Excessive Expense Ratios for Index Funds in 401(k)

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InvestoGuy
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Joined: Thu Feb 11, 2010 1:34 pm

Excessive Expense Ratios for Index Funds in 401(k)

Post by InvestoGuy » Mon May 23, 2016 11:03 am

Hello,
We are a small company and just recently got a 401(k) plan. I was thrilled and excited when I heard that, but soon was in despair when I saw the E/R for the index funds offering. The E/R for a S&P 500 Index fund is about 10 times more than that of an equivalent Vanguard or Fidelity Spartan fund.

What options do I have at this point in time? Is there anything I can do to get a better choice of the Index Funds with more reasonable E/Rs? Also, under the new April 6th Fiduciary Rulings, do I have any leverage with this?

Thanks for the input.

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by mhalley » Mon May 23, 2016 11:10 am

Sorry you are being ripped off. See the wiki on how to campaign for a better 401k.

https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

DSInvestor
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Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by DSInvestor » Mon May 23, 2016 11:15 am

Vanguard 500 Index Admiral er=0.05%
Vanguard 500 Index Investor er=0.16%

When you say 10X, do you mean 10X admiral or Investor? 10X Admiral is 0.50% would be bad but great when compared against 10X Investor 1.60%! There are lots of 401k plans with expense ratios of 1.60% and higher.

If 0.50% maybe go with the flow. If 1.60% for the cheapest option, maybe look into making changes.
Last edited by DSInvestor on Mon May 23, 2016 11:22 am, edited 1 time in total.
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retiredjg
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Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by retiredjg » Mon May 23, 2016 11:20 am

Your small company may be doing the best they can. Sometimes, they just need to pass on the cost of operating the plan to the employees.

I'd agree if your expense ratios are still in the .3% to .8% region, the plan would have to qualify as a pretty good one. Even if it is a bad one, you should probably use it.

Rainmaker41
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Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by Rainmaker41 » Mon May 23, 2016 11:23 am

The cheapest funds in the 403b at my nonprofit organization job range from 0.41% to 0.51% in expense ratios. I'd obviously like better, but given where I am on the totem pole I doubt I can affect any meaningful change. For my situation starting out the additional tax sheltering alone beyond the $5,500 IRA limit is worth more than the fees.

Mellon Bond Market Index R5 Fund
Principal LargeCap S&P 500 Index R5 Fund
Principal MidCap S&P 400 Index R5 Fund
Principal SmallCap S&P 600 Index R5 Fund

If you can swing it, I second the suggestion to consider lobbying for better funds and/or plan administrator.
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masteraleph
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Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by masteraleph » Mon May 23, 2016 11:35 am

I'm with most of the other folks here.

I originally used our 403b, with TIAA CREF, because it had lower ERs than our 401k (originally through ING, now Voya). But TIAA Cref recently created 3 share classes, with ours being the most expensive; instead of being in the .4-.5 range, they're now in the .6-.7 range. Still not outrageous by a lot of standards, but I've switched to investing as much as possible in the Voya account instead, and using a decent percentage of the 403b for their real estate account (which lists an ER of .89 but really isn't comparable to anything else out there).

Voya, on the other hand, has dropped its S&P type fund to .37, so that's where most of my money's going now. Still not phenomenal, but pretty good.

At any rate- expense ratios below .3 in a 401k tend to be very good. .3-.8 or so tend to be decent. Above 1%, and you're into a pretty poor range.

Careful
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Joined: Mon Jan 18, 2016 10:27 am

Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by Careful » Mon May 23, 2016 11:38 am

InvestoGuy wrote:Hello,
We are a small company and just recently got a 401(k) plan. I was thrilled and excited when I heard that, but soon was in despair when I saw the E/R for the index funds offering. The E/R for a S&P 500 Index fund is about 10 times more than that of an equivalent Vanguard or Fidelity Spartan fund.

What options do I have at this point in time? Is there anything I can do to get a better choice of the Index Funds with more reasonable E/Rs? Also, under the new April 6th Fiduciary Rulings, do I have any leverage with this?

Thanks for the input.
I agree with everyone else...they are passing along the cost of administering the plan, most likely. Smaller employers may not have a budget to carry this themselves (and not all small companies have a 401K, as you've discovered), so they may have been sold on debuting a plan based on 'zero out of pocket costs' to the employer...

But what kind of ERs do you have? Which funds?

InvestoGuy
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Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by InvestoGuy » Mon May 23, 2016 11:48 am

Thank you all for your replies. The funds I have is the:
PLFMX with an ER of 0.78%. (and similar other funds with 0.73 to 0.78% ERs).

So it does look like they are trying to pass on the Admin Fees to us. I guess I don't have choice here, than go with the flow and enjoy the 'tax advantages' of the 401(k) account.

retiredjg
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Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by retiredjg » Mon May 23, 2016 12:22 pm

That is about the same cost of the fund at Morningstar (.72%) Not sure what that means. The employer may be paying the cost of the plan but the plan administrator just offers expensive choices.

If you want to get involved in it, it might be worth asking the employer and comparing to what a different administrator (such as Employee Fiduciary) would charge.

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Exige
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Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by Exige » Mon May 23, 2016 1:00 pm

thats not so terrible nothing in my wifes 401k is under 1.2 Sigh.........
‘I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you.'

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ruralavalon
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Re: Excessive Expense Ratios for Index Funds in 401(k)

Post by ruralavalon » Mon May 23, 2016 8:14 pm

InvestoGuy wrote:Thank you all for your replies. The funds I have is the:
PLFMX with an ER of 0.78%. (and similar other funds with 0.73 to 0.78% ERs).

So it does look like they are trying to pass on the Admin Fees to us. I guess I don't have choice here, than go with the flow and enjoy the 'tax advantages' of the 401(k) account.
Use the 401k, the expense ratios of the funds offered are poor but not terrible.

If eligible, also open and use an IRA at a low cost provider like Vanguard.

Ask whoever is responsible at your employer if the plan could include index funds with lower ERs, or if the plan administration could be transferred to a low fee administrator like Employee Fiduciary, llc.

I wouldn't mention "fiduciary duty" or anything else that might seem to be a threat of legal action. The high fees hurt the managers/owners of this small company just as much as they hurt you, so make it a matter of doing something good to benefit everyone.
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