High expense ratios in Vanguard 401k

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randomtimbersfan
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High expense ratios in Vanguard 401k

Post by randomtimbersfan » Sat Jun 09, 2018 3:48 pm

My employer, a publicly traded small cap company, recently switched to Vanguard as its 401k provider.

I was initially excited, but when it happened I was surprised to find that a majority of the funds offered were non-Vanguard and had higher expense ratios than the Vanguard equivalents. For example, all 11 of the target date funds were American rather than Vanguard. Overall only 8 out of 24 are Vanguard funds.

None of the non-Vanguard funds looked truly awful and I'd assume the explanation is that Vanguard makes more money by offering non-Vanguard funds. Or maybe this is based on customer demand?

Have others noticed this as well in their Vanguard 401k, or perhaps my employer's plan is below average in the choices available?

Thanks!

retiredjg
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Re: High expense ratios in Vanguard 401k

Post by retiredjg » Sat Jun 09, 2018 3:56 pm

This is an area of mystery to me as well. Vanguard's 401k offering American Funds and many Fidelity's 401k offering mostly Vanguard funds?

How does this happen? I'm sure someone here knows.

Independent George
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Re: High expense ratios in Vanguard 401k

Post by Independent George » Sat Jun 09, 2018 4:15 pm

This sounds like something to take to HR. It seems more likely to me that your HR department selected the funds for the plan than this being a standard offering from Vanguard.

pkcrafter
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Re: High expense ratios in Vanguard 401k

Post by pkcrafter » Sat Jun 09, 2018 4:29 pm

Independent George wrote:
Sat Jun 09, 2018 4:15 pm
This sounds like something to take to HR. It seems more likely to me that your HR department selected the funds for the plan than this being a standard offering from Vanguard.
Yes, it sounds like the company did not select Vanguard, but added some VG funds.

Paul
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retiredjg
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Re: High expense ratios in Vanguard 401k

Post by retiredjg » Sat Jun 09, 2018 4:45 pm

It seems likely to me that the 401k is actually administered by Vanguard since the poster said it is a Vanguard 401k.

If that is correct, it apparently means little about what funds were selected for the plan. I'm interested in how that happens.

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whodidntante
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Re: High expense ratios in Vanguard 401k

Post by whodidntante » Sat Jun 09, 2018 5:21 pm

An advisor, possibly assisted by a committee of clueless internal people, selected your investments. You can have a bad 401k at Vanguard, and a great one at Empower Retirement. Or vice versa.

randomtimbersfan
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Re: High expense ratios in Vanguard 401k

Post by randomtimbersfan » Sat Jun 09, 2018 6:42 pm

The plan is administered by Vanguard, it is not a 3rd party account with a few Vanguard options. The statements come in the mail directly from Vanguard and I sign in to the account at https://retirementplans.vanguard.com. I have no idea if there are third party partners or resellers between my employer and Vanguard. Seems unlikely but might be the case.

The plan has a reasonable selection of Admiral versions of Vanguard's stock and bond funds. I don't have too many complaints though wouldn't mind small cap value and international small cap options. I mostly feel bad for co-workers who may be buying into somewhat overpriced target date funds. I'll ask our HR people if we can make suggestions for changes.

Overall it sounds like this might be somewhat common for a Vanguard 401k plan.

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ruralavalon
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Re: High expense ratios in Vanguard 401k

Post by ruralavalon » Sat Jun 09, 2018 6:53 pm

randomtimbersfan wrote:
Sat Jun 09, 2018 6:42 pm
The plan is administered by Vanguard, it is not a 3rd party account with a few Vanguard options. The statements come in the mail directly from Vanguard and I sign in to the account at https://retirementplans.vanguard.com. I have no idea if there are third party partners or resellers between my employer and Vanguard. Seems unlikely but might be the case.

The plan has a reasonable selection of Admiral versions of Vanguard's stock and bond funds. I don't have too many complaints though wouldn't mind small cap value and international small cap options. I mostly feel bad for co-workers who may be buying into somewhat overpriced target date funds. I'll ask our HR people if we can make suggestions for changes.

Overall it sounds like this might be somewhat common for a Vanguard 401k plan.
It seems likely that the higher expense ratio American Funds were included at the request of the customer, the 401k committee or HR at your employer.
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livesoft
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Re: High expense ratios in Vanguard 401k

Post by livesoft » Sat Jun 09, 2018 7:04 pm

My spouse's employer is getting a new selection of funds in their 401(k), too. The characteristic is similar to the OP's: Lots of new Vanguard index funds and some DFA funds, but the Target Retirement funds are John Hancock. Here's is my guess as to what is happening:

1. A fiduciary responsibility of offering low-cost index funds has been met even if most participants choose a J-H fund. That is, the plan is immunized from lawsuits.

2. The J-H funds will help pay for the plan, so that the employer does not have to. Employers always like reducing costs.

3. The vocal "indexers" can be told to shut-up and select index funds.

4. Inertia will keep participants in the more expensive J-H funds since the mapping of old funds to new funds chooses J-H funds and not Vanguard index funds.
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Spirit Rider
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Re: High expense ratios in Vanguard 401k

Post by Spirit Rider » Sat Jun 09, 2018 7:13 pm

retiredjg wrote:
Sat Jun 09, 2018 3:56 pm
This is an area of mystery to me as well. Vanguard's 401k offering American Funds and many Fidelity's 401k offering mostly Vanguard funds?

How does this happen? I'm sure someone here knows.
This is a common misconception that people have when they say; I have a "Vanguard" 401k plan or I have a "Fidelity" 401k plan.

No, you have a 401k plan that uses Vangurd or Fidelity as a custodian and maybe as a record keeper, but often uses a Third Party Administrator (TPA) and often an Advisor as administor/parasite to the 401k plan.

This is no different than an individual who uses an advisor with full transaction rights who happens to use Fidelity, Schwab, TD Ameritrade, etc... For their IRAs and/or taxable brokerage accounts.

Your employer has chosen to use a TPA and/or advisor for their 401k plan who selects a menu of high expense ratio mutual funds and/or employee administrative fees as a compensation model for the TPA and/or advisor so the employer doesn't have to pay any administrative fees themselves for the 401k plan.

The problem is not Vanguard , Fidelity, Schwab, etc..., but rather your employer.

randomtimbersfan
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Re: High expense ratios in Vanguard 401k

Post by randomtimbersfan » Sun Jun 10, 2018 12:24 am

Thanks Spirit Rider. Not knowing much about the 401k industry, I assumed my employer was dealing with Vanguard directly. But it sounds like they are likely using a third party administrator.

I'm a little surprised that Vanguard thinks it is ok for third parties to sell overpriced funds in 401k plans using Vanguard's name and brand. Caveat emptor I suppose.

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JamesSFO
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Re: High expense ratios in Vanguard 401k

Post by JamesSFO » Sun Jun 10, 2018 8:31 am

randomtimbersfan wrote:
Sun Jun 10, 2018 12:24 am
Thanks Spirit Rider. Not knowing much about the 401k industry, I assumed my employer was dealing with Vanguard directly. But it sounds like they are likely using a third party administrator.

I'm a little surprised that Vanguard thinks it is ok for third parties to sell overpriced funds in 401k plans using Vanguard's name and brand. Caveat emptor I suppose.
Vanguard doesn't necessarily get a say. You can read their annual reports on the 401Ks they have oversight of to see what is typical.

"How America Saves" 2017 covering 2016 year - https://institutional.vanguard.com/iam/pdf/HAS17.pdf

2018 version covering 2017 just came out 5 June 2018: https://institutional.vanguard.com/VGAp ... aSaves2018

Spirit Rider
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Re: High expense ratios in Vanguard 401k

Post by Spirit Rider » Sun Jun 10, 2018 9:40 am

JamesSFO wrote:
Sun Jun 10, 2018 8:31 am
randomtimbersfan wrote:
Sun Jun 10, 2018 12:24 am
Thanks Spirit Rider. Not knowing much about the 401k industry, I assumed my employer was dealing with Vanguard directly. But it sounds like they are likely using a third party administrator.

I'm a little surprised that Vanguard thinks it is ok for third parties to sell overpriced funds in 401k plans using Vanguard's name and brand. Caveat emptor I suppose.
Vanguard doesn't necessarily get a say. You can read their annual reports on the 401Ks they have oversight of to see what is typical.

"How America Saves" 2017 covering 2016 year - https://institutional.vanguard.com/iam/pdf/HAS17.pdf

2018 version covering 2017 just came out 5 June 2018: https://institutional.vanguard.com/VGAp ... aSaves2018
Vanguard is not letting them use their Name/Brand. If you look at your SPD, this will be spelled out. Also, look at it another way.

There is a lot of revenue to be made providing custodial, record keeping, etc... services. This revenue can then used to cover overhead, allowing Vanguard to keep fund expenses lower. If Vanguard doesn't offer these services to TPAs/Advisors, they will just go elsewhere as many of them already do. It isn't going to result in you having a better plan.

dave1054
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Re: High expense ratios in Vanguard 401k

Post by dave1054 » Mon Jun 11, 2018 12:43 pm

Our company of which I am the trustee uses Vanguard, and all of our funds Are Vanguard. I chose only Vanguard funds unlike your employer. Our expense ratio is lower than the ultra low government retirement fund. My only complaint is the third party administrator doing the bookkeeping for our plan is Ascensus. Vanguard probably doe not pay them much. You get what you pay for.

bh7785
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Re: High expense ratios in Vanguard 401k

Post by bh7785 » Mon Jun 11, 2018 1:28 pm

It could always be worse. The lowest ER fund available in my company's 401k is 0.8%. And that's a large-cap index fund. The average fund cost is well over 1%

talzara
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Re: High expense ratios in Vanguard 401k

Post by talzara » Mon Jun 11, 2018 6:05 pm

livesoft wrote:
Sat Jun 09, 2018 7:04 pm
My spouse's employer is getting a new selection of funds in their 401(k), too. The characteristic is similar to the OP's: Lots of new Vanguard index funds and some DFA funds, but the Target Retirement funds are John Hancock. Here's is my guess as to what is happening:

1. A fiduciary responsibility of offering low-cost index funds has been met even if most participants choose a J-H fund. That is, the plan is immunized from lawsuits.
MIT and Yale offered index funds with expense ratios below 0.05%, but that didn't immunize them from lawsuits: viewtopic.php?f=10&t=197130

Engineer250
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Re: High expense ratios in Vanguard 401k

Post by Engineer250 » Mon Jun 11, 2018 7:29 pm

whodidntante wrote:
Sat Jun 09, 2018 5:21 pm
An advisor, possibly assisted by a committee of clueless internal people, selected your investments. You can have a bad 401k at Vanguard, and a great one at Empower Retirement. Or vice versa.
This. My company switched from Schwab to Vanguard and most of the funds stayed the same. They do offer VG Target Retirement (I wanna say 0.15% expense ratio) but that's about it. I emailed my HR asking if they could add Total US, Total International, and Total Bond and even explained how much money a person would save per year in fees. I got a forwarded response from some small, third party, financial advising company about how they choose the funds. So apparently my MegaCorp pays those hacks so we can have 1% expense ratio bond and international funds.

Luckily Vanguard offers a brokerage option which for me is $50 a year. I did the math and it will be worth it even with my relatively low balance 401k.
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