Target Date Funds can they have hidden expenses

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Godzilla
Posts: 57
Joined: Sun May 13, 2012 2:28 pm

Target Date Funds can they have hidden expenses

Post by Godzilla » Wed Oct 04, 2017 4:32 pm

Hi everyone,

Well, I am trying to figure out investment options in my wife's new 401K plan (a new job). She is automatically steered to JPMCB
SmartRetirement Passive Blend 2030 Fund, class A shares. I have no objection to that and appreciate it that employers are starting to steer employees to appropriate target date investments. But I am unclear whether the quoted (gross and net) 0.25 expense ratio includes the fees of the funds which underlie this target date fund. It is my understanding that Vanguard transparently prices the expenses its target date funds - it simply averages the investor share expenses of the conglomeration of funds within its target date funds and charges nothing extra "off the top". How about other companies - specifically the fund I am concerned with.
On the disclosure form for this fund (off the 401K plan administrators website): under the annual operating expenses quoted there is a note stating "The Fund indirectly bears its proportionate share of the operating expenses of any underlying funds in which it may invest (excluding management fees and service fees)." The acquired fund fees and expenses (underlying fund) is listed as 0.01%.
0.01% seems too low to be possible for these underlying fees to my mind.
Any clarification would be appreciated.

Thanks, Godzilla

pkcrafter
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Location: CA
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Re: Target Date Funds can they have hidden expenses

Post by pkcrafter » Wed Oct 04, 2017 10:04 pm

Here is information on your fund for 2017. The ER is stated as 0.25% and that should be total. In 2016, the ER was 0.55%, so looks better now.

https://nb.fidelity.com/public/workplac ... w-all/OH6N

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

alex_686
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Re: Target Date Funds can they have hidden expenses

Post by alex_686 » Wed Oct 04, 2017 11:01 pm

FYI, by law a "fund of funds" expense ratio includes the underlying expense ratio of the funds held. So the expense ratio quoted must included both the management fee and the underlying bits.

0.01% is probably in-line. It reflects many other FOF out there. Most of the heavy lifting is done by the underlying fund. Less work to be done then running a index fund.

Vanguard does not "charges nothing extra 'off the top'. " There is an extra fee for doing the fund of funds. They bury it so we don't know what it is, but it is there.

dbr
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Re: Target Date Funds can they have hidden expenses

Post by dbr » Thu Oct 05, 2017 8:09 am

Class A shares normally charge a front end load. You should verify that the load has been waived in a 401K plan. You should look at the turnover in the underlying funds to estimate internal trading costs at 1% per 100% turnover.

Godzilla
Posts: 57
Joined: Sun May 13, 2012 2:28 pm

Re: Target Date Funds can they have hidden expenses

Post by Godzilla » Fri Oct 06, 2017 1:29 pm

I just wanted to give thank yous to pkcrafter, alex686 and dbr for their help. I think I will veer towards keeping it simple and simply invest it all in the Vanguard index funds that are offered in her plan. I don't want to have to wonder if the fund will increase its expenses next year, any turnover (currently at 30%), etc.. Very glad to hear that by law the funds of funds have to accurately report their expense ratios!!

Thanks all.

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