I've recently completed the process of moving my company's 401(K) plan from the extremely high-fee John Hancock to Employee Fiduciary (EF)
, which offers the lowest cost 401(k) plan available to small businesses. I thought other Bogleheads might be interested in a quick review of the switch and my opinions. In summary, I've been extremely pleased with EF and would highly recommend them to any company unable to work with Vanguard directly (i.e., with less than $3 M in assets). Even above $3 M, I believe EF's fees are still less than Vanguard's for many companies.
In my opinion, the 401(K) industry as a whole does an extremely good job of fleecing individual investors by (in many cases) overcharging for mediocre funds. I think EF is the best alternative to that for small companies because they have no conflict of interest from being paid kickbacks to carry specific funds. They let you choose any fund you want for your plan and offer solid customer service and extremely low fees. They charge $25 per employee with a minimum of $1500.
The funds we chose to offer our employees (with fees) are:
VG S&P 500 (VFINX) [0.18]
VG Extended Index (VEXMX) [0.25]
TIAA-CREF International Index (TCIEX) [0.15]
VG Int. Treasury (VFITX) [0.26]
VG Total Bond (VBMFX) [0.20]
VG Money Market (VMMXX) [0.24]
VG Target Retirement Income - 2050 [~0.20]
Here are some details on our plan (as I presented them to our employees). My minor critiques are at the bottom.
Q. John Hancock offered over 60 funds. Why are there only 6 mutual funds and 11 target retirement funds?
A. Our new 401(k) plan is modeled on the Federal Government's Thrift Savings Plan, which is the largest defined contribution plan in the world and one of the very best. Although we can't offer the rock bottom fees of the TSP, our plan has the lowest fees available for any small business. Since fees are subtracted directly from your investment return, this means more money for your retirement. More info on the TSP is available from Money Magazine
and the TSP website
All of the funds in the 401(k) plan are index funds. This article
has a good background on index funds. Note that if you wish to invest in more exotic assets or actively managed funds, you can still do so in an IRA or a taxable account.
Q. How can I learn more about the funds available?
A. When you log into the website and choose Investment Profiles, each fund name is a link to the Morningstar report on the fund. Morningstar shows the fund's performance, fees and a lot of other information. If you want to read Morningstar's analysis of the funds, you can sign up for their 14 day free trial. But I'll ruin the suspense and let you know that they rate all of the funds very highly.
Another great source of information, including links to the prospectuses for the funds, is the Vanguard website
. The funds the plan invests in are the regular Vanguard investor shares.
Here is information
on the TIAA-CREF International Index.
Q. What plan should I sign up for?
A. Acting under guidelines from the 2006 Pension Act, we officially recommend that if you're not sure what investment to choose, you seriously consider a Target Retirement plan. They have a number of advantages:
1. Diversified portfolios designed by Vanguard experts.
2. Eleven different choices, to match your planned retirement, or to choose a more or less aggressive asset allocation, if you wish.
3. No need to rebalance, as Vanguard does it for you every quarter.
4. Stock/bond allocation grows more conservative with age.
5. Simple to understand and maintain.
We will be automatically enrolling new employees in the age appropriate Target Retirement fund unless they choose a different asset allocation or explicitly opt out. But we need current plan participants to choose their funds explicitly.
Q. Which Target Retirement fund should I choose?
A. According to Vanguard
, these funds are best at the following ages:
Fund Name Your Current Age Years to Retirement
TR 2050 Fund 18–23 About 45
TR 2045 Fund 24–28 About 40
TR 2040 Fund 29–33 About 35
TR 2035 Fund 34–38 About 30
TR 2030 Fund 39–43 About 25
TR 2025 Fund 44–48 About 20
TR 2020 Fund 49–53 About 15
TR 2015 Fund 54–58 About 10
TR 2005 Fund 64–69 About 1–5
TR Income Fund In retirement In retirement
Q. Why do you use the TIAA Cref International (TCIEX) fund instead of Vanguard's Developed Markets (VDMIX)?
A. Both the TIAA-CREF and Vanguard are index funds that track the EAFE index of European and Pacific stocks, so their returns should be (and have been) nearly identical. However, the Vanguard fund charges a redemption fee of 2% if held for less than 2 months, in order to discourage frequent trading. The TIAA-CREF fund does not have this limitation. Also, the Vanguard fund has an expense ratio of 0.22%, while the TIAA-CREF fund only costs 0.15%.
Q. I have investments in taxable accounts and have been told that I should put tax inefficient funds like bonds in my tax-advantaged 401(k) and put tax efficient index stock funds in my taxable accounts. Can I do this with the Target Retirement plans?
A. We can't advise you on your taxes. But in addition to the Target Retirement funds, the 401(k) plan offers 6 individual funds (including 2 bond funds and a money market) from which to choose your allocations.
Q. I want to own the Total Stock Market (like Vanguard's VTSMX). How can I do that with the fund offerings?
A. As shown at Vanguard
, you can replicate the Total Stock Market by purchasing 79% Vanguard S&P 500 Index Fund (VFINX) and 21% Vanguard Extended Market Index (VEXMX).
Q. What are the fees for the 401(k) plan?
A. The fees range from 0.15% to 0.26% per year. So, on a $10,000 balance, you will be paying less than $26 per year. By contrast, the John Hancock funds charged expense ratios of between 1.05% and 2.15%.
Here are my thoughts now that the transition is over:
+ Rewriting plan documents is always a pain, although EF did a nice job and have been very cooperative in the transition.
+ EF's sponsor/participant website is a hosted service provided by Sungard Reliant. It has all the necessary functionality, but is badly in need of a refresh (in particular, it should not use frames and needs to look better on Firefox). However, this isn't really EF's fault, and the website does meet all of our needs. I believe it's much smarter for EF to work off of a 3rd party hosted platform than to invest in their own proprietary solution.
+ EF can provide any mutual fund you want. However, they appropriately tout the EF Smart Plan, which very cleverly imitates the federal government's Thrift Savings Plan to provide a low-cost menu of indexed funds. My first complaint is that as an analogue to the TSP's G fund, EF recommended VUSTX, the Long-term Treasury Fund, over VFITX, the intermediate-term one. I received a lot of good advice from this board on this thread
+ As much as I prefer the TSP to almost all alternatives, it has some flaws. Of course, these can't be held against EF, as they'll put any fund in your plan that you ask them to. As a fund fiduciary, I liked the simplicity of modeling my plan on the TSP's. However, there are 3 things I would have changed, if I hadn't been explicitly modeling our plan on the TSP:
1) The TSP I fund and the EF equivalent track the EAFE Index, which doesn't give access to Emerging Markets or Canada. FTSE All World Ex-US is better in both regards. However, the FTSE has a 0.40 ER and a purchase fee, as opposed to only 0.15 ER and no purchase fee for the TIAA-CREF Institutional International fund.
2) Second, I think offering the S&P500 and Extended Index separately is unnecessarily confusing, and both funds should be replaced with VG Total Stock Market.
3) Finally, I think the TSP should consider including an Inflation Protected Bond Fund.
Interestingly, using the VG Target Retirement funds fixes all of my complaints, as it uses the Total Stock Market, offers Emerging Markets (though not Canada), and provides Inflation Protected Bonds in later years.
Anyway, I'm a fan of Employee Fiduciary's and would recommend them to any small or medium business. Hopefully this post can help some Bogleheads convince their employers to switch to a better plan.