Campaigning for a better 401(k) Question

[jriding]

I'm new to the forums and have spent the past month Bogleizing my own investments. I offered to bring the Boglehead philosophy to my sisters investments and she gladly accepted. I was appalled at the high fees of available funds through her Hartford 401(k) (the high costs of Hartford 401(k) funds are well documented on these forums).

One thing lead to another and, in the spirit of the How to Campaign for a Better 401(k) Wiki, she emailed her company's President and fiduciary rep. She asked why her company had chosen Hartford, given the high costs of their fund offering. Mr. President responded quickly: "Among other reasons, because of the low fees." He went on to ask why her brother (that's me) thinks the fees are high.

I want to help my sister prepare a response that will hopefully lead to her company either dropping Hartford or getting some low cost index funds added to the Hartford plan.

A few questions:

1) Her company is pretty small at around 70 employees. Is it harder for smaller companies to get 401(k)s with firms like Vanguard and Fidelity?
2) Do companies like Hartford have better funds available, but push the high cost actively management funds for the obvious revenue benefits? In other words, is there any hope for Hartford?
3) I thought I'd provide my sister with examples of funds I have available through my AON Hewitt 401(k) (comparable to Vanguard costs) and the superior fund options my wife has through her Fidelity 403(b). I work for a huge corporation and my wife works for a state university. Is it even fair to compare the funds available to us to funds that a small company might be able to get?

Any advice on how to respond would be appreciated. I don't want to make suggestions that are impractical for a small company. Maybe The Hart(burn) is the best they can do?

[LadyGeek]

Welcome! I moved this thread to the Personal Finance (Not Investing) forum, which will get better attention for 401(k) questions.

Direct link to the wiki article: How to Campaign for a Better 401(k) Plan

[tj]

I'm new to the forums and have spent the past month Bogleizing my own investments. I offered to bring the Boglehead philosophy to my sisters investments and she gladly accepted. I was appalled at the high fees of available funds through her Hartford 401(k) (the high costs of Hartford 401(k) funds is well documented on these forums).

One thing lead to another and, in the spirit of the How to Campaign for a Better 401(k) Wiki, she emailed her company's President and fiduciary rep. She asked why her company had chosen Hartford, given the high costs of their fund offering. Mr. President responded quickly: "Among other reasons, because of the low fees." He went on to ask why her brother (that's me) thinks the fees are high.

I want to help my sister prepare a response that will hopefully lead to her company either dropping Hartford or getting some low cost index funds added to the Hartford plan.

A few questions:

1) Her company is pretty small at around 70 employees. Is it harder for smaller companies to get 401(k)s with firms like Vanguard and Fidelity?
2) Do companies like Hartford have better funds available, but push the high cost actively management funds for the obvious revenue benefits? In other words, is there any hope for Hartford?
3) I thought I'd provide my sister with examples of funds I have available through my AON Hewitt 401(k) (comparable to Vanguard costs) and the superior fund options my wife has through her Fidelity 403(b). I work for a huge corporation and my wife works for a state university. Is it even fair to compare the funds available to us to funds that a small company might be able to get?

Any advice on how to respond would be appreciated. I don't want to make suggestions that are impractical for a small company. Maybe The Hart(burn) is the best they can do?

The cheapest options for Vanguard funds with small companies are to use Paychex, Employee Fiduciary or Ascensus.

However, if the company doesn't want to switch to Paychex and would like to use a company that people have actually heard of with good customer service - both Nationwide and American funds do have access to Vanguard funds, and both are available through third party administrators if you don't want to work directly with them.

My company with slightly more employees opted to use Nationwide.

If i recall correctly, with American Funds, you are forced to use American for the target date funds, but in nationwide, we use Vanguard for the target dates.

The employer has the choice to roll the cost into the plan or have the company pay for it. Unless they are incredibly generous, they are not going to pay for it. Even having the costs rolled into the plan, we are paying like 60 bps including the fund's ER on the cheapest funds, which is way less than what John Hancock was charging.


Unless you have large number of assets, these are your options ---at least, these were our options.

[lawman3966]

1) Her company is pretty small at around 70 employees. Is it harder for smaller companies to get 401(k)s with firms like Vanguard and Fidelity?

Harder but not that bad. I think that 70 is more medium-sized than small, and Vanguard has recently re-entered that sector of the market. I think that 70 people is ample for Vanguard being a candidate.

2) Do companies like Hartford have better funds available, but push the high cost actively management funds for the obvious revenue benefits? In other words, is there any hope for Hartford?

The short answer is no. The sum of the fund ERs and other fees produces their expected earnings, and they'll never let you get away with lowering them significantly. One provider that solicited our employer told us that even if index funds were added, various fund fees would be added into the Expense ratios of such funds, thereby making them higher-fee funds. The logic was that the 401K plan had administrative costs, and that it wasn't fair for the index fund investors to avoid paying their fair share of the plan expenses. In other words, proceeds from the expense ratios of all funds benefit both the mutual fund companies and the insurance company provider. The opaqueness of most actively managed mutual funds makes it easy to hide the fees. However, many people now know the fees for index funds, which makes it more difficult to mix and match fees when coming up with the expense ratio.

3) I thought I'd provide my sister with examples of funds I have available through my AON Hewitt 401(k) (comparable to Vanguard costs) and the superior fund options my wife has through her Fidelity 403(b). I work for a huge corporation and my wife works for a state university. Is it even fair to compare the funds available to us to funds that a small company might be able to get?

I feel compelled to reiterate that 70 people is not that small. My employer has about 12 employees, only about half of whom are likely to participate in our 401K plan. We nevertheless just activated a 401K plan with Employee Fiduciary and have an all-Vanguard fund based with some charging as little as 0.05% expense ratios.

If we can do that, a company with 70 people should be able to as well, and should have many more options along the way. In our case, I was able to persuade our management to reject the scare tactic of advisory liability used by the high-cost providers to bully employers into the "security" of using a provider that provides financial advice. Our plan has no advisor, which is why the overall fees were kept under control. Moreover, with 70 people, the fixed dollar costs of the provider will be spread over more people making the plan less expensive for your participants than it is for ours.

After an ins. co provider said they'd immunize the employer against liability against lawsuits for bad market performance, we asked when such a lawsuit had occurred. They sheepishly replied that they knew of no such case. [/quote]

[Clever_Username]

If i recall correctly, with American Funds, you are forced to use American for the target date funds, but in nationwide, we use Vanguard for the target dates.

My employer's 401(k) is through American Funds and we have AF's target date funds.

Your other statement about Vanguard fund availability is true, also: we have the 500 fund and the inflation protected bonds; for my company, at least, these are at the investor-shares level expense ratio.

I'll admit I'm a little surprised that Nationwide has Vanguard funds; I would expect them to have a lot of high-cost choices.

[JamesSFO]

Also for 70 people, Fidelity will almost certainly directly take you on as a 401K client, and it is not that expensive.

I got quotes recently for TheOnline401K, Vanguard/Ascensus and a few others directly using Vanguard funds for a _THREE_ employee 401K and quotes were between $1-3K/year to have VG funds and the VG/Ascensus option would use the spread between Admiral/Investor shares to trim the fee. So with 70 emps it could have been free. Or I could have put admiral shares in, etc.

Anyhow, for 70 emps it would be trivial to have either of these options and basically pay nothing in the big scheme of things to run the plan.

[jriding]

Thank you tj, lawman, clever, and james!
Based on your thoughtful responses, I think the key points to pass on to the company President and fiduciary rep are:

1) Hartford is unlikely to offer less expensive funds. Even index funds will have fees added that will make their costs comparable to the actively managed funds already offered.
2) Companies worth looking at for a better fund selection are: Vanguard, Fidelity, Paychex, Employee Fiduciary, and Ascensus. Nationwide is also worth considering, although fees might be slightly higher. Lawman stated that Employee Fiduciary offers Vanguard funds with ERs as low as 0.05%. That sounds like a great place to start if the company can't contract with Vanguard directly.
3) Don't succumb to scare tactics used by high-cost providers. I don't understand the concept of "advisory liability", but it sounds like it's not something that happens often, if ever.

Hopefully these key points and a short list of Vanguard and Fidelity fund ERs will convince my sister's employer that there are better options out there that will save employees (including Mr. President) many $$$.

Thanks all for helping me fight the good fight.

[livesoft]

One has to divide the fees between (a) those that the company pays directly that you do not see, but the president and owner sees and (b) the fees paid by all the participants either through higher expenses ratios or quarterly fees.

My spouse was in a Hartford plan that cost the company zero because the 1.25% added fees on assets paid for all the costs and then some. One of the company owners did not even participate in the 401(k) plan, so he did not care about the (b) fees paid by participants. If the president was in an associated deferred compensation plan with no fees provided by the same vendor he would have little incentive to make the 401(k) plan from a (b)-style plan to an (a)-style plan. For example, a vendor says, "If your company uses our [high-fees-to-participants] 401(k) plan, then we can set up a deferred compensation plan with no fees for the C-level officers."

OTOH, if the president has substantial assets in the 401(k) plan, then they may be more suggestible about reducing the (b) fees, but that will usually mean an increase in the (a) fees.

[jriding]

One has to divide the fees between (a) those that the company pays directly that you do not see, but the president and owner sees and (b) the fees paid by all the participants either through higher expenses ratios or quarterly fees.

My spouse was in a Hartford plan that cost the company zero because the 1.25% added fees on assets paid for all the costs and then some. One of the company owners did not even participate in the 401(k) plan, so he did not care about the (b) fees paid by participants. If the president was in an associated deferred compensation plan with no fees provided by the same vendor he would have little incentive to make the 401(k) plan from a (b)-style plan to an (a)-style plan. For example, a vendor says, "If your company uses our [high-fees-to-participants] 401(k) plan, then we can set up a deferred compensation plan with no fees for the C-level officers."

OTOH, if the president has substantial assets in the 401(k) plan, then they may be more suggestible about reducing the (b) fees, but that will usually mean an increase in the (a) fees.

Thanks livesoft, I do worry about the scenario you describe. That is, the decision maker's inventives not being aligned with their employees. It will be interesting to see how the company responds to the argument I'm helping my sister make. I sent sis an e-mail that will hopefully convince Mr. President that the Hartford plan stinks (average fees are twice my wife's Fidelity offerings and five times my AON Hewitt 401(k) and Vanguard IRA funds). I included some 401(k) plan alternatives offered by the kind folks that responded to this thread. We'll see what happens. I'll post updates as events transpire.

[NightOwl]

Also for 70 people, Fidelity will almost certainly directly take you on as a 401K client, and it is not that expensive.

Agreed. My employer chose a Fidelity 401k when my company employed about 70 people, and it runs very smoothly at a low cost. I use the Spartan funds inside my 401k as the core of my portfolio, and I have an average ER of .14%. We don't pay for Brokerage Link, but I probably wouldn't use it even if I had access to it.

NightOwl

[c_anthony]

Another aspect to consider is that The Hartford sold their retirement plan business to Mass Mutual this past fall. As of Jan. 1st, 2013, MassMutual will have added over $50 billion worth of 401k business, along with over 30,000 more K plans. This may factor into the service level they would be receiving in addition to any other issues related to fees. Something to think about.

In my experience, when a decision marker wants to STAY with these Hartford plans, (related to a previous post) that the decision maker may have substantial assets in one of their Legacy plan guaranteed accounts. What this means is that many years ago when they offered higher fixed returns on their assets, around 3%+, they could be grandfathered into those. Once they decide to move, there is no going back. Looking from a fiduciary level, this is NOT acting in the best interest for the plan (unless they can justify that the majority of the employees have the bulk of their money in that fund) and this could be a severe liability to the fiduciary.

[lawman3966]

I don't understand the concept of "advisory liability", but it sounds like it's not something that happens often, if ever.

The term advisory liability may not be the most accurate. Liability for not providing an advisor is more like it.

Essentially, the high-fee providers convince the plan sponsor that they are at risk of expensive lawsuits on behalf of participants for violation of the sponsor's fiduciary obligation. The implication is that if the plan does not have an advisor, and a participant's investments do badly, that participant could sue the plan sponsor. In response to this issue, the expensive plan providers offer a sheet of paper promising to reimburse the plan sponsors for any losses in court arising from such a lawsuit. However, after searching on Google, I was unable to find a single lawsuit filed because of bad investment performance. Moreover, after being asked about this, one provider company representative admitted that there had not yet been such a lawsuit in the U.S.

To be sure, there have been other types of lawsuits involving 401K plans. Companies have been sued for forcing participants to invest in the stock of their own employer, only to have management siphon money out of the 401K plan. In some other cases, corporate management, upon noticing how money it was for advisors to squeeze money out of their employees with investment fees, decided to get in on the action themselves, since the money was by then "held hostage". Thus, some employers set up subsidiaries to offer advisory services with limited selections of bad funds with both high ERs and high wrap fees, among other expenses. There were some lawsuits over issues like that.

The logic of the simple, transparent approach offered by the likes of Employee Fiduciary is that the selection of funds should be kept short, simple, low-fee, and hopefully modeled on the Federal Thrift Savings Plan. The fees are as low as can be, and the fund selection is limited to index funds. Thus, there is a limited opportunity to get into mischief. The question about liability migrates to something like "could an employee with numerous safer options who chooses to place 100% of his assets in a stock index fund sue his employer if the overall market drops by 40% in a year?" I don't think there's been a single case like this, and there is therefore no guidance from the courts as to whether this could happen.

[krayzbone227]

I don't understand the concept of "advisory liability", but it sounds like it's not something that happens often, if ever.

The term advisory liability may not be the most accurate. Liability for not providing an advisor is more like it.

Essentially, the high-fee providers convince the plan sponsor that they are at risk of expensive lawsuits on behalf of participants for violation of the sponsor's fiduciary obligation. The implication is that if the plan does not have an advisor, and a participant's investments do badly, that participant could sue the plan sponsor. In response to this issue, the expensive plan providers offer a sheet of paper promising to reimburse the plan sponsors for any losses in court arising from such a lawsuit. However, after searching on Google, I was unable to find a single lawsuit filed because of bad investment performance. Moreover, after being asked about this, one provider company representative admitted that there had not yet been such a lawsuit in the U.S.

To be sure, there have been other types of lawsuits involving 401K plans. Companies have been sued for forcing participants to invest in the stock of their own employer, only to have management siphon money out of the 401K plan. In some other cases, corporate management, upon noticing how money it was for advisors to squeeze money out of their employees with investment fees, decided to get in on the action themselves, since the money was by then "held hostage". Thus, some employers set up subsidiaries to offer advisory services with limited selections of bad funds with both high ERs and high wrap fees, among other expenses. There were some lawsuits over issues like that.

The logic of the simple, transparent approach offered by the likes of Employee Fiduciary is that the selection of funds should be kept short, simple, low-fee, and hopefully modeled on the Federal Thrift Savings Plan. The fees are as low as can be, and the fund selection is limited to index funds. Thus, there is a limited opportunity to get into mischief. The question about liability migrates to something like "could an employee with numerous safer options who chooses to place 100% of his assets in a stock index fund sue his employer if the overall market drops by 40% in a year?" I don't think there's been a single case like this, and there is therefore no guidance from the courts as to whether this could happen.

The scenario you provide in which only high-fee providers (and not low-fee, or even other non-provider parties) would contact you about the fiduciary liability is short-sighted and inaccurate. Yes, it may happen that someone tries to convince you that you can share or transfer the fiduciary risk with them; however, that's also inaccurate because the employer would still be liable for CHOOSING that party in the first place. Wrapped fees you describe, including Revenue Sharing, ARE difficult to track and there have been lawsuits specifically on that. Just the possibility that an employee, upon finding out that his plan utilizes Revenue Sharing--which many 401(k)'s do may rightfully take action is significant in itself. While it may not make sense for ALL businesses, SIMPLE IRA's could among other things root out the Revenue Sharing. I mean, if you knew you didn't have to be paying inflated ER's accounting for Revenue Sharing, etc., eliminated the fiduciary risk, had an unlimited pool of investment options, didn't have to pay/account for a TPA, didn't have to file an annual 5500, and could offer eligible employees lifetime guaranteed income riders...it may be a huge boon to both employers and employees.

And so. It might not be just high-fee providers contacting you about the risk, but others trying to inform you of aforementioned advantages.

[retiredjg]

Mr. President responded quickly: "Among other reasons, because of the low fees." He went on to ask why her brother (that's me) thinks the fees are high.

I also wonder if two different types of fees were being discussed here. Mr. President may have no idea what an expense ratio is. He may believe the fees are low because the fees to manage the plan are lower than some he looked at.

Then theres that "among other reasons" thing. Could be a relative or friend who sold him the plan and told him the fees are low.

[jriding]

Mr. President responded quickly: "Among other reasons, because of the low fees." He went on to ask why her brother (that's me) thinks the fees are high.

I also wonder if two different types of fees were being discussed here. Mr. President may have no idea what an expense ratio is. He may believe the fees are low because the fees to manage the plan are lower than some he looked at.

Then theres that "among other reasons" thing. Could be a relative or friend who sold him the plan and told him the fees are low.

Good point about Mr. President's perspective. He might see Hartford as being the cheapest plan for the company without considering fund ERs. I'm hoping to get some feeback from him this week, so we'll see. I laid out a pretty simple summary of the average ER of Hartford funds vs. funds available in other plans suggested in this thread. Even translated the ER to annual dollars per $10,000 invested. It's a pretty striking difference (but now I'm preaching to the choir).

[jriding]

I just wanted to provide an update to this thread that I started in February and reiterate my thanks to those that have contributed their knowledge. Some progress has been made thanks to you.

Mr. President (who is also the fiduciary trustee) setup a conference call between him, me, my sister, and the Hartford rep that manages the 401(k) plan to discuss the plan's fees.

It was an interesting call to say the least. First, I thought it was great that they initiated the call and included me (keeping in mind that other than occasionally imparting Boglehead inspired wisdom to my sister, I have no stake in their 401(k) plan).

It was important to me that the conversation didn't become a debate on the merits of active vs. index funds, or whether the fees Hartford tacked onto the already high fund fees were of any value to the 401(k) participants.

I tried to keep the focus of the meeting on one fundamental question: Can Hartford offer several core index funds (US, international, and total bond) with expense ratios that are commensurate with companies like Vanguard and Fidelity. I used the 0.06% VTSAX as an example (the lowest cost stock fund offered by Hartford runs 0.68% and most are above 1%).

The Hartford rep said he'd look into adding lower cost index funds and get back to us within two weeks. He also mentioned looking into offering some ETFs, which I suppose could be just as good. He mentioned that Hartford does offer funds by Vanguard, so that's promising.

Hopefully I'll be updating this thread with some good news in a couple of weeks. In the mean time, my sister is gifting John Bogle's Little Book of Common Sense Investing to Mr. President.

EDIT: I was just re-reading the posts in this thread and noticed c_anthony's reference to fixed return 3%+ funds. As it happens, Hartford offers a 3% fixed return fund for all 401(k) participants. The Hartford rep pointed to this fund as a value added product. I suppose he has a point given the current fixed income market.

[fcirullo]

I just wanted to provide an update to this thread that I started in February and reiterate my thanks to those that have contributed their knowledge. Some progress has been made thanks to you.

Mr. President (who is also the fiduciary trustee) setup a conference call between him, me, my sister, and the Hartford rep that manages the 401(k) plan to discuss the plan's fees.

It was an interesting call to say the least. First, I thought it was great that they initiated the call and included me (keeping in mind that other than occasionally imparting Boglehead inspired wisdom to my sister, I have no stake in their 401(k) plan).

Amazing! Thank you for the update. For anyone who wants a better 401(k) plan, the rule is to ask for what you want and allow the other person say "No" or "Yes."