Setting up a 401(K) plan

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Setting up a 401(K) plan

Postby fcirullo » Tue Aug 24, 2010 5:16 pm

Updated on February 12, 2013

Is your 401(k) or 403(b) plan in compliance with the final rule Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee Disclosure?

By now, employers should know every cost that the company pays for the plan. Also, employees should know every cost that they pay. On or before November 14, 2012, service providers should have given employers a fee disclosure statement. In turn, employers should have given employees a disclosure statement that shows the fees that employees pay for the plan. In addition to the fee disclosure statement, employees are receiving quarterly statements that show the fees that they pay.


--Done right! For step by step instructions on how to set up your 401(k) or 403(b) plan to comply with the final rule, read this thread and the wiki article at Setting up a 401(k) plan


Welcome!

As you read each post on this thread and you begin to learn the Five Simple Steps to cut costs, save money, and make monitoring your plan stress free, you will realize that the simple process you are learning never gets old. The information is true today, it will be true tomorrow, and it will be true for as long as there are 401(k) and 403(b) plans. It works!

The following is an update:

- If you are an employee, you will learn how to talk to your employer in a way that is guaranteed to get him or her interested in improving your 401(k) or 403(b) plan. Please keep an open mind, and read every post on this thread before you talk with your employer. Then, contact a Third Party Administrator (TPA) who can show your employer a comparison of why it makes sense to switch from your old 401(k) or 403(b) to a new one. Next, arrange a meeting between the TPA and your employer. Easy!

-If you are an employer, you will learn how to set up, manage, and monitor a truly low cost and optimal plan FAST. Please keep an open mind, and read every post on this thread.

So far, on this thread we have learned how to set up an optimal plan FAST. You can find how we defined the word "optimal" in this thread.

We've also learned how to select our mix of investments in a plan in mere minutes and beat the pants off the picks of most experts--long term.

We've learned how to allocate and rebalance our assets in a flash like a pro. And we've learned how to put it on auto-pilot--FREE.

We've learned how the employer and employee can get on the same page so that they are pulling the wagon (401(k) plan) in the same direction.

We've learned how employees can become an effective watchdogs so that they can help their employer protect their retirement money.

We've done all of that by asking the right questions, which are the very same questions that every employer and employee should be asking each other. It's the way everyone should communicate to ensure that YOUR plan is optimal.

We have discussed the first four of five guidelines that are shown below, and we have many more easy things that we can do to ensure that we have more money, more time, and less stress beginning today.

If you are new to this thread, please join us in our discussions. Ask us any questions that you want answered about investing in a 401(k) plan or 403(b) plan or even about improving a plan or setting up a brand new one.

If you would like to read it, my very first post that started this thread is below the ---- // ---- line.

-------------------------- // --------------------------

If you watched any of the hearings that Congress held on 401(k) plans and 403(b) plans, it's obvious that employers are setting up high cost plans that only create the illusion that they are low cost.

Here's the problem. Employers don't know whose advice to trust, and they fear making a mistake!

My question is this. Do you think employers would visit this thread if it had guidelines that are proven to improve any plan fast? It would be a free resource that any employer or employee could use to improve their plan, regardless of experience.

For example:

Guideline #1 could show employers which kind of investments to use for a core mix of investments that the employees would select from.
Guideline #2 could show employers which self-directed brokerage accounts are truly low cost.
Guideline # 3 could show employers which recordkeepers and administrators are low cost.
Guideline # 4 could show employers how to educate and communicate with employees.
Guideline # 5 could show employers how to manage and monitor their plan for results. Good results mean you earn more money on the investments, save money on costs, and save time, too.

Please let me know if you think putting proven guidelines on this thread is a good idea, or not.

Edited on November 23, 2012 to include an update on the new fee disclosure rule. Edited on 09/21/2012 to include an update on the new fee disclosure rule. Edited on 05/20/2012 to fix a link. Edited on 02/03/2012 to include the word "Welcome" as the beginning. Edited 01/14/2011 to include this statement: As you read each post on this thread and begin to learn the Five Simple Steps to cut costs, save money, and make monitoring your plan stress free, you will realize that the simple process you are learning never gets old. The information is true today, it will be true tomorrow, and it will be true for as long as there are 401(k) and 403(b) plans. It works! Edited on 10/15/2011. Removed the following sentence "Today is October 23, 2010" and replace it with this sentence "The following is an update." Edited seven times on 10/22/2011 to fix the existing poll, but the forum's poll is NOT working properly. Edited four times on 10/31/2011 to fix the existing poll, but the forum's poll is still NOT working properly.
Last edited by fcirullo on Tue Feb 12, 2013 8:26 am, edited 29 times in total.
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Postby NAVigator » Tue Aug 24, 2010 6:00 pm

While it would be an improvement over getting information from the salesman, I'm not sure it would work. The person going to the board of directors and recommending something "because they read it on the internet", is not going to convince most people, IMHO.

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Postby livesoft » Tue Aug 24, 2010 6:08 pm

Anything that will require employees to read and learn anything will not be beneficial. My experience is that only a small subset (say less than 5%) of plan participants care.

Almost all the others need to be forced to use the plan, so they should have low-cost target retirement funds forced on them as in, "You must put X% into the plan and the default option is this TR fund based on your expected retirement age." That default option would have to be legally tenable, so that the fiduciaries are not sued.

Once the default option is set, I think only about 5% of the plan participants would change from it.
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Postby nimo956 » Tue Aug 24, 2010 6:22 pm

livesoft wrote:Anything that will require employees to read and learn anything will not be beneficial. My experience is that only a small subset (say less than 5%) of plan participants care.

Almost all the others need to be forced to use the plan, so they should have low-cost target retirement funds forced on them as in, "You must put X% into the plan and the default option is this TR fund based on your expected retirement age." That default option would have to be legally tenable, so that the fiduciaries are not sued.

Once the default option is set, I think only about 5% of the plan participants would change from it.


This is exactly how it works with my company. Once I became eligible to enroll in the 401k, it was automatically setup to deduct 3% and put it in Vanguard's TR 2050 fund. I wonder how many people don't even increase it to 6% to get the full match. We have a VG rep come to the office every year to talk about the plan/planning for retirement, and I remember that the year I went only about 3 other people showed up!
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Postby fcirullo » Wed Aug 25, 2010 2:13 am

Thank you for your excellent comments Jerry, Livesoft, and Nimo956!

I get what you are saying. If the employer does not know that the company's plan is too expensive to keep, it's because no one, not even Congress, has been able to convince him or her to switch to a lower cost plan.

And you feel it's likely that putting guidelines for setting up a low cost plan on this thread will not convince an employer to improve his or her plan, either.

Unfortunately, most employers still follow the herd and many employees are unnecessarily wasting their hard earned money in the high cost plans that have investments that underperform index funds. It's a double whammy!
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Postby SpecialK22 » Wed Aug 25, 2010 3:19 am

fcirullo wrote:I get what you are saying. If the employer does not know that the company's plan is too expensive to keep, it's because no one, not even Congress, has been able to convince him or her to switch to a lower cost plan.


I think one of the main reasons why an employer may have a high cost plan is because the plan administrator makes it cost effective for the employer. In other words, most of the costs are transferred from the employer to the employee in the form of a plan with higher expense ratios and fees. So the plan actually may be low cost from the employer's perspective.
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Postby james22 » Wed Aug 25, 2010 4:19 am

Comparative ranking helps.

http://www.brightscope.com/
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Postby leo383 » Wed Aug 25, 2010 5:48 am

livesoft wrote:Anything that will require employees to read and learn anything will not be beneficial. My experience is that only a small subset (say less than 5%) of plan participants care.

Almost all the others need to be forced to use the plan, so they should have low-cost target retirement funds forced on them as in, "You must put X% into the plan and the default option is this TR fund based on your expected retirement age." That default option would have to be legally tenable, so that the fiduciaries are not sued.

Once the default option is set, I think only about 5% of the plan participants would change from it.


This is pretty much how it worked at my company, too, and it was a bank trust department that ran retirement plans for other companies!
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Postby fcirullo » Wed Aug 25, 2010 10:20 am

james22 wrote:Comparative ranking helps.

http://www.brightscope.com/


Thank you for the link. BrightScope is a good resource for comparing six components of a plan.

What matters most is the long term performance of each one the mutual funds in the plan's core mix of investments. After that, what matters most is the total cost of services such as recordkeeping and administration, investment advice, plan consulting, and education. After that, company generosity with a matching contribution is great but a company that can't afford a match can still set up a truly low cost plan, right?
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Postby fcirullo » Wed Aug 25, 2010 10:35 am

leo383 wrote: This is pretty much how it worked at my company, too, and it was a bank trust department that ran retirement plans for other companies!


Thank you for your comment. Are you as amazed as I am that so few employees are interested in being a good watchdog over their own retirement money?
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Postby fcirullo » Wed Aug 25, 2010 10:43 am

SpecialK22 wrote:I think one of the main reasons why an employer may have a high cost plan is because the plan administrator makes it cost effective for the employer. In other words, most of the costs are transferred from the employer to the employee in the form of a plan with higher expense ratios and fees. So the plan actually may be low cost from the employer's perspective.


Thank you for your comment. It's true, employers do transfer the cost of a plan to the employees (participants). And most employers won't even consider the possibility that the plan they set up is too expensive to keep, as is.
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Postby fcirullo » Wed Aug 25, 2010 10:56 am

NAVigator wrote:While it would be an improvement over getting information from the salesman, I'm not sure it would work. The person going to the board of directors and recommending something "because they read it on the internet", is not going to convince most people, IMHO.

Jerry


Thank you for your comment. This happens when the plan's named fiduciary, which could be the board of directors, and the employees are not on the same page regarding what a low cost plan really looks like. However, when both know what a low cost plan looks like they want to hear each other out so that they can fix whatever is broken, which is the only way to go.
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Postby livesoft » Wed Aug 25, 2010 11:07 am

My wife has a craptacular 401(k) plan. She works for a small company. The owner himself does not even participate in the 401(k) plan. He is advised that the plan is a great plan by the folks he hired to set up the plan. At a recent company-wide 401(k) meeting, the plan provider/advisor spoke about how great the plan was and how great the funds were. He did not mention the 2+% annual fees.

So who are employees supposed to believe: Somebody standing at the front of their conference room telling them that they have one of the best 401(k) plans in the world? Or some anonymous internet people who they have never heard of?

Furthermore, there appear to be some so-called rating agencies that give the highest marks to high-fee plans like those provided by Hartford Life, Nationwide, JP Morgan, etc and low marks to low-fee plans containing index funds. What's up with that?

My spouse does not want to rock the boat, so anything I say about how bad the plan is does not get transmitted back to anybody who can change the plan.

Ignorance and head-buried-in-the-sand seem to be popular in the world of 401(k) plans.
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Postby jeffp » Wed Aug 25, 2010 11:19 am

livesoft wrote:Anything that will require employees to read and learn anything will not be beneficial. My experience is that only a small subset (say less than 5%) of plan participants care.

Almost all the others need to be forced to use the plan, so they should have low-cost target retirement funds forced on them as in, "You must put X% into the plan and the default option is this TR fund based on your expected retirement age." That default option would have to be legally tenable, so that the fiduciaries are not sued.

Once the default option is set, I think only about 5% of the plan participants would change from it.


This is the unfortunate truth. I changed my company's plan from a Merrill Lynch/BlackRock fund lineup to an all-index fund lineup, and since there was no logical way to map the funds one-to-one, I chose a participant default investment of Vanguard Balanced Index. Well, 3-4 months later, and HALF of our plan assets are in... Vanguard Balanced Index! As a 60/40 fund, it's not exactly the right risk profile for most of our employees, who are mostly in their 20's and 30's, but I have no doubt that they are better off in that than in whatever they were in before.

And to be honest, most of our employees are probably better in 100% VBINX than trying to choose their own funds - that is, assuming they didn't do the smart and simple thing and pick a Target Retirement fund. Not the perfect portfolio for everyone, but at the moment no one is using the optional advisor we made available, and I would venture to say that our young employees with low account balances are better off in TR2045 or TR2050 than trying to come up with a combination of funds on their own.
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Postby fcirullo » Wed Aug 25, 2010 11:38 am

livesoft wrote:Anything that will require employees to read and learn anything will not be beneficial. My experience is that only a small subset (say less than 5%) of plan participants care.

Almost all the others need to be forced to use the plan, so they should have low-cost target retirement funds forced on them as in, "You must put X% into the plan and the default option is this TR fund based on your expected retirement age." That default option would have to be legally tenable, so that the fiduciaries are not sued.

Once the default option is set, I think only about 5% of the plan participants would change from it.


Your comments are so true. Few employees are able to act as an effective check and balance over their own money in the plan because of two reasons: They never learned how to save money and invest it, and they don't know what a low cost plan looks like.
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Postby fcirullo » Wed Aug 25, 2010 11:50 am

livesoft wrote:My wife has a craptacular 401(k) plan. She works for a small company. The owner himself does not even participate in the 401(k) plan. He is advised that the plan is a great plan by the folks he hired to set up the plan. At a recent company-wide 401(k) meeting, the plan provider/advisor spoke about how great the plan was and how great the funds were. He did not mention the 2+% annual fees.

So who are employees supposed to believe: Somebody standing at the front of their conference room telling them that they have one of the best 401(k) plans in the world? Or some anonymous internet people who they have never heard of?

Furthermore, there appear to be some so-called rating agencies that give the highest marks to high-fee plans like those provided by Hartford Life, Nationwide, JP Morgan, etc and low marks to low-fee plans containing index funds. What's up with that?

My spouse does not want to rock the boat, so anything I say about how bad the plan is does not get transmitted back to anybody who can change the plan.

Ignorance and head-buried-in-the-sand seem to be popular in the world of 401(k) plans.


Most employers won't even consider the possibility that they need to switch to a low cost plan. What can employees do about it? Nothing can be done if the employer won't hear the employees out.
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Postby fcirullo » Wed Aug 25, 2010 12:05 pm

jeffp wrote:This is the unfortunate truth. I changed my company's plan from a Merrill Lynch/BlackRock fund lineup to an all-index fund lineup, and since there was no logical way to map the funds one-to-one, I chose a participant default investment of Vanguard Balanced Index. Well, 3-4 months later, and HALF of our plan assets are in... Vanguard Balanced Index! As a 60/40 fund, it's not exactly the right risk profile for most of our employees, who are mostly in their 20's and 30's, but I have no doubt that they are better off in that than in whatever they were in before.

And to be honest, most of our employees are probably better in 100% VBINX than trying to choose their own funds - that is, assuming they didn't do the smart and simple thing and pick a Target Retirement fund. Not the perfect portfolio for everyone, but at the moment no one is using the optional advisor we made available, and I would venture to say that our young employees with low account balances are better off in TR2045 or TR2050 than trying to come up with a combination of funds on their own.


Great comments! Would you mind sharing who you use for recordkeeping and administration? Also, if a participant wanted to could he choose his own index funds and set up an automatic asset-allocation and rebalancing program based on his age?
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Postby fcirullo » Wed Aug 25, 2010 12:12 pm

nimo956 wrote:This is exactly how it works with my company. Once I became eligible to enroll in the 401k, it was automatically setup to deduct 3% and put it in Vanguard's TR 2050 fund. I wonder how many people don't even increase it to 6% to get the full match. We have a VG rep come to the office every year to talk about the plan/planning for retirement, and I remember that the year I went only about 3 other people showed up!


Thank you for your comments. What was it that made you realize how important it is to save and invest your money? And would you mind sharing with us who your company uses for recordkeeping and adminstration?
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Postby NateW » Wed Aug 25, 2010 12:22 pm

livesoft wrote:My wife has a craptacular 401(k) plan. She works for a small company. The owner himself does not even participate in the 401(k) plan. He is advised that the plan is a great plan by the folks he hired to set up the plan. At a recent company-wide 401(k) meeting, the plan provider/advisor spoke about how great the plan was and how great the funds were. He did not mention the 2+% annual fees.

So who are employees supposed to believe: Somebody standing at the front of their conference room telling them that they have one of the best 401(k) plans in the world? Or some anonymous internet people who they have never heard of?

Furthermore, there appear to be some so-called rating agencies that give the highest marks to high-fee plans like those provided by Hartford Life, Nationwide, JP Morgan, etc and low marks to low-fee plans containing index funds. What's up with that?

My spouse does not want to rock the boat, so anything I say about how bad the plan is does not get transmitted back to anybody who can change the plan.

Ignorance and head-buried-in-the-sand seem to be popular in the world of 401(k) plans.
Yes, I have one of those craptacular 401ks as well. There are only three of us in the "company" I work for (a non-profit trade association). I have selected the least expensive funds option. I have the DISpleasere of paying at least 1.68% of plan assets for a Vanguard Target Date fund (it is branded by Transamerica Insurance Company). I may be paying even more than that. The 1.68% is what I see in print. Who knows if there are any hidden fees and what they are.

And to add insult to injury, before I knew better and when I began this job, I rolled my previous 401k ($50,000) into this plan. Once I learned what I should have done (opened a rollover IRA at Vanguard), I find out that no in-service withdrawals are allowed until I reach retirement age. I am stuck!

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Postby fcirullo » Wed Aug 25, 2010 12:32 pm

NateW wrote:Yes, I have one of those craptacular 401ks as well. There are only three of us in the "company" I work for (a non-profit trade association). I have selected the least expensive funds option. I have the DISpleasere of paying at least 1.68% of plan assets for a Vanguard Target Date fund (it is branded by Transamerica Insurance Company). I may be paying even more than that. The 1.68% is what I see in print. Who knows if there are any hidden fees and what they are.


What's amazing to me is that this kind of retirement plan was created over twenty-five years ago, and employers still don't get it on cost! Thank you for your comments.
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Postby fcirullo » Wed Aug 25, 2010 1:00 pm

NateW wrote:Who knows if there are any hidden fees and what they are.


Great question! Rather than wasting time trying to uncover every hidden and camouflaged cost, the easiest and fastest way to know if your plan is optimal is to compare it to a plan that looks like this:
1. The plan's core mix of index funds cost not more than 0.07% to 0.25%, per year.
2. Recordkeeping and administration costs not more than $30.00, per year, per eligible employee.
3. The plan's Self-directed Brokerage Account option for employees who don't want to invest in index funds has low commissions on trades.

Note: Any managed mutual funds or packaged products such as target-date funds and balanced funds that a plan has as a default option are likely to underperform a core mix of index funds, long term. Therefore, those funds are too expensive to own!
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Postby jeffp » Wed Aug 25, 2010 3:42 pm

I voted 'No.' Then again, I built my company's 401(k) plan.
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Postby livesoft » Wed Aug 25, 2010 3:52 pm

fcirullo wrote:Note: Any managed mutual funds or packaged products such as target-date funds and balanced funds that a plan has as a default option are likely to underperform a core mix of index funds, long term. Therefore, those funds are too expensive to own!

That may be true, but consider the cost to the average participant : Sally Sixpack who works on the loading dock, and Joe Foodworker, who works in the company cafeteria.

The cost is not just the expense ratio and fees. The cost includes what they would pay to get someone to tell them what "core mix of index funds" they should own and why. They also have to understand the "why". Guess what? They are not ever going to understand why they should select a "core mix of index funds". Never. No how. No way.

They would just rather pick a TR or balanced fund and stop thinking about it. And they don't want it to lose any money. Can you say TIAA traditional?
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Postby jeffp » Wed Aug 25, 2010 3:55 pm

fcirullo wrote:
jeffp wrote:This is the unfortunate truth. I changed my company's plan from a Merrill Lynch/BlackRock fund lineup to an all-index fund lineup, and since there was no logical way to map the funds one-to-one, I chose a participant default investment of Vanguard Balanced Index. Well, 3-4 months later, and HALF of our plan assets are in... Vanguard Balanced Index! As a 60/40 fund, it's not exactly the right risk profile for most of our employees, who are mostly in their 20's and 30's, but I have no doubt that they are better off in that than in whatever they were in before.

And to be honest, most of our employees are probably better in 100% VBINX than trying to choose their own funds - that is, assuming they didn't do the smart and simple thing and pick a Target Retirement fund. Not the perfect portfolio for everyone, but at the moment no one is using the optional advisor we made available, and I would venture to say that our young employees with low account balances are better off in TR2045 or TR2050 than trying to come up with a combination of funds on their own.


Great comments! Would you mind sharing who you use for recordkeeping and administration? Also, if a participant wanted to could he choose his own index funds and set up an automatic asset-allocation and rebalancing program based on his age?


We use Paychex as our TPA (also have payroll through them). Paychex's OFS platform is a pretty good open architecture platform. Paychex partners with a company called Guided Choice, which has a program that our employees may opt into. For about 45 bps/year (there's a dollar cap if your account is over 75k or so) GC will either manage your account for you using our available funds (including rebalancing, etc.) or simply provide advice that participants may implement themselves.

That's if they don't know what to do and want a professional to do it for them. Is that what you were asking? Obviously if someone doesn't want to pay the 45 bps and wants to choose his or her own funds, we have a good selection of regular Vanguard index funds. I can list our funds if anyone cares, but basically our lineup was designed to be similar to what is offered in the TSP, in terms of asset classes that is - we can't quite match the ERs in the TSP. :roll:
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Postby fcirullo » Wed Aug 25, 2010 3:58 pm

jeffp wrote:I voted 'No.' Then again, I built my company's 401(k) plan.


I understand. It seems there are as many opinions on how to set up a plan as there are people, right?

However, results matter. For instance, compared to other plans is the cost of the plan's services truly low? And does the plan have a core mix of investments that will at least match the market's performance--long term? Long term means more than ten years. If the answer is "Yes" to both questions, the plan is optimal. Easy!
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Postby jeffp » Wed Aug 25, 2010 3:59 pm

livesoft wrote:
fcirullo wrote:Note: Any managed mutual funds or packaged products such as target-date funds and balanced funds that a plan has as a default option are likely to underperform a core mix of index funds, long term. Therefore, those funds are too expensive to own!

That may be true, but consider the cost to the average participant : Sally Sixpack who works on the loading dock, and Joe Foodworker, who works in the company cafeteria.

The cost is not just the expense ratio and fees. The cost includes what they would pay to get someone to tell them what "core mix of index funds" they should own and why. They also have to understand the "why". Guess what? They are not ever going to understand why they should select a "core mix of index funds". Never. No how. No way.

They would just rather pick a TR or balanced fund and stop thinking about it. And they don't want it to lose any money. Can you say TIAA traditional?


And WRT balanced funds, sure a well-managed portfolio of index funds would probably outperform that, but I have to choose SOMETHING as a default investment option, and balanced funds meet all the criteria under ERISA. Try as I might, I can't force people to move out of the default option, but like I said I think most are better off in that than in a money market fund or trying to time the market picking funds themselves.
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Postby livesoft » Wed Aug 25, 2010 4:00 pm

We use Fidelity. We have the Spartan Index funds and many actively-managed funds in the common asset categories. Participants are able to talk the Fidelity and go to the local walk-in office for advice. I would not think that the local Fido folks would steer everyone into just the Spartan Index funds.
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Postby dbr » Wed Aug 25, 2010 4:27 pm

I am getting by with total costs of about 0.3% in my 401K. That, however does not count transaction costs in the funds themselves. I suppose total friction is under 0.5%. That number seems unacceptably high, but I still voted "not too high" in the survey.

Note that if I were to withdraw 4%/year from my 401K as income this is a tax imposed by the financial services industry of 12.5%. I think that is outrageous, frankly. One could compare that to my current income tax burden, including state, of about 15%.
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Postby ryuns » Wed Aug 25, 2010 4:39 pm

livesoft wrote:We use Fidelity. We have the Spartan Index funds and many actively-managed funds in the common asset categories. Participants are able to talk the Fidelity and go to the local walk-in office for advice. I would not think that the local Fido folks would steer everyone into just the Spartan Index funds.


This is the same with me. I'm satisfied with "total costs" simply because I insulate myself by using the two Spartan funds they have available. After that, the costs skyrocket. If I'm with the company for another couple years, I'll have to bite the bullet and buy a 1% ER internat'l fund.
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Postby SSSS » Wed Aug 25, 2010 4:47 pm

Ways my 401k could save money:

1. Don't mail me a letter every time I change my contribution percentage. For personal reasons, I'm increasing it by 1% every two weeks and I really don't need to be reminded of what I just did.

2. Don't keep mailing me glossy brochures asking me to enroll in the 401k that I'm already enrolled in.
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Postby jeffp » Wed Aug 25, 2010 4:47 pm

fcirullo wrote:
jeffp wrote:I voted 'No.' Then again, I built my company's 401(k) plan.


I understand. It seems there are as many opinions on how to set up a plan as there are people, right?

However, results matter. For instance, compared to other plans is the cost of the plan's services truly low? And does the plan have a core mix of investments that will at least match the market's performance--long term? Long term means more than ten years. If the answer is "Yes" to both questions, the plan is optimal. Easy!


Total cost to the participant is essentially the ER of the funds, which in our plan is generally between 0.2%-0.3%. There are no longer any 12b-1 fees or anything like that. In addition, of course, are intra-fund trading costs. Then if participants opt into the advisor program there's that additional cost, but it's only an option, and right now no one is using it. And yes, we have a selection of index funds covering the global equity market, and a few good fixed income funds as well.

Total cost to the company is a flat $180/month, plus the match (4%). So yes, I would say the cost in our plan is truly low.

P.S. When I said that I built our plan, I should have added that I did so with the help of livesoft, ddb, dbr, leonard, and several other helpful Bogleheads. And also a good book written by Josh Itzoe. I was lucky to be in a position where I had the authority at my company to enact change, and also to have a community like this to help me.
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Postby jeffp » Wed Aug 25, 2010 4:50 pm

SSSS wrote:Ways my 401k could save money:

1. Don't mail me a letter every time I change my contribution percentage. For personal reasons, I'm increasing it by 1% every two weeks and I really don't need to be reminded of what I just did.

2. Don't keep mailing me glossy brochures asking me to enroll in the 401k that I'm already enrolled in.


3. Don't allow participants to change their deferral rates twice a month. The recordkeeper has to pay people to process those changes, you know. :D
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Postby fcirullo » Wed Aug 25, 2010 4:50 pm

jeffp wrote:We use Paychex as our TPA (also have payroll through them). Paychex's OFS platform is a pretty good open architecture platform. Paychex partners with a company called Guided Choice, which has a program that our employees may opt into. For about 45 bps/year (there's a dollar cap if your account is over 75k or so) GC will either manage your account for you using our available funds (including rebalancing, etc.) or simply provide advice that participants may implement themselves.

That's if they don't know what to do and want a professional to do it for them. Is that what you were asking? Obviously if someone doesn't want to pay the 45 bps and wants to choose his or her own funds, we have a good selection of regular Vanguard index funds. I can list our funds if anyone cares, but basically our lineup was designed to be similar to what is offered in the TSP, in terms of asset classes that is - we can't quite match the ERs in the TSP. :roll:


Thank you for sharing this information with us! It is very helpful. If you don't mind listing your index funds, I would like to see them: especially, since they are similar to the index funds in Thrift Savings Plan For Federal Employees (TSP).

Regarding investment advice for 45 bps/year: Did you know that not one expert has ever picked a mix of mutual funds that beat a core mix of index funds in performance, long term? Nor is an expert's asset-allocation and rebalancing model superior to the classic asset-allocation and rebalancing model, which can be set up on auto-pilot--free!

Just one more thing that would be helpful--would you mind telling us how much you pay for recordkeeping and administration, per year, per eligible employee?
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Postby fcirullo » Wed Aug 25, 2010 5:07 pm

SSSS wrote:Ways my 401k could save money:

1. Don't mail me a letter every time I change my contribution percentage. For personal reasons, I'm increasing it by 1% every two weeks and I really don't need to be reminded of what I just did.

2. Don't keep mailing me glossy brochures asking me to enroll in the 401k that I'm already enrolled in.


Great points!
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Postby fcirullo » Wed Aug 25, 2010 5:17 pm

livesoft wrote:That may be true, but consider the cost to the average participant : Sally Sixpack who works on the loading dock, and Joe Foodworker, who works in the company cafeteria.

The cost is not just the expense ratio and fees. The cost includes what they would pay to get someone to tell them what "core mix of index funds" they should own and why. They also have to understand the "why". Guess what? They are not ever going to understand why they should select a "core mix of index funds". Never. No how. No way.

They would just rather pick a TR or balanced fund and stop thinking about it. And they don't want it to lose any money. Can you say TIAA traditional?


You are right, as usual! However, it's the employer's responsibility to educate employees, and if the employer can't or won't set up a program on auto-pilot that uses index funds and the classic asset-allocation model, the employee will choose whichever packaged product is available--no matter how expensive it may be.
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Postby fcirullo » Wed Aug 25, 2010 5:30 pm

Look at all of YOUR great comments! Wow!

I know that your knowledge and comments can help employers slash their plan's cost, and I hope that more employers will discover this thread.
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Postby fcirullo » Wed Aug 25, 2010 5:47 pm

jeffp wrote:P.S. When I said that I built our plan, I should have added that I did so with the help of livesoft, ddb, dbr, leonard, and several other helpful Bogleheads. And also a good book written by Josh Itzoe. I was lucky to be in a position where I had the authority at my company to enact change, and also to have a community like this to help me.


You had an open mind and some great help, too--good for you!

You found this Web site, which means there is hope that many other employers will find it and have an open mind, too. Wouldn't that be great for both the employers and their employees! Setting up, managing, and monitoring a plan for the results you desire does not have to be time consuming or stressful, right?
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Postby fcirullo » Wed Aug 25, 2010 6:10 pm

ryuns wrote:This is the same with me. I'm satisfied with "total costs" simply because I insulate myself by using the two Spartan funds they have available. After that, the costs skyrocket. If I'm with the company for another couple years, I'll have to bite the bullet and buy a 1% ER internat'l fund.


Would you mind telling us who does the plan's recordkeeping and administration and how much he or she charges, per year, per eligible employee? Thank you for your comments.
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Postby fcirullo » Wed Aug 25, 2010 6:21 pm

dbr wrote:I am getting by with total costs of about 0.3% in my 401K. That, however does not count transaction costs in the funds themselves. I suppose total friction is under 0.5%. That number seems unacceptably high, but I still voted "not too high" in the survey.

Note that if I were to withdraw 4%/year from my 401K as income this is a tax imposed by the financial services industry of 12.5%. I think that is outrageous, frankly. One could compare that to my current income tax burden, including state, of about 15%.


That's great! Would you mind sharing with us which funds you are using and who is doing your plan's recordkeeping and administration?
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Postby SSSS » Wed Aug 25, 2010 7:04 pm

jeffp wrote:3. Don't allow participants to change their deferral rates twice a month. The recordkeeper has to pay people to process those changes, you know. :D


Don't they have computers for that now?

fcirullo wrote:Regarding investment advice for 45 bps/year: Did you know that not one expert has ever picked a mix of mutual funds that beat a core mix of index funds in performance, long term? Nor is an expert's asset-allocation and rebalancing model superior to the classic asset-allocation and rebalancing model, which can be set up on auto-pilot--free!


Considering how many participants pick their investments entirely at random, or go 100% money market, 45 basis points for a sane asset allocation & automatic rebalancing might be a small price to pay for some people compared to what they're costing themselves. Reading a book would be much cheaper, but a lot of people are just never going to do that.
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Postby dbr » Wed Aug 25, 2010 7:31 pm

fcirullo wrote:
dbr wrote:I am getting by with total costs of about 0.3% in my 401K. That, however does not count transaction costs in the funds themselves. I suppose total friction is under 0.5%. That number seems unacceptably high, but I still voted "not too high" in the survey.

Note that if I were to withdraw 4%/year from my 401K as income this is a tax imposed by the financial services industry of 12.5%. I think that is outrageous, frankly. One could compare that to my current income tax burden, including state, of about 15%.


That's great! Would you mind sharing with us which funds you are using and who is doing your plan's recordkeeping and administration?


I invest in Vanguard bond funds in a brokerage account. Assuming ER's in the .25% range and an equal amount for trading costs inside funds (and admittedly may be much less than that in a Vanguard bond index fund) you get the .5%. I haven't actually tracked down the trading costs inside Vanguard bond funds as the information would not change anything anyway. Since the plan charges no costs against funds in the brokerage there are no administrative costs at all and there is no cost for the brokerage option, although originally there was a $75/yr. fee. $1000 must stay in funds in the regular plan. There are transaction costs for Vanguard funds in the brokerage, part of which pays back to the plan. A large transaction would cost $49.95, which for older investors with large plan balances and infrequent transactions amounts to negligible. The plan did not originally but may now be allowing ETF's in the brokerage, but I am not sure investing in bond ETF's is quite so clear cut a proposition as investing in major stock index ETF's.

I could reduce these costs by rolling over the whole 401K to an IRA at Vanguard but there are some considerations that make that a debatable proposition in this particular case.

The administrator is Hewitt Associates.
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Re: Who else saw the hearings on the real cost of 401(K) pla

Postby Dan Moroboshi » Wed Aug 25, 2010 7:34 pm

fcirullo wrote:Do you think employers would visit this thread if it had guidelines that are proven to improve any plan fast? It would be a free resource that any employer or employee could use to improve their plan, regardless of experience.


Why would they read this thread, when other, more comprehensive resources exist elsewhere on the Internet? Such as this, maybe?

http://frankcirullo.com/blog/

It sounds perverse, but I think at least some employers would tend to heed the advice of a paid consultant or representative of a financial services company, rather than something from a book or a web forum ("you get what you pay for"), and there's some cover in the event of litigation ("Hey, I paid a lot for a professional's advice, and I followed it - you can't say I didn't breach my fiduciary duty").
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Postby LadyGeek » Wed Aug 25, 2010 8:52 pm

Wow, I feel lucky. My employer has its own mix of proprietary funds, run by more fund managers and administrators than you can shake a stick at. However, it has decent fund selection.

They keep the index funds around 0.2% ER. I'm not happy with how they keep changing funds. Last year, they dumped a Vanguard SCV fund in favor of an actively managed fund that is essentially the same thing. This year, they changed their target date retirement funds from passive to active managed and doubled the ERs from around 0.2% to 0.4 % and higher (it's a range).

What I'm happy about is that they recently have become a client of Financial Engines, Inc., the online retirement planning company started by William F. Sharpe. I'm using the Online Advice product, very nice. It's a complete retirement planning and portfolio monitoring package in one spot. This service is "free" to all 401(k) participants, which means it comes out of fund expenses. I haven't seen an impact on ER (yet).

For those wanting to change their 401(k) plan, please see How to Campaign for a Better 401(k) Plan on the Bogleheads Wiki.
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Postby Gerbil Wheel » Wed Aug 25, 2010 9:14 pm

As the 401(k) manager for a Fortune 500 company, I can say that our management and fiduciary committee have set up a remarkably low-cost plan, investment line-up, recordkeeper, etc., dotting all the Is and crossing all the Ts from an ERISA standpoint...yet still the employees complain...a minority yes, but a vocal minority, enough to where it takes up a few hours of my time each week responding to the challenges and running it up the flagpole to legal where it simmers for weeks, while the employee continues to nag me, threatening to call the Department of Labor.

So if I may vent here...because I cannot say this at work...

MEMORANDUM

To: All Employees

From: Gerbil Wheel

Re: 401(k) Plan

A number of employees have been complaining about the cost of our 401(k) plan.

Here is our response.

If you don't like it, DON'T PARTICIPATE!! OPT OUT!! OPEN A FLIPPIN' IRA!! STICK THE MONEY UNDER YOUR MATTRESS!! BETTER YET, QUIT YOUR JOB!! NOBODY HAS A GUN TO YOUR HEAD!!


Rant off. :twisted:
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Postby livesoft » Wed Aug 25, 2010 9:20 pm

^ Two questions:

1. "remarkably low-cost" to the employer, the employee, or both?

2. How much are the expense ratios and other costs to the employee?
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401(k)

Postby etm » Wed Aug 25, 2010 9:23 pm

Gerbil, I'll gladly not participate in your 401(k) if you can convince congress to increase the Roth/regular IRA contribution limit to 16,500 plus inflation each year. :)
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Postby Gerbil Wheel » Wed Aug 25, 2010 9:38 pm

livesoft wrote:^ Two questions:

1. "remarkably low-cost" to the employer, the employee, or both?

2. How much are the expense ratios and other costs to the employee?


1. Clearly to the employees, to the employer not as transparent to me yet (I started just a few months ago)

2. Expense ratios in bottom quartile of fund peers...target dates funds with the lowest expense ratios in the industry...other fees to set up a loan or to process a domestic relations order
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Postby livesoft » Wed Aug 25, 2010 9:44 pm

I'm sorry, but bottom quartile does not mean doodly-squat. Can you give specific expense ratios for 3 non-S&P500 index funds or for your TR funds?

You could've just said, the expense ratios are "under 0.2%" or something like that.
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Postby KyleAAA » Wed Aug 25, 2010 9:56 pm

An employer setting up his 401k based on advice from an anonymous web forum is a recipe for getting sued.
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Postby leonard » Wed Aug 25, 2010 10:28 pm

KyleAAA wrote:An employer setting up his 401k based on advice from an anonymous web forum is a recipe for getting sued.


Assuming the employer fulfills fiduciary duty in the execution of "anonymous web forum" advice, how so?

how can one amass 1431 posts on a forum after just over a year of participation, yet argue someone would be asking to get sued for taking advice from said forum?
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