Lobbying for 401K funds

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Tom_T
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Lobbying for 401K funds

Post by Tom_T »

I am going to ask my employer about possibly offering some better funds in the 401K. I work for a relatively small company, so at least I don't have to jump through hoops to ask the right person.

What I am wondering about is the cost aspect of 401Ks from the employer's perspective. In a typical situation, how does the plan administrator make money from the company? Does it cost more to offer more funds? If I ask for a new fund, and it is going to cost the company money, that won't fly. If there's no cost difference to the company, then I can make an argument about index funds, lower expenses, etc.

P.S. The plan administrator in my case offers a variety of 401K funds from different companies: Vanguard, Fidelity, T Rowe, etc.
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Tim_in_GA
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Re: Lobbying for 401K funds

Post by Tim_in_GA »

All I can say is good luck. It's like talking to a brick wall at my company. I even posted the suggestion to our online "suggestion box" so more people in the company would hopefully see it and it was immediately removed.
livesoft
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Re: Lobbying for 401K funds

Post by livesoft »

There are several ways a company could pay for a 401(k) plan. The principals may not even know that they have many options and could be fooled into thinking what they are paying.

Some examples:

1. Company does not pay directly. The 401(k) sponsor uses high fee funds and/or front-end load funds and takes a cut. So while the company pays nothing, the principals who typically might have the largest account values are paying thousands out of their out pockets without realizing it. It can be worse because they often have personal financial advisors who are also taking a cut from their portfolios. In egregious cases, the company owner's brother-in-law or golf buddy is running the plan and milking it for profits.

2. Company pays a per participant fee of $5 to $30 annually, plus the 401(k) sponsor gets a cut of 401(k) assets under management (AUM) from the fund companies.

3. Company pays a flat rate regardless of the number of participants for various services, plus 401(k) sponsor gets a cut of 401(k) AUM.

4. Company pays a AUM fee.

5. Participants get fees withdrawn quarterly from their accounts which could be the per person fee and the AUM fees.

5. Any combination of the above and probably a few other clever ways to extract money.

With a large plan with index funds and actively-managed funds, the cost to the company may be zero because enough participants use enough of the actively-managed funds that those folks pay the cost burden through their 12(b)-1 fees.

Generally, there is no extra cost to add a fund, but there may be confusion among the plan participants with too many funds. In particular, if there are two funds for the same asset class or if a fund in an esoteric asset class is added, what's the point?

As a 401(k) committee member, I get aggregate info about our 401(k) plan. I can see how many people are invested in each fund. A fund with just 1 or 2 people invested in it is something we look at and causes us to wonder, Why have this fund?
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JamesSFO
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Re: Lobbying for 401K funds

Post by JamesSFO »

Tom_T wrote:I am going to ask my employer about possibly offering some better funds in the 401K. I work for a relatively small company, so at least I don't have to jump through hoops to ask the right person.

What I am wondering about is the cost aspect of 401Ks from the employer's perspective. In a typical situation, how does the plan administrator make money from the company? Does it cost more to offer more funds? If I ask for a new fund, and it is going to cost the company money, that won't fly. If there's no cost difference to the company, then I can make an argument about index funds, lower expenses, etc.

P.S. The plan administrator in my case offers a variety of 401K funds from different companies: Vanguard, Fidelity, T Rowe, etc.
It really can vary. It may pay to look at the fee disclosures and ask a few questions before going right towards asking for new funds. There may be vested interests in liking the higher expense funds, etc. Or you may just end up with your index funds with really high ERs.

In the abstract, adding a fund doesn't cost more money, but it really matters how the 401K plan is set up for how the company is charged.

Who is the 401k plan administrator right now? E.g. John Hancock? Fidelity? Etc? What is the fund line up? Typical ERs?
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Tom_T
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Re: Lobbying for 401K funds

Post by Tom_T »

JamesSFO wrote:Who is the 401k plan administrator right now? E.g. John Hancock? Fidelity? Etc? What is the fund line up? Typical ERs?
The administrator is Transamerica Retirement Solutions, part of the Transamerica family. The fund lineup that I see is a hodge-podge from different providers:

- Fidelity 500 Spartan (ER 0.05)
- Vanguard Wellington (ER 0.17)
- MetroWest Total Return bond fund (ER 0.62)
- Invesco American Value (ER 1.32), along with a few other "mid-cap" or "value" funds with ERs in the 1.3 range.
- T-Rowe Target Retirement funds (ER around 0.75)
- American Funds EuroPacific (ER around 0.90) -- this is the only international fund offered
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JamesSFO
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Re: Lobbying for 401K funds

Post by JamesSFO »

Tom_T wrote:
JamesSFO wrote:Who is the 401k plan administrator right now? E.g. John Hancock? Fidelity? Etc? What is the fund line up? Typical ERs?
The administrator is Transamerica Retirement Solutions, part of the Transamerica family. The fund lineup that I see is a hodge-podge from different providers:

- Fidelity 500 Spartan (ER 0.05)
- Vanguard Wellington (ER 0.17)
- MetroWest Total Return bond fund (ER 0.62)
- Invesco American Value (ER 1.32), along with a few other "mid-cap" or "value" funds with ERs in the 1.3 range.
- T-Rowe Target Retirement funds (ER around 0.75)
- American Funds EuroPacific (ER around 0.90) -- this is the only international fund offered
Oh, well if you already have some sub 0.25 ER funds you may have a decent shot at getting others in there. Sometimes when people post they have a plan where EVERYTHING is over 1.00 ER. I would still do a bit of digging to understand who/why the funds were picked and the process before lobbying too hard.
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Tom_T
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Re: Lobbying for 401K funds

Post by Tom_T »

JamesSFO wrote:Oh, well if you already have some sub 0.25 ER funds you may have a decent shot at getting others in there. Sometimes when people post they have a plan where EVERYTHING is over 1.00 ER. I would still do a bit of digging to understand who/why the funds were picked and the process before lobbying too hard.
I'd like to get Vanguard Total Stock Market and Vanguard Total International. I can live with the bond fund. I don't have any interest in the other funds. Not expecting anything to happen, but we'll see. Thanks for the information!
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Re: Lobbying for 401K funds

Post by jjbiv »

Tom_T wrote:
JamesSFO wrote:Oh, well if you already have some sub 0.25 ER funds you may have a decent shot at getting others in there. Sometimes when people post they have a plan where EVERYTHING is over 1.00 ER. I would still do a bit of digging to understand who/why the funds were picked and the process before lobbying too hard.
I'd like to get Vanguard Total Stock Market and Vanguard Total International. I can live with the bond fund. I don't have any interest in the other funds. Not expecting anything to happen, but we'll see. Thanks for the information!
At the very least, you should be able to the the Fidelity Spartan Extended Market Index fund added to complete the Fidelity S&P 500 Index fund. I think Vanguard Total International fund or Fidelity Spartan Global Ex-US would also be easy additions. You have it pretty easy compared to many others who post their fund lineups here. Best of luck in fighting the good fight!
leonard
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Re: Lobbying for 401K funds

Post by leonard »

If it's a small company - quantify how much less the owner will have at retirement by investing in the higher priced 401k vs a low cost 401k. This calculation is very easy. Then, present the results appropriately.

Once an owner sees they are hurting their own future with these high fees and/or poor choices - they should move to protect their interest if they are rational.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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dm200
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Re: Lobbying for 401K funds

Post by dm200 »

leonard wrote:If it's a small company - quantify how much less the owner will have at retirement by investing in the higher priced 401k vs a low cost 401k. This calculation is very easy. Then, present the results appropriately.

Once an owner sees they are hurting their own future with these high fees and/or poor choices - they should move to protect their interest if they are rational.
Even in a small company, I doubt your "logic" and argument would work. The owner, almost certainly, will have MORE money (all other factors being equal) by offering the high cost 401k to employees. One major factor in a company choosing a rotten 401k (high fees and costs) is that doing so costs the company (and the owner of the company) a lot less. Tat "lot less" goes right into the pockets of the owner. The owner, in your scenario, is one person - but multiply the extra costs to the company (the owner) by the number of employees.

My estimate is that this argument would only cause a change in about 1/10 of 1% (if that) and you run the risk of being labeled a "troublemaker"! Been there, done that!
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Re: Lobbying for 401K funds

Post by leonard »

dm200 wrote:
leonard wrote:If it's a small company - quantify how much less the owner will have at retirement by investing in the higher priced 401k vs a low cost 401k. This calculation is very easy. Then, present the results appropriately.

Once an owner sees they are hurting their own future with these high fees and/or poor choices - they should move to protect their interest if they are rational.
Even in a small company, I doubt your "logic" and argument would work. The owner, almost certainly, will have MORE money (all other factors being equal) by offering the high cost 401k to employees. One major factor in a company choosing a rotten 401k (high fees and costs) is that doing so costs the company (and the owner of the company) a lot less. Tat "lot less" goes right into the pockets of the owner. The owner, in your scenario, is one person - but multiply the extra costs to the company (the owner) by the number of employees.

My estimate is that this argument would only cause a change in about 1/10 of 1% (if that) and you run the risk of being labeled a "troublemaker"! Been there, done that!
Have you run the numbers? the owner stands to loose a lot more on average - due to a bad 401k. Excessive fees can easily - easily cost them 25-33% of their ending portfolio balance invested via the 401k. On an owners 401k plan - that can amount to $500k to $1M - using extremely conservative numbers. There is no way to make up that kind of shortfall just by having a more expensive 401k. btw - the multiplicative effect is smaller because - again - we are talking about a small company (see OP's post).

It's popular to believe that expensive 401k's save companies money. They don't it's false. Most of the excess fees are collected by the TPA and fund companies. The very small dollars the employer saves is minimal.

So, go ahead and present your actual numbers demonstrating how expensive 401k's save small companies money vs a low cost administrator. And, specifically, how that savings accrues to the owner in such a way to compensate them for the drag of high fees? Looking forward to this analysis.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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dm200
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Re: Lobbying for 401K funds

Post by dm200 »

Of course companies save a lot (all other things being equal) with a 401k plan that loads all, or almost all, of the costs of running a plan on the participant employees. That money goes right, straight into the pockets of the owner. A very low cost plan would require the employer to fully fund the administration of the plan, which would either mean paying an outside administrator or having an employee do it, or some combination.
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Re: Lobbying for 401K funds

Post by jjbiv »

Why couldn't a low-cost plan pass its costs on to participants if the employer decided to not pay those costs? It seems plan fees and who pays those fees are being conflated here.
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Re: Lobbying for 401K funds

Post by livesoft »

jjbiv wrote:Why couldn't a low-cost plan pass its costs on to participants if the employer decided to not pay those costs? It seems plan fees and who pays those fees are being conflated here.
A problem is that there is a minimum cost per participant and thus participants with low balances would be hit with the equivalent of a huge expense ratio.

For example suppose it costs $50 per person per year. Someone with with $500 in the plan would be charged 10% of their balance,
someone with $5,000 in the plan, 1% of their balance;
someone with $500,000 in the plan, 0.01% of their balance.
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dm200
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Re: Lobbying for 401K funds

Post by dm200 »

jjbiv wrote:Why couldn't a low-cost plan pass its costs on to participants if the employer decided to not pay those costs? It seems plan fees and who pays those fees are being conflated here.
I believe it to be the case that high fees in 401k and 403b plans are what provides the funds to cover plan costs. I can't cite figures, but I would guess that a "low cost" plan, with ALL admin costs of the employer passed on to participants would be very close to what such employees would pay with a higher cost plan. The two issues are, IMO, very intertwined.
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Re: Lobbying for 401K funds

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (401(k)).

Also, see: How to Campaign for a Better 401(k) Plan
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Re: Lobbying for 401K funds

Post by leonard »

dm200 wrote:Of course companies save a lot (all other things being equal) with a 401k plan that loads all, or almost all, of the costs of running a plan on the participant employees. That money goes right, straight into the pockets of the owner. A very low cost plan would require the employer to fully fund the administration of the plan, which would either mean paying an outside administrator or having an employee do it, or some combination.
No - it's very easy for an employer to recoup the cost of a very low cost plan. Some TPA's will charge the employee account directly.

Or some employer simply pay employees a fraction less to recoup the 401k.

It's easy to do either way.

So, low cost or high cost - the cost can be born by the employer, the employee, or a combination.

So, Again, the employer could easily have a low cost plan AND shift the cost to employees, if that's the goal. But, for some reason, they decide to saddle themselves with high costs too, that can eat of a quarter or a third of their 401k portfolios, costing hundreds of thousands of dollars. In a profit sharing plan, it could cost them easily a million or more. That's easy to quantify and easy to show the employer what they are personally losing with a high cost plan.

What again are your even rough numbers that indicate an employer is better off with a high cost plan vs what they lose personally?
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: Lobbying for 401K funds

Post by leonard »

dm200 wrote:
jjbiv wrote:Why couldn't a low-cost plan pass its costs on to participants if the employer decided to not pay those costs? It seems plan fees and who pays those fees are being conflated here.
I believe it to be the case that high fees in 401k and 403b plans are what provides the funds to cover plan costs. I can't cite figures, but I would guess that a "low cost" plan, with ALL admin costs of the employer passed on to participants would be very close to what such employees would pay with a higher cost plan. The two issues are, IMO, very intertwined.
Not intertwined at all. A cheap 401k plan might have about $3000-$3500 of start up costs - plus cost a thousand or so a year to operate in per participant fees. It's easy to shift those costs to the employees - if that's the goal. Charge accounts directly. Reduce salaries a fraction. Covered pretty painlessly.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: Lobbying for 401K funds

Post by 555 »

leonard wrote:A cheap 401k plan might have about $3000-$3500 of start up costs - plus cost a thousand or so a year to operate in per participant fees. It's easy to shift those costs to the employees - if that's the goal. Charge accounts directly. Reduce salaries a fraction. Covered pretty painlessly.
Our 457b plan charges participants 0.2% (per year) of balance up to $50k, so a max of $100 (per year). A little high, but much cheaper than 1% of the whole balance. And it has a few <10bp index funds. This structure is definitely in the interest of participants.
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Re: Lobbying for 401K funds

Post by heikejohn »

My husbands 401K has some Mutual Funds with .40 - .89% fees, PLUS the outragous 1.58% administrations fees. No company match.
If there was an "In Service Roll Over" available, we would have done it every year. The combined fees are about 25 - 30% of new contributions every month. :annoyed
Only a few more years until my husband can retire. Can't wait to get the money out of this plan!!
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Re: Lobbying for 401K funds

Post by gloomydog »

Usually when the 401K is set up, someone from the company gets to choose the funds that will be included in the plan. I think all you have to do is ask to be on the 401K committee or similar. I will wager you can change the fund lineup at least once a year if you like.

But keep in mind if new funds are selected and some are gone, then any assets invested in the funds that are being replaced may need to go elsewhere. It will add complexity. If you work for a small company (like me!) it's probably easier to do this and convince your colleagues something else is better.

---------
On plan admin fees - there are a number of fees involved. When I set this up for the small co I work for, I was given the option of having the plan participants share some of the fees, or company pays it. The company decided to pay for the fees instead of spread it out over participants.
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Re: Lobbying for 401K funds

Post by fcirullo »

Good question and great answers! I have included this thread under Forum discussions in the wiki article Setting up a 401(k) plan

Best wishes,

Frank R. Cirullo
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Re: Lobbying for 401K funds

Post by jegallup »

Tom_T wrote:
JamesSFO wrote:Who is the 401k plan administrator right now? E.g. John Hancock? Fidelity? Etc? What is the fund line up? Typical ERs?
The administrator is Transamerica Retirement Solutions, part of the Transamerica family. The fund lineup that I see is a hodge-podge from different providers:

- Fidelity 500 Spartan (ER 0.05)
- Vanguard Wellington (ER 0.17)
- MetroWest Total Return bond fund (ER 0.62)
- Invesco American Value (ER 1.32), along with a few other "mid-cap" or "value" funds with ERs in the 1.3 range.
- T-Rowe Target Retirement funds (ER around 0.75)
- American Funds EuroPacific (ER around 0.90) -- this is the only international fund offered
My company had Transamerica, and they charged a 1.65% wrap fee on top of all the high-fee funds they offered. And in fact they didn't really buy the funds the they purported to offer; they simply manipulated each participant's funds as if they had done so. Although there were decent funds available in the mix of about 100 they offered, overall It was a terrible, terrible deal — but, according to the business insurance agent we used, the best that a small company could get.

Later an employee got me interested in Vanguard, and we switched. When the Pyramid Power minions saw we were departing, they offered a lower wrap fee, thereby validating my already low opinion of them.
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Re: Lobbying for 401K funds

Post by TRC »

I work for a small company (200 people). We used to have ING as our fund provider and they were awful - all actively managed funds and really high ERs.

Luckily I have some clout in my organization with Sr. management and put a bug in their ear. They had me sit down with HR to educate them on how poor our selection was, why index funds are better, etc. They gave me all sorts of excuses on why they didn't want to move. Mainly because they were too comfortable with our plan / fund sales guy, they thought our portfolio size was too small for other providers (~5M), and he brainwashed them into thinking they couldn't pick the right funds without his help.

I ended up calling Fidelity directly and spoke with the rep who handled our sized company & area. Got her in touch with HR, they did more eduction and ended up issuing a Request for Proposal (RFP) to several new providers, including the current one & Fidelity. 1 year later, they finally switched to fidelity and I now have access to the Spartan S&P 500, Total Int. Index, and Total Bond Index.

My advise is to sit down with your CEO and/or CFO and start with them. Educate them first on the benefits of passive, index fund investing. Show them how poor actively managed funds perform, then show how the fees erode returns even more. Get them bought into index funds, and then show them how poor your selection is. Fidelity is a great fund provider to work with IMO. I don't "believe" it costs your company anything to switch. I think they are compenstated by the ER int the funds....I could be wrong though.
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Re: Lobbying for 401K funds

Post by leonard »

555 wrote:
leonard wrote:A cheap 401k plan might have about $3000-$3500 of start up costs - plus cost a thousand or so a year to operate in per participant fees. It's easy to shift those costs to the employees - if that's the goal. Charge accounts directly. Reduce salaries a fraction. Covered pretty painlessly.
Our 457b plan charges participants 0.2% (per year) of balance up to $50k, so a max of $100 (per year). A little high, but much cheaper than 1% of the whole balance. And it has a few <10bp index funds. This structure is definitely in the interest of participants.
My opinion is that the absolute best fees structure for employees (and employers, since they participate too) is the for the employer to write 100% of the checks for the plan expenses. Then, if the employer decides to try to "recoup" fees, they should offer marginally lower salaries to employees. The employer can write off 100% of plan fees for taxes. And, the employee's "fee" for the 401k is in the form of lower salary - so they are in better shape after taxes.

Any scenario where the employees pay out of their plan assets are 2 bad scenarios: 1) you are paying with dollars that you worked hard to get in the plan and they are just coming right back out and 2) in the case of a Roth 401k, you are paying with dollars that are after tax and worth more then Trad 401k dollars.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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