American Funds Simple IRA - avoiding fees

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American Funds Simple IRA - avoiding fees

Postby atDev » Mon May 24, 2010 9:23 pm

My wife recently setup an employer sponsored 401k. They match up to 3% of income.

Right now her account is set to invest in:
Capital World Bond Fund – A - CWBFX
EuroPacific Growth Fund – A - AEPGX
Washington Mutual Investors Fund – A - AWSHX

I notice for every transaction (every pay period) each purchase is getting knocked with a front load sales charge due to them being A shares.

I think she is deferring 6% of her income and I am thinking of reducing this so she can invest the rest elsewhere and only take advantage of the match and avoid these fees.

Any recommendations on any other funds offered by American Funds that she should use instead of the above three?

Would one of their target date retirement funds be best?
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Postby Bobalude » Mon May 24, 2010 10:01 pm

You should clarify if its a 401k or a SIMPLE IRA. They are very different in terms of rollover/transfer flexibility while still working for the employer.

going with a money market fund will incur no sales charge if you intend to transfer out to another fund family.

May I ask what the sales load amount is?

In order of highest to lowest sales charge in the AF family: Equity funds > Bond Funds > Short term bond funds > Money Market Fund.

As far as what to invest in if you do want to invest with AF, use online tools (Morningstar I think has one called an x-ray tool or something) to figure out the asset breakdown of funds to find the mix you want.
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Postby FredPeterson » Mon May 24, 2010 10:24 pm

A shares at 5.75%
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Postby Bobalude » Tue May 25, 2010 12:04 am

Thats the maximum. Most established plans will pay a lower amount.

And for what it's worth, most of American's Funds have performed well over the last 10 years, and some have done well even longer looking farther back. Using a tax advantaged plan negates some of the tax inefficiency of an actively managed fund.
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Are you certain she is paying the front load?

Postby flossy21 » Tue May 25, 2010 6:35 am

I had a SIMPLE IRA with Am. Funds which I have since moved to Vanguard. At the time American Funds/the custodian were not charging any front loads on the A shares as part of our plan.

There was an annual custodial fee of $40 and of course the American Funds ER's but otherwise no fees.
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Postby The Wizard » Tue May 25, 2010 7:13 am

Is there some LAW against these employer sponsored 401K plans going with Vanguard?
I'm thinking there's some kind of commission/kickback/referral-fee thing going on here...
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Postby FredPeterson » Tue May 25, 2010 8:40 am

The Wizard wrote:Is there some LAW against these employer sponsored 401K plans going with Vanguard?
I'm thinking there's some kind of commission/kickback/referral-fee thing going on here...


Its about getting the right people in charge of retirement plans. People who truly understand active vs index and expenses and how markets perform and how active has great potential to under perform broader indexes.

The people in charge want to look good and they do that by saying "hey look at the funds we picked for our 401k plan and how they've done the last 5 years"
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Postby atDev » Tue May 25, 2010 8:48 am

Hello,

It is a SIMPLE IRA just for clarification.

Sales load is right around 5.75%.

As far as what to invest in if you do want to invest with AF


I am not really seeing the option to invest in anything but AF in this account?

I have the option of choosing A, B, C F-1, F-2 shares but it looks like it was setup with A shares by default.
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Re: American Funds Simple IRA - avoiding fees

Postby insurance1288 » Tue May 25, 2010 8:10 pm

atDev wrote:My wife recently setup an employer sponsored 401k. They match up to 3% of income.

Right now her account is set to invest in:
Capital World Bond Fund – A - CWBFX
EuroPacific Growth Fund – A - AEPGX
Washington Mutual Investors Fund – A - AWSHX

I notice for every transaction (every pay period) each purchase is getting knocked with a front load sales charge due to them being A shares.

I think she is deferring 6% of her income and I am thinking of reducing this so she can invest the rest elsewhere and only take advantage of the match and avoid these fees.

Any recommendations on any other funds offered by American Funds that she should use instead of the above three?

Would one of their target date retirement funds be best?


If you don't want to keep your money with American Funds and would like to move it to Vanguard, this is what you should do:

1)For the first year, invest in "C" shares of whatever funds you want.
2)For the 2nd year, make all new investments into the money market option "A" share.
3)At the 2nd anniversary, transfer all of the money to Vanguard.
4)After the 2nd anniversary, make all new investments into money market "A" share. Immediately transfer the money to Vanguard.

A few other points:
1) I would not assume that moving money to Vanguard from American Funds will give you better returns.
2) The front end sales charges of "A" shares will drop as more money goes into the plan.
3) The basic rule with SIMPLE IRAs is that the money can be transferred after two years even if you are still employed. Transferring the money before this will cause giant penalties even if not employed.
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Postby insurance1288 » Tue May 25, 2010 8:25 pm

The Wizard wrote:Is there some LAW against these employer sponsored 401K plans going with Vanguard?
I'm thinking there's some kind of commission/kickback/referral-fee thing going on here...


There is a wonderful thing about salesmen. They make people take action. The plan doesn't go with Vanguard because nobody from Vanguard ever picked up the phone and called the owner and fought for an appointment and twisted his arm to seriously consider putting in a plan, and showed him the benefits and enrolled his people, etc.

The salesman gets paid for his work. If the plan getting started necessitated a call to Vanguard, the plan wouldn't get started.

I also don't think that Vanguard has any interest in working with people making $25/month contributions and total plan assets of a few thousand dollars.
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Postby Swamproot » Wed May 26, 2010 1:09 pm

I used to have the exact same plan. I would avoid Washington Mutual Investors Fund because there is an arbitrary $10 annual fee on that fund, at least there was a few years ago, and you could have the same asset class exposure in another fund that doesn't. That's not too bad, but its 1% on a $1000 position on top of the ER.

FWIW, here was my SIMPLER IRA at American Funds. I was trying to be well diversified given what I had, and it was all I had at the time:
15% American Mutual AMRMX
20% Growth Fund of America AGTHX
10% Capitol Income Builder CAIBX
10% EuroPacific Growth AEPGX
35% Small Cap World SMCWX
10% New World NEWFX

This was before their International Value fund came out and I might have found a place for it, at least until I figured out it could be transferred to Vanguard. The 35% Small Cap World might seem high but given AF's extremely loose definition of "small" (necessary because the fund is so HUGE), it takes that much to get adequate, truly small company exposure. It is really a Mid-Cap fund.

This comes out a reasonably balanced portfolio, IMHO. YMMV. But just for kicks and giggles, whatever you decide to do at American Funds, keep your portfolio plugged into Morningstars Instant X-ray tool and watch the style drift. Keeping the same portfolio is actually keeping a constantly changing portfolio, as The Growth Fund of America goes 20% foreign, the Europacific Growth Fund goes 20% domestic and the other funds are all over the place.

Active management is fun that way.
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Postby insurance1288 » Wed May 26, 2010 1:36 pm

Swamproot wrote:I used to have the exact same plan. I would avoid Washington Mutual Investors Fund because there is an arbitrary $10 annual fee on that fund, at least there was a few years ago, and you could have the same asset class exposure in another fund that doesn't. That's not too bad, but its 1% on a $1000 position on top of the ER.

FWIW, here was my SIMPLER IRA at American Funds. I was trying to be well diversified given what I had, and it was all I had at the time:
15% American Mutual AMRMX
20% Growth Fund of America AGTHX
10% Capitol Income Builder CAIBX
10% EuroPacific Growth AEPGX
35% Small Cap World SMCWX
10% New World NEWFX

This was before their International Value fund came out and I might have found a place for it, at least until I figured out it could be transferred to Vanguard. The 35% Small Cap World might seem high but given AF's extremely loose definition of "small" (necessary because the fund is so HUGE), it takes that much to get adequate, truly small company exposure. It is really a Mid-Cap fund.

This comes out a reasonably balanced portfolio, IMHO. YMMV. But just for kicks and giggles, whatever you decide to do at American Funds, keep your portfolio plugged into Morningstars Instant X-ray tool and watch the style drift. Keeping the same portfolio is actually keeping a constantly changing portfolio, as The Growth Fund of America goes 20% foreign, the Europacific Growth Fund goes 20% domestic and the other funds are all over the place.

Active management is fun that way.


The $10 fee had nothing to do with Washington Mutual. The cost to the participants of having a SIMPLE IRA held directly at American Funds is $10. If you don't pay the fee directly, it comes out of a fund. For you, they took it out of Washington Mutual. If you didn't have that fund, it would have come out of a different one.

The American Funds are a good fund family, but they aren't good for the DIY crowd. The issue is exactly what you are posting. It makes it hard to put together a portfolio when the funds don't stick to a particular style box.
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Postby Swamproot » Thu May 27, 2010 2:41 pm

insurance1288 wrote:The $10 fee had nothing to do with Washington Mutual. The cost to the participants of having a SIMPLE IRA held directly at American Funds is $10. If you don't pay the fee directly, it comes out of a fund. For you, they took it out of Washington Mutual. If you didn't have that fund, it would have come out of a different one.

The American Funds are a good fund family, but they aren't good for the DIY crowd. The issue is exactly what you are posting. It makes it hard to put together a portfolio when the funds don't stick to a particular style box.


Thanks for the clarification. I guess it was not so arbitrary after all. :-)
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Postby Bobalude » Thu May 27, 2010 8:52 pm

Swamproot wrote:Thanks for the clarification. I guess it was not so arbitrary after all. :-)


It would have taken $10 out of a money market fund first, and if not it takes the fund with the lowest ID number. Washington Mutual Investors Fund happens to be fund ID # 1 with American.

As others mentioned American may not be for the DIYers who want to use a low ER/index/asset allocation approach.

If you decide to use American for a long term investment (thus eating the front-end sales charge), your best bet is to visit the website and review each fund's asset breakdown by industry, asset/geographical mix, and 10 largest holdings. From there you can select the best mix you feel you want.

If you want hypothetical back-testing results (yeah yeah past performance is no indicator of the future) of difference fund mixes, you can ask the plan's adviser to access those for you.
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Postby Shireman28 » Fri May 28, 2010 10:57 am

I also don't think that Vanguard has any interest in working with people making $25/month contributions and total plan assets of a few thousand dollars.


Our company has 2 simple IRAs. One with Principal that a salesman sold them. It had loaded funds with 4%+ upfront fees. Another through Vanguard that I got set up by complaining. My account is the only one in the Vanguard Simple IRA and Vanguard never worried about the fact that only a few thousand dollars were in it.

OP should go to the benefits person with the Vanguard printouts and have them set something up.
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