email to this person showing how the addition of these funds would benefit all of the employees, then start hounding them, like I'm going to. :wink:

Cary
Admiral class shares are not offered to 401k plans, but lower cost Signal class or Institutional class shares sometimes are. The share classes that can be offered depend on the size of the plan.

Maybe best to ask for the addition of just 1 or 2 low expense total market type index funds. Or if someone is wedded to using American funds, American has much lower expense versions of the same funds available.

Here is an on-line calculator which can be used to illustrate the impact of high expenses: Texas State Securities Board, "How do expenses impact mutual fund returns?"
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Jeff7
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by Jeff7 »

This sounds familiar.
Class R2 shares?
That's what my employer had used, until we got enough money invested to get R3.
Nothing was below 1%. The highest was 1.89%. (The money market fund was below 1%, but it has returned 0.00% since it first opened 5 years ago. Flat. Line.)

R3's not a huge bump, but at least some options are (slightly) below 1% now.


- Hope that your 401k rep/salesman/financial-person isn't buddies with someone high up in the company, or you're going to be fighting a losing battle before it's even started.
- Citing the money lost to fees might not work either, especially against a skilled salesman. "But our fund advisors have a system. You're only going to get market average performance with an index fund. Cost isn't everything."
- I've also learned that a surprising number of people don't trust math. Yes, the equation might be something as simple as 7x = 49, but they still won't trust the answer unless you work it all out in front of them with a real-world example, or maybe a stack of pennies. Citing costs can cause eyes to glaze over if there are too many numbers thrown around.
- "You don't have to worry about ERISA or the Department of Labor. I'll go to bat for you if there's ever an audit." Saying the words "Department of Labor audit" to upper management can cause dangerous drops in blood pressure; they'll gladly keep the expensive advisor around just to make the mean ol' DOL go away.

And here's another fee calculator.



I'm waiting semi-patiently for the 401k review at the end of this year, which I got myself invited to. My employer has shown little interest in switching providers, or doing much of anything to the plan. I guess I'll need to be the troublemaker. :wink:
Hopefully you have better luck.

My as-yet-untested thoughts on the matter:
- Be sure to specify that you are looking for low-cost fund options. American Funds will gladly offer you Vanguard's Total Stock Market fund. It'll also have an ER of around 1.5%.
- Present fund options across different companies, but which are still comparable and inexpensive. Vanguard of course has their index funds, but Fidelity's Spartan index funds are also good options. The financial advisor's organization might have various revenue sharing arrangements with a few specific mutual fund companies, which will automatically filter out those who are not part of that group.
- Present fund options that will benefit more people than just you. That could help "sell" the idea more easily. A lot of people don't know about this investing stuff, nor do they care to figure it out. Something like a LifeStrategy Fund, which invests in a certain ratio of stocks and bonds, or one of the other all-in-one types of fund, like Fidelity's FFNOX (US stocks, US bonds, international stocks) lets someone get a lot of diversification out of a single fund.
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by HardKnocker »

StevenNJ1 wrote:I have no idea how the 401K works for or against an employer. Who pays or benefits, etc. However, our 401K is with company American Funds and it's pretty bad. Not only is selection bad but average expense is at around 1.50%.

Spoke to our head of accounting and she suggested to get some info to pitch to CFO. So .... how does this whole thing work?
thanks in advance.
The way the whole thing works is that the fund company sells the 401k plan based on cost/benefit to the employer. Some employers want to keep their 401k costs to a minimum. The cost of the plan has to be paid somehow and thus, the costs are passed on to the employees in fund fees.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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StevenNJ1
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by StevenNJ1 »

HardKnocker wrote:
StevenNJ1 wrote:I have no idea how the 401K works for or against an employer. Who pays or benefits, etc. However, our 401K is with company American Funds and it's pretty bad. Not only is selection bad but average expense is at around 1.50%.

Spoke to our head of accounting and she suggested to get some info to pitch to CFO. So .... how does this whole thing work?
thanks in advance.
The way the whole thing works is that the fund company sells the 401k plan based on cost/benefit to the employer. Some employers want to keep their 401k costs to a minimum. The cost of the plan has to be paid somehow and thus, the costs are passed on to the employees in fund fees.
That's exactly what I wanted to know .... so company saves money by going with higher expense plans
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HardKnocker
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by HardKnocker »

StevenNJ1 wrote:
HardKnocker wrote:
StevenNJ1 wrote:I have no idea how the 401K works for or against an employer. Who pays or benefits, etc. However, our 401K is with company American Funds and it's pretty bad. Not only is selection bad but average expense is at around 1.50%.

Spoke to our head of accounting and she suggested to get some info to pitch to CFO. So .... how does this whole thing work?
thanks in advance.
The way the whole thing works is that the fund company sells the 401k plan based on cost/benefit to the employer. Some employers want to keep their 401k costs to a minimum. The cost of the plan has to be paid somehow and thus, the costs are passed on to the employees in fund fees.
That's exactly what I wanted to know .... so company saves money by going with higher expense plans
Sometimes. It depends on the employer's attitude toward employee benefits. Some are not too keen on it. Those not in favor generally avoid providing employee benefits if at all possible. They are then approached by high-expense 401k providers who sell them on a low-cost way to have a 401k plan. The method is to pass the costs on to the employees. The result is a lousy plan for the employees, little expense for the employer, and nice profits for the 401k administrator.

The strategy you would have to use to change this is to find an equally low employer expense plan with good fund options and low employee expenses. A tough job.

Don't forget you can utilize Roth IRAs yourself and tax efficient index funds to invest your money. It may not be in your best interest to rock the boat at work.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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Lifut
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by Lifut »

To preface, I don't have a 401k available and have practically no personal experience with them. Last year my significant other sent a simple email to someone in HR suggesting that they include some lower cost funds, specifically from Vanguard. She never received a reply, but soon after appeared a Vanguard S&P fund. Maybe it can be that easy?
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ruralavalon
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by ruralavalon »

Adding a 2 - 3 low expense funds to the existing lineup might be the easiest approach.

Remember that upper management suffers the same erosion of performance thru high fees as everyone else, so there is reason to hope.

Here are several fund companies with 2 - 3 low expense funds that would help, listed in order of preference. There is Bogleheads' wiki page on each of these companies. The key is low expense.

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) or any share class
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) or any share class
Vanguard Total International Stock Index Fund Investor Shares (VGTSX) or any share class

Fidelity Spartan Total Market Index Fund (FSTVX) or any share class
Fidelity Spartan U.S. Bond Index Fund (FSITX) or any share class
Fidelity Spartan Global ex U.S. Index Fund (FSGDX) or any share class

Schwab Total Stock Market Index Fund (SWTSX)
Schwab total bond market index fund (SWLBX)
Schwab International Index Fund (SWISX)

T Rowe Price Total Equity Market Index POMIX
T Rowe Price US Bond Enhanced Index PBDIX
T Rowe Price International Equity Index PIEQX

Northern Trust Stock Index NOSIX
Northern Trust Bond Index NOBOX
Northern Trust International Index NOINX
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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StevenNJ1
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by StevenNJ1 »

So I am about to go today to talk about the 401k cheaper options ... current avg expense is at 1.5% ... what's the realistic % we can expect to get from these funds?

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)
Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
Vanguard Total International Stock Index Fund Investor Shares (VGTSX)

Fidelity Spartan Total Market Index Fund (FSTVX)
Fidelity Spartan U.S. Bond Index Fund (FSITX)
Fidelity Spartan Global ex U.S. Index Fund (FSGDX)

Schwab Total Stock Market Index Fund (SWTSX)
Schwab total bond market index fund (SWLBX)
Schwab International Index Fund (SWISX)

T Rowe Price Total Equity Market Index POMIX
T Rowe Price US Bond Enhanced Index PBDIX
T Rowe Price International Equity Index PIEQX

Northern Trust Stock Index NOSIX
Northern Trust Bond Index NOBOX
Northern Trust International Index NOINX
Greenleaves
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by Greenleaves »

I believe the expense ratios can be found at the funds website or using a site like Morningstar.

Good luck, maybe you should take along someone with a firmer grip on fund expenses if you can get a second meeting after today. I have tried to get my wife or a few of her coworkers to make the case for lower fee funds in their 401K plan but they are afraid, sadly.
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StevenNJ1
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by StevenNJ1 »

So, our 401k meeting got scheduled for tomorrow with CFO and HR Manager ... should be fun.

My argument is going to be that our 401k fees are very high. At 1.5% avg, that's usually twice as much as a decent 401k?
I'll show them this calculator http://www.dinkytown.net/java/CompareFees.html and use the avg 1.5% vs let's say 0.8% Expense rate? Also a suggested 7% 401k yearly return.

I'll reference some other low cost funds that can be added to our American Funds account such as;
(VTSMX)
(VBMFX)
(VGTSX)

(FSTVX)
(FSITX)
(FSGDX)
also a few accounts from Schwab, etc ...

good so far? Anything else I should be prepared for? :-)

thank you
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ruralavalon
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by ruralavalon »

'll show them this calculator http://www.dinkytown.net/java/CompareFees.html and use the avg 1.5% vs let's say 0.8% Expense rate? Also a suggested 7% 401k yearly return.
Use the actual expense ratios for the American, Vanguard & Fidelity funds.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by roymeo »

I thought of this thread today when I was reading the Fund management briefing "Will invest for food" article in the Economist:

http://www.economist.com/news/briefing/ ... fa625b13c4

"But in a DC [Defined Contribution] pension the employer merely makes contributions. The payout is governed by the whims of the market; the employee bears all the investment risk. Most employers offer a default DC fund (which most employees opt for). And these funds usually have a big exposure to low-cost index-trackers: no employer can be blamed for opting for low-cost funds. The average large British company has costs of 0.41% on its DC scheme. That does not leave much scope for active fund managers. More than half of all schemes use trackers exclusively."
The sewer system is a form of welfare state. | -- "Libra", Don DeLillo
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StevenNJ1
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by StevenNJ1 »

What I did notice is that American funds, listed all their options here http://retire.americanfunds.com/about/funds/index.htm

when I check out the same funds they offer us, the expense fees on the site are much lower than in our booklet. So, does that mean that their fees are really adjustable? Meaning, like airline tickets ... I paid $700 for the same flight as my seat neighbor who paid $300?
Jeff7
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by Jeff7 »

StevenNJ1 wrote:What I did notice is that American funds, listed all their options here http://retire.americanfunds.com/about/funds/index.htm

when I check out the same funds they offer us, the expense fees on the site are much lower than in our booklet. So, does that mean that their fees are really adjustable? Meaning, like airline tickets ... I paid $700 for the same flight as my seat neighbor who paid $300?
There are several share classes for the funds.
Check the prospectus.

For example, here's the PDF for their Growth Fund of America.
Class A, B, C, F-1, F-2, etc etc.
I believe the R shares are usually found in 401k plan menus, and the class you get follows with how much money your company has in the plan. My employer recently got bumped from R2 to R3 because of the amount we had invested, and the ERs dropped a little bit. They're still all around 1% or more, so it's still nothing wonderful - and of course, before you had a big percent of a small number, whereas now you've got a small percent of a big number. Either way, they're still getting getting quite a lot of money out of the people in this company. After checking our Form 5500 to see the total amount invested, and knowing the average expense ratios, I should quit my job and work for a mutual fund company. The plan participants at this company are paying roughly half of my annual paycheck in mutual fund fees.
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StevenNJ1
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by StevenNJ1 »

Very interesting ... I am definitely using that chart you provided in PDF ...


one question .... the 1.5% expense fee ... it's 1.5% on all 401k balance or just on earnings? When using a calculator, even at 0% growth, I still saw a difference based on fee %, so that means it's 1.5% on balance in 401 not just earnings

what got me a bit confused is this quote

""Assuming 7% returns is a good long-term average value to use.
Assume 1% for costs.
Your cost is 1/7th of your returns: Suddenly, that little cost just ate 14.3% of your returns.

Every. Year.""
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by pkcrafter »

*If you have a couple of ticker symbols for funds available to you it would help.

*You haven't said whether your company must comply with ERISA standards. If so, you can make a very strong case for a few low cost funds to insure compliance. Companies have been sued for not offering lower cost choices.

*It's very common for company upper management to be completely unaware of the difference between one 401k plan and another. They are convinced by the professional presentations and the idea that there is no cost to the company. Lower cost plans don't aggressively promote their services. Company management must be aware of their existence.

*Not long ago the TV series Frontline did a very revealing program on 401k plans. It made a national stir. Review it and the other related articles here.

*You can read the text or watch the video. Link to text:

http://www.pbs.org/wgbh/pages/frontline ... script-43/

*Link to video and several related presentations. Note, Boglehead Steve Schillo was interviewed in the Frontline program.

http://www.pbs.org/wgbh/pages/frontline ... nt-gamble/

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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StevenNJ1
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by StevenNJ1 »

yep, I am going to show them the 5 min video part that talks about fees.

As a suggestion from other members here, I am also going to show comparison of growth of some of our funds VS some low cost ones.

Here is what I am comparing ... please see if this chart makes sense. We are being offered only American Funds .. I am comparing to (VTSMX) (FSTVX) (SWTSX) (POMIX) fair??


http://quote.morningstar.com/fund/chart ... %2C0%22%7D

thank you
Jeff7
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Re: How to pitch better 401K to Employer??? Ours is pretty b

Post by Jeff7 »

StevenNJ1 wrote:Very interesting ... I am definitely using that chart you provided in PDF ...


one question .... the 1.5% expense fee ... it's 1.5% on all 401k balance or just on earnings? When using a calculator, even at 0% growth, I still saw a difference based on fee %, so that means it's 1.5% on balance in 401 not just earnings

what got me a bit confused is this quote

""Assuming 7% returns is a good long-term average value to use.
Assume 1% for costs.
Your cost is 1/7th of your returns: Suddenly, that little cost just ate 14.3% of your returns.

Every. Year.""
Your annual returns are assumed to be 7%, as a reasonable long-term average. And 1% is assumed as the cost.

So in a simplified example, if you have $100 invested in the fund, the return is assumed to be $7 for that year.
1% for costs: You're paying $1 that year for the fund's expense ratio.

You got $7 from the market, but you paid $1 back in expenses, leaving you with a net return of only 6%.
1/7 = 0.143
14.3%.
That 1% expense ratio cost you 14.3% of the return from the market.
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