Is my 401k plan a total rip off?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Gringo
Posts: 33
Joined: Fri Dec 09, 2011 6:57 am

Is my 401k plan a total rip off?

Post by Gringo » Fri Aug 10, 2012 4:04 pm

And if so, what companies out there can I direct my company to look into?

My 401k provider is Great West Retirement Services.

Of all the funds they offer, I'm now only invested in two- the Maxim S&P 500 (MXVIX, with a 0.60%ER) and the Maxim Bond Index (MXBIX, with a 0.50ER).

(As mentioned in previous posts most of the other funds have expense ratios north of 1%, which is why I didn't bother listing them)

In addition to the expense ratios, I found out that GWRS is also charging me another 0.50% annually for account fees, bringing my total expense for the S&P 500 at a whopping (to me, maybe I'm wrong?) 1.10% ER.

And today I did some digging around and I found out that the S&P 500 index doesn't even pay dividends- is that common? I look at my Vanguard funds, and although I don't own VFINX I see that it pays out a quarterly dividend...

I'm leaning more and more every day to the conclusion that my retirement plan is a total rip off, the question is, what's a better solution? I was hoping Vanguard would be an answer, but I didn't see anything on their website that mentions 401k plans for medium to large companies (my company, in the airline industry, employs about 1000 people).

Or am I just being too sensitive to expense ratios and lack of a dividend? Is this typical?

Thanks for all the enlightened responses!

mrpotatoheadsays
Posts: 223
Joined: Fri Mar 16, 2012 2:36 pm

Re: Is my 401k plan a total rip off?

Post by mrpotatoheadsays » Fri Aug 10, 2012 4:18 pm

If it's an insurance company and it's selling mutual funds, you can pretty much guarantee you're being ripped off by excessive fees; that's just how they work; they feed on the ignorant.

All S&P 500 index funds are getting dividends from their holdings, however, within a 401K plan, you may not see this as a distribution, rather as it receives dividends they are just rolled into the price.

There's not much you can do but complain to your employer.

nimo956
Posts: 725
Joined: Mon Feb 15, 2010 6:07 pm

Re: Is my 401k plan a total rip off?

Post by nimo956 » Fri Aug 10, 2012 4:19 pm

Others will chime in about potential 401k providers you can contact, but yes, 1.1% for an S&P 500 fund is a total rip off. My plan with Vanguard offers the same index fund for 0.05%. Yours is 22x more expensive.
50% VTI / 50% VXUS

mlipps
Posts: 890
Joined: Thu Jun 21, 2012 9:35 am

Re: Is my 401k plan a total rip off?

Post by mlipps » Fri Aug 10, 2012 4:20 pm

I can't comment on the dividends, but I don't think your plan is unusual. On the other hand, that certainly doesn't make it acceptable. Lots of people retire w/$25k, so obviously being average does not mean good (which I'm sure you know). I don't know enough about the administrative side of the plans to know if you'd have any luck w/a Vanguard plan, but many people here seem to have had success advocating w/their HR departments for a change in plan.

On the other hand, it could be much worse, so try not to lose much sleep over it. My boyfriend's best option in his Hartford plan was the JP Morgan Actively Managed 2040 Target Fund with an ER of something like 1.25. :oops:

livesoft
Posts: 61944
Joined: Thu Mar 01, 2007 8:00 pm

Re: Is my 401k plan a total rip off?

Post by livesoft » Fri Aug 10, 2012 5:01 pm

1.1% sounds like a dream compared to my spouse's previous 401(k) plan that had a funds with 2.2% expense ratios on average. Even the money market fund had this expense ratio, so its average annual return was negative. Lowest expense ratio in the plan was 1.9%.
Wiki This signature message sponsored by sscritic: Learn to fish.

foxfirev5
Posts: 245
Joined: Sun Jun 29, 2008 7:19 am

Re: Is my 401k plan a total rip off?

Post by foxfirev5 » Fri Aug 10, 2012 5:12 pm

If Vanguard is not an option. I would suggest giving Fidelity a call. My Mega corp plan is extremely low cost with Vanguard Institutional shares included in the offerings. I see that they do promote 401k's for small companies with competitive expenses.
By the way the ER your paying is a rip off. Hopefully there's a big enough employer match.

User avatar
CABob
Posts: 4569
Joined: Sun Feb 25, 2007 8:55 pm
Location: Southern California

Re: Is my 401k plan a total rip off?

Post by CABob » Fri Aug 10, 2012 5:21 pm

As the gambler said, "I know the game is crooked, but, it's the only game in town."
Yes, those expenses are high, but, the tax deferral is worth something so I suggest that you participate to get any employer contribution and then to a Roth IRA.
Bob

User avatar
LadyGeek
Site Admin
Posts: 46814
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Is my 401k plan a total rip off?

Post by LadyGeek » Fri Aug 10, 2012 5:52 pm

Gringo wrote:And if so, what companies out there can I direct my company to look into?
Welcome! If you are interested in helping your company improve, the wiki can get you started: How to Campaign for a Better 401(k)

Be sure to check the forum discussions (listed at the bottom).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

NateW
Posts: 448
Joined: Tue Feb 23, 2010 11:44 am

Re: Is my 401k plan a total rip off?

Post by NateW » Fri Aug 10, 2012 6:31 pm

It could be worse. My ER is 1.64% for a TransAmerica branded Vanguard 2050 fund. At least contribute enough to get the full company match (if any) and then into a Roth at Vanguard (if under the income limit) and then consider contributing more to your 401k. The tax advantage probably outweighs your high(er) ER, thus its probably more advantageous contributing to your 401k as opposed to a taxable account at Vanguard.

Remember this also: A crappy 401k makes an excellent rollover IRA when you leave your company. So if you have any plans on leaving in the near future, contribute all you can and close it out and roll it over to Vanguard when you leave.

--Nate

User avatar
hoppy08520
Posts: 1980
Joined: Sat Feb 18, 2012 11:36 am

Re: Is my 401k plan a total rip off?

Post by hoppy08520 » Fri Aug 10, 2012 8:00 pm

For reference here's an article talking about average all-in 401k plan expenses, relative to the size of the company. Larger companies with more participants and assets tend to have better and cheaper plans because of economies of scale (admin costs spread out over more employees) and more negotiating leverage.

http://money.cnn.com/2012/07/25/retirem ... /index.htm

I was a bit surprised that even the biggest plans, with an average of 50,000+ employees, still have a total all-in of 0.35% in average. Plans with under 1,000 employees have an average of 0.85% total all-in. Reading that made me feel a bit less aggrievedd about paying 0.92%, when I work at a 200 employee company. Although I'm still annoyed to be paying so much compared to my Vanguard IRAs. The whole 401k structure has been so twisted and corrupted.

User avatar
Watty
Posts: 13495
Joined: Wed Oct 10, 2007 3:55 pm

Re: Is my 401k plan a total rip off?

Post by Watty » Fri Aug 10, 2012 8:39 pm

In addition to the expense ratios, I found out that GWRS is also charging me another 0.50% annually for account fees, bringing my total expense for the S&P 500 at a whopping (to me, maybe I'm wrong?) 1.10% ER.

And today I did some digging around and I found out that the S&P 500 index doesn't even pay dividends- is that common? I look at my Vanguard funds, and although I don't own VFINX I see that it pays out a quarterly dividend...
As was already mentioned I would be surprised it the dividend was not built into the fund. You can look at the 5 and 10 year perfomance numbers then compare that to the same number from the Vanguard S&P 500 fund to see it is laginb by about the 0.6% ER. If so then the dividend is being included.

The cost does add up but the earnings on the deffered taxes will be more then the expense ratio cost so you should not avoid it just because of the cost.

For example if you are in a combined 25% tax bracket you could put $1333 into a deductable 401k, or put $1,000 into a taxable account and pay $333 in taxes. With a 1.1% expense ratio on the 1333 you would pay $14.66 in expenses. In the 401K you would have $333 additional invested and if only earned 5% then you would earn $16.65 and be ahead after expenses.

Gringo
Posts: 33
Joined: Fri Dec 09, 2011 6:57 am

Re: Is my 401k plan a total rip off?

Post by Gringo » Sat Aug 11, 2012 2:21 am

Lots of good information here! This should keep me occupied for a while-thanks for the responses!

Valuethinker
Posts: 35367
Joined: Fri May 11, 2007 11:07 am

Re: Is my 401k plan a total rip off?

Post by Valuethinker » Sat Aug 11, 2012 4:34 am

Gringo wrote:And if so, what companies out there can I direct my company to look into?

My 401k provider is Great West Retirement Services.
....

And today I did some digging around and I found out that the S&P 500 index doesn't even pay dividends- is that common? I look at my Vanguard funds, and although I don't own VFINX I see that it pays out a quarterly dividend...
!
In the long run 60%-66 23/% of equity returns come from dividends. Losing the dividend income from the S&P500 is *big* issue.

Say the S&P500 is paying a 2.7% yield right now (I am afraid I don't have a Financial Times to hand to look it up). Of the 5-6% long run expected return of the S&P500 from now (ie 3-4% real) half of it is going to come from dividends.

You would expect most S&P500 index funds right now to be paying dividends around the 2.5% pa mark (quarterly ie c. 0.6% per quarter).

Now:

- are they simply not paying a dividend, but increasing the fund NAV? - from other comments, this looks like what is happening?
- are they charging an additional fee against income, as well as against capital?

User avatar
tfb
Posts: 7888
Joined: Mon Feb 19, 2007 5:46 pm
Contact:

Re: Is my 401k plan a total rip off?

Post by tfb » Sat Aug 11, 2012 12:45 pm

Gringo wrote:I'm leaning more and more every day to the conclusion that my retirement plan is a total rip off, the question is, what's a better solution? I was hoping Vanguard would be an answer, but I didn't see anything on their website that mentions 401k plans for medium to large companies (my company, in the airline industry, employs about 1000 people).
It's a small rip off but far from a total rip off because there are much worse ones out there. However, it is more of a rip off for the size of your employer. A better solution is of course for the people in charge to shop for a better vendor. Vanguard would be interested in a plan of this size. You have to go to the institutional side of the Vanguard website.

https://institutional.vanguard.com/VGAp ... lutions/dc

For you as an employee, however, this small rip off still beats everything else assuming you are saving more than the $5k/6k allowed in an IRA.
Harry Sit, taking a break from the forums.

ks289
Posts: 626
Joined: Sun Mar 11, 2012 12:42 pm

Re: Is my 401k plan a total rip off?

Post by ks289 » Sat Aug 11, 2012 1:25 pm

hoppy08520 wrote:For reference here's an article talking about average all-in 401k plan expenses, relative to the size of the company. Larger companies with more participants and assets tend to have better and cheaper plans because of economies of scale (admin costs spread out over more employees) and more negotiating leverage.

http://money.cnn.com/2012/07/25/retirem ... /index.htm

I was a bit surprised that even the biggest plans, with an average of 50,000+ employees, still have a total all-in of 0.35% in average. Plans with under 1,000 employees have an average of 0.85% total all-in. Reading that made me feel a bit less aggrievedd about paying 0.92%, when I work at a 200 employee company. Although I'm still annoyed to be paying so much compared to my Vanguard IRAs. The whole 401k structure has been so twisted and corrupted.

This is great information. With the new 401k fee disclosure rules now in effect, it is so much easier to have a frank comparison and discussion of fees. Not only will vanguard be sought after, but I think there will be a boom for the open platforms out there (like Employee Fiduciary) which allow access to vanguard and other low cost funds even for small 401k plans. I hope this will dramatically lower costs for people in plans across the country and those averages (which are abysmal) will come down.

I really wonder how the insurance companies will respond (go back to selling insurance?).

User avatar
Watty
Posts: 13495
Joined: Wed Oct 10, 2007 3:55 pm

Re: Is my 401k plan a total rip off?

Post by Watty » Sat Aug 11, 2012 1:42 pm

hoppy08520 wrote:I was a bit surprised that even the biggest plans, with an average of 50,000+ employees, still have a total all-in of 0.35% in average. Plans with under 1,000 employees have an average of 0.85% total all-in. Reading that made me feel a bit less aggrievedd about paying 0.92%, when I work at a 200 employee company.
Don't compare these expense ratios to the S&P 500 expense ratio. These percentages would include investments like international or small cap mutual funds where the expense ratio is often higher even at someplace like Vanguard.

The size of the accounts could matter too. I would suspect that the average account size at the small companies is less than tha account size at large companies that usually have a 401k match.

User avatar
Alskar
Posts: 643
Joined: Wed Jan 06, 2010 10:52 pm
Location: Oregon

Re: Is my 401k plan a total rip off?

Post by Alskar » Sat Aug 11, 2012 2:34 pm

IMHO the vast majority of 401(k) plans are a total rip-off, yours included. If it makes you feel any better, yours isn't the biggest rip-off I've seen. For example, the cheapest fund in my current employer's 401(k) plan is a SSgA S&P 500 fund with an ER of 0.70%. This compares with the ER of 0.05% of Vanguard's S&P 500 fund (VFIAX) of 0.05% or 14x higher. Rydex had an S&P 500 fund with an ER of 1.40% that was in several 401(k) plans. Somehow the plan administrators avoided prosecution.

However, a 0.50% administrative fee (presumably 0.50 of assets under management) is a total rip-off. Recording keeping for a 401(k) plan costs $25 to $35 per year per employee.

Here are some things to do about your current plan:

1. Read Dan Solin's book "The Smartest 401(k) Book You'll Ever Read".
2. Read David Loeper's book "Stop the 401(k) Rip-Off!"
3. Lookup your 401(k) plan on Brightscope (http://www.brightscope.com). If your plan isn't listed, supply them with the information they need to list your company.
4. Use this information and the information the Bogleheads Wiki to campaign for a change.

Here are some plans that would probably be cheaper for both you and your employer:
1. Vanguard small-business 401(k) plan. This is new. See: https://institutional.vanguard.com/VGAp ... llbusiness. This is for plans up to $20M in assets.
2. Above $20M I would look at Vanguard or Fidelity
3. If the plans assets are very low (<$10M) I would consider Employee Fiduciary (http://www.employeefiduciary.com) but EF has recently added a 0.08% "Custodian Fee". I was a big fan of EF until recently.

I've successfully lobbied to have changes made to 401(k) plans at two different employers. It was not easy and it takes forever. Benefits administrators often have no idea what the real costs are.
Last edited by Alskar on Sat Aug 11, 2012 6:40 pm, edited 1 time in total.
Lagom är bäst

bberris
Posts: 1033
Joined: Sun Feb 20, 2011 9:44 am

Re: Is my 401k plan a total rip off?

Post by bberris » Sat Aug 11, 2012 3:29 pm

Most likely the dividends are just rolled up in the fund. When the fund is 401k only, it makes no difference whether dividends or gains, so some 401k only funds do that.

Consider paying 1 % expenses. When you withdraw, you are drawing at a 4 % rate. So if you can't roll this over soon, you are paying 25 % of your derivable income in fees. Its not likely that you will be paying income tax at that rate when you retire. Even if you reach the 25 % bracket, most of your income will be taxed at a lower rate.

So if this is a lifetime career, and they don't have in service withdrawals, I would save in a taxable account.

Post Reply