Employer 401ks with high fees

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
alex11
Posts: 118
Joined: Wed Jul 28, 2010 5:25 pm

Employer 401ks with high fees

Post by alex11 »

I'm curious as to what(if any) benefits employers get for having high expense mutual funds withing their 401ks.
Does an employer get any type of "kick-back"?

How much input does any employer have when choosing which funds will be a part of the plan?

Can't quite wrap my head around why we have such lousy fund choices when the people overseeing the 401k plan are probably the biggest contributors. Don't they know about low cost investing, shouldn't they lobby for this?

Also what are the odds of me convincing the company fiduciary to get an index fund added to the plan? Kind of a repeat question from above, but who ultimately decides if an index fund can be added to the plan?
Thanks
SteadyWins
Posts: 46
Joined: Sun Feb 22, 2015 9:24 am

Re: Employer 401ks with high fees

Post by SteadyWins »

alex11 wrote:I'm curious as to what(if any) benefits employers get for having high expense mutual funds withing their 401ks.
Does an employer get any type of "kick-back"?

How much input does any employer have when choosing which funds will be a part of the plan?

Can't quite wrap my head around why we have such lousy fund choices when the people overseeing the 401k plan are probably the biggest contributors. Don't they know about low cost investing, shouldn't they lobby for this?

Also what are the odds of me convincing the company fiduciary to get an index fund added to the plan? Kind of a repeat question from above, but who ultimately decides if an index fund can be added to the plan?
Thanks
In the past, I was employed for a short period at a small business with the CFO close by who was putting together retirement benefits for employees for the first time. Early on I recommended taking a look at funds, such as vanguard, with lower expense ratios. He said he would, but nothing ever came out of it. The 20 funds he chose averaged around 1%. Maybe he was accustom to and satisfied with actively managed funds, who knows.

The advisors who came to the office for one on one's sure didn't point out ER's when recommending funds.
sport
Posts: 12084
Joined: Tue Feb 27, 2007 2:26 pm
Location: Cleveland, OH

Re: Employer 401ks with high fees

Post by sport »

I was on the 401k committee when my employer set up the plan. It was a small company, less than 100 employees, so low cost plans were not available. The way our plan worked, the plan provider, an insurance company, provided a list of available funds. They were all high cost. The committee recommended choices from that list to management, who generally followed that recommendation. All plans have expenses. If the employer decides to pay them, the plan is less expensive for the employees. If the employer does not want to do that, then the plan has administrative fees in addition to the expense ratios of the funds. For a small company, the fees per participant will be larger than at a big company due to economies of scale. Also bigger companies have access to better plans.
bberris
Posts: 2412
Joined: Sun Feb 20, 2011 8:44 am

Re: Employer 401ks with high fees

Post by bberris »

Strange that no one pays a fee for an IRA, with the same reporting and record keeping as a 401k which supposedly costs so much to run.
anil686
Posts: 1316
Joined: Thu May 08, 2014 12:33 pm

Re: Employer 401ks with high fees

Post by anil686 »

Small business employer here - we switched our 401K plan from a large insurer setup by a financial advisor to Vanguard/Ascensus last year and are very happy with it. To your question - I had no idea of investing (I am a physician) and trusted that an "expert" - financial advisor - would be better suited to help us setup a 401K plan. I had no idea how they were reimbursed and again - did not have a concept of what a 1% fee was. This board is very well educated on fees, investing and money management but I was not nearly as educated. I read the books on the wiki to educate me and it took me a year to switch the plan. The financial advisors we met when we interviewed to first setup the plan are all very well versed, are friendly and affable and seem competent. This tends to lead to trusting instead of doing due diligence.

As far as why fees are higher for small business - I agree with another poster above. There are lots of regulatory costs - even at VG/Ascensus - recordkeeping and TPA costs are a flat $3500/year for up to 15 participants. That cost must be born by somebody and if they are rolled into a plan, then they are proportionally applied. If the employer pays for all the costs and the owner is a HCE - it may be worthwhile since their totals in the plan may be very high and thus the cost savings may make a difference over time (note fees as you are aware come out of the 401K totals - not pretax - if the employer pays them from the business then it is a tax deductible expense).

To your last question - it never hurts to try. There is never any harm asking for broad market index funds to be added and most fiduciary and financial advisors we talked with do not try to limit them out of a 401K - they will just tell you why the high cost, actively managed funds are much better.

Hope that helps...
sport
Posts: 12084
Joined: Tue Feb 27, 2007 2:26 pm
Location: Cleveland, OH

Re: Employer 401ks with high fees

Post by sport »

The small plan I was in had one index fund, and S&P 500 fund. The ER was .90% and there was a wrap fee of .90% for a total cost of 1.8%. At that time a Vanguard S&P 500 was available to the general public with an ER of .18%. I asked the representative of the provider why our cost was 10 times the going rate. I received and honest answer. She said it was "a profit center" for the insurance company.
Post Reply