401k Help. They are removing index funds.

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Jaredc
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401k Help. They are removing index funds.

Post by Jaredc » Wed Sep 05, 2018 1:31 pm

[Thread updated, see below. --admin LadyGeek]

Hello all,

I'm a 29 year old male with a wife and two young children (3 and 11 months).

Here is our current financial situation:

His salary: $45k/year
Her salary: Approximately $40k/year, working 24 hours per week.

My 401k (Roth): $30k, in Total Stock Index, Total International Index, Total Bond Index
Her 401k (Roth): $16k, in S&P Index, Mid Cap Index, Small Cap Index (to mimic Total Stock Market) and Total Bond Index
My Roth IRA: $11.5k, in Total Stock Index, Total International Index, Total Bond Index ETFs
Her Roth IRA: $11.5k in Total Stock Index, Total International Index, Total Bond Index ETFs
Son's 529 Plan: $3100 in Vanguard Growth Portfolio
Daughter's 529 Plan: $1500 in Vanguard Growth Portfolio
Joint Brokerage Account: $71k

Once my wife became eligible for her 401k plan through her hospital employer, I was very excited, as my contributions into my plan are very limited. While not a HCE, I am part of a family business and because my uncles own the company, I'm limited to 4-5% contribution per year. Her plan was great, and included three Fidelity indexes (S&P, Mid Cap, and Small Cap) and the Vanguard Total Bond Index. We are currently on track to max out her contributions this year.

We received notification a few weeks back that all the index funds were being scrapped, presumably in favor of shiny American Funds Target Date Funds. While there certainly could be a worse situation, I took offense. I used the "how to campaign for a better 401k plan" as a template for a letter she agreed to send to her employer. She sent the email to her boss and her boss forwarded it on to the HR Director. Her response was ridiculous, in my opinion. I need help in writing a civil reply, instead of my immediate reaction, PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS, or, "well, as long as you promise to beat the market, even if the fees are higher, I trust you." Give me a break.

See below for the emails, with names redacted.

My wife's email:

"Dear (Boss):

I am appreciative that (employer) provides a tax deferred plan to help employees prepare for retirement. However, after studying new investment options and those that are being removed from the plan with the upcoming change, I am concerned that there are few options for employees who wish to invest efficiently for the long-term.

Once this plan change takes effect, all available funds in the plan will be actively managed. Actively managed funds result in higher fees for the investor. Over long periods of time, increased fees can add up to tens of thousands of dollars for long-term retirement savers. Because many employees are counting on this plan to see them through a lengthy retirement, I believe (Employer) has a fiduciary duty to provide adequate fund investments to attain that goal. That fiduciary duty could be met by simply not removing the low-cost fund options that are already part of the plan.

Prior to this change, we had three low-cost index options from Fidelity and one from Vanguard. Once this change takes effect, (employer) employees will no longer have access to index funds. The new American Funds Target Date options have relatively reasonable fees, but the funds are still actively managed and the fees are significantly higher than those of the currently offered index funds. Personally, my best option for low-cost investing will be to move into one of the target date funds, but this will still increase my expenses by over 10 times.

This is a strategy that even Warren Buffett recommends:

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals." --Warren Buffett Berkshire Hathaway Annual Letter, 1996

Mr. Buffett’s recommendation is consistent with the great majority of academic research done on investment costs and index fund performance.

(Employer) currently offers low-cost options for its plan participants. Is there a reason for the plan to remove these option? I would like to ask that (Employer), please give participants the right to choose their own investment strategy.

Let me know if I misunderstood the changes to the plan. I do appreciate that (Employer) offers a 401K plan to help provide for retirement. I think the information that I have suggested may impact other (Employer) employees. Thanks for your assistance!"




And the response:

"Thanks for your email. I am always happy to see employees take an active role in their benefits, especially their retirement. :)

We utilize an investment advisory service, Pension Consultants, to select the choices for the 401k platform. Their investing philosophy is to select actively managed funds (that do have a higher cost structure) that outperform index funds. They select those they believe will net even more return after the fees. This is a different approach than index fund investing, and the reason of the fund line-up changes.

(Employer) meets regularly with Pension Consultants to understand what funds they have chosen, the returns on those funds, if they outperformed the index and if there are changes that need to be made. Our regular meeting with them is later this month and the selection of their fund line up is already on the agenda.

We are also working on bringing someone from Pension Consultants on site in the next few weeks to talk directly to employees about the changes and how that impacts them. We should have dates firmed up this week and will let everyone know. Hopefully you will be able to attend.

In the meantime, if you want to talk with them directly about why the change and how that may impact you, I would encourage you to contact (Consultant) from Pension Consultants, and I have actually copied him on this email. His direct phone number is xxx-xxx-xxxx or email: xxxxxx@pension-consultants.com/ I am sure he is much more articulate about the fund changes and can answer your individual questions.

Please let me know if you have any other questions. If I don’t know the answer, I will work to find it. I really, really appreciate your email and have shared your concerns with others on the committee that oversees the 401k plan."

BigMoneyNoWhammies
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Re: 401k Help. They are removing index funds.

Post by BigMoneyNoWhammies » Wed Sep 05, 2018 2:03 pm

Lots of ways to go here, and I'm sure others will bring up salient points, but if it was me in your shoes, if they want to play the "our fund beats the market" game, i'd be going into the employee-wide meeting/call with the advisor with backtested data about how your portfolio would have done after expenses if you had been invested in the proposed offerings this whole time vs. the index funds you've had all along. I'd wager they haven't beaten the market more than 1 year here or there if at all, and even then the higher expenses have likely eroded any outperformance over your current fund choices. I'd also point out to them that target date funds are meant as a catch all for investors who want a one stop shop for investing - as far as i'm aware (others feel free to correct me on this) they aren't meant to beat a specific index because they're invested across multiple asset classes. They're intended for people who don't have the time or inclination to do their own asset allocation and want to dump their money in, set it, and forget it; an inclination you obviously DO have since you're on this board and care about your investment options.
Last edited by BigMoneyNoWhammies on Wed Sep 05, 2018 2:16 pm, edited 1 time in total.

Jack FFR1846
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Re: 401k Help. They are removing index funds.

Post by Jack FFR1846 » Wed Sep 05, 2018 2:14 pm

I'd be asking that at least one, current low cost index fund remain. My own 401k with Fidelity has that one single low cost index fund....the S&P 500 fund with a 0.015% ER. To me, that's all I need. Perhaps they'll leave one index fund in place.

Perhaps a nice, passive aggressive response if they won't leave one good fund might be "Is there a method to remove all funds from the upcoming, poor choice of high cost funds through an in service withdrawal, or must an employee terminate to initiate a withdrawal?".
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Jaredc
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Re: 401k Help. They are removing index funds.

Post by Jaredc » Wed Sep 05, 2018 2:18 pm

I was thinking something along the lines of:

The average managed fund is, by definition, average. This means that, before fees, approximately half will outperform a market index, and half will underperform. After fees, the average managed fund is more likely to underperform the index. I do appreciate that (Employer) reviews funds periodically, and understand that past performance of a fund is taken into consideration. However, stated in the prospectus for the new American Funds options, and true with any investment option, "past investment results are not predictive of future investment results."

While Pension Consultants may believe these options will net better returns, even with fees, than index funds, there is no guarantee. If their belief is correct, great, everyone wins; the investor's returns are better than average, and the managers of the funds earned their expenses. However, if their belief is incorrect, and an index would have outperformed their actively managed funds, the fund managers still win: they get their cut regardless. For the investors, however, we lose twice. We not only miss out on the better return of the index, but we also must pay inflated fees on top of it all.

The simplest solution to this problem is for (Employer) to retain the index options currently in place and put the interest of the employee-investors above the preferences and beliefs of Pension Consultants. If keeping all four current index options is not possible, leaving the Fidelity 500 Index will allow investors a low-cost, diversified investment vehicle that will always track the market.
Last edited by Jaredc on Wed Sep 05, 2018 2:44 pm, edited 6 times in total.

MotoTrojan
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Re: 401k Help. They are removing index funds.

Post by MotoTrojan » Wed Sep 05, 2018 2:23 pm

Jack FFR1846 wrote:
Wed Sep 05, 2018 2:14 pm
I'd be asking that at least one, current low cost index fund remain. My own 401k with Fidelity has that one single low cost index fund....the S&P 500 fund with a 0.015% ER. To me, that's all I need. Perhaps they'll leave one index fund in place.

Perhaps a nice, passive aggressive response if they won't leave one good fund might be "Is there a method to remove all funds from the upcoming, poor choice of high cost funds through an in service withdrawal, or must an employee terminate to initiate a withdrawal?".
I’d also push for this; just S&P500.

VaR
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Re: 401k Help. They are removing index funds.

Post by VaR » Wed Sep 05, 2018 2:25 pm

Maybe ask Pension Consultants whether they hold themselves up to the fiduciary standard or if they merely hold themselves to the suitability standard? The fiduciary rule may be dead but we don't have to put up with a lower standard. That said, since improper asset allocation is the most common mistake people make in their 401k, I do worry that we'll see more movement towards plans that only have higher cost target date funds.

One thing to look at closely are the expense ratios for each of the offered funds. Index funds will generally have lower costs but there can be big differences between a moderate cost active fund and a high cost one.

The real answer to why they may be switching is that the hospital wants to save themselves the cost of covering administrative expense of the plan by hiding them by recovering costs via rebates from the fund administrator/manager. I have a friend who has Vanguard index funds in her 401k but the plan administrator charges an extra 0.1% per quarter as an administrative fee (0.4% per annum). The active fund administrators rebate this fee so the fee isn't charged if you invest in those (with expense ratios ranging from 0.6% to 1.8%).

Good luck. Do a search for other threads on the subject of "bad 401k options" here. There are several examples of people having no success at arguing with the benefits department of their company.

I agree with the previous poster that the best route to success may be to keep one low cost option open. Who is your 401k administrator?
Last edited by VaR on Wed Sep 05, 2018 2:39 pm, edited 1 time in total.

MotoTrojan
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Re: 401k Help. They are removing index funds.

Post by MotoTrojan » Wed Sep 05, 2018 2:26 pm

Jaredc wrote:
Wed Sep 05, 2018 2:18 pm
I was thinking something along the lines of:

The average managed fund is, by definition, average. This means that approximately half will outperform a market index, and half will underperform. I do appreciate that (Employer) reviews funds periodically. However, stated in the prospectus for the new American Funds options, and true with any investment option, "past investment results are not predictive of future investment results."

While Pension Consultants may believe these options will net even more return, even with their fees, than index funds, there is no guarantee. If their belief is correct, great, everyone wins. The investor's returns are better than average, and the managers of the funds earned their inflated expenses. If their belief is incorrect, and an index would have outperformed their actively managed funds, the fund managers still win, they get their cut regardless. For the investor, however, we lose twice. We not only miss out on the better return of the index, but we also must pay fees on top of it all.

The simplest solution to this problem is for (Employer) to keep the index options currently in place, take a more direct role in fund selection, and put the interest of the employee-investors above the preferences and beliefs of Pension Consultants. If keeping all four current index options is not possible, leaving the Fidelity 500 Index will allow investors a low-cost, diversified investment vehicle that will always track the market.
It’s actually more likely that less beat the index than lose to it, due to expenses.

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Jaredc
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Re: 401k Help. They are removing index funds.

Post by Jaredc » Wed Sep 05, 2018 2:29 pm

MotoTrojan wrote:
Wed Sep 05, 2018 2:26 pm

It’s actually more likely that less beat the index than lose to it, due to expenses.
Moto, agreed. Edited.

MichCPA
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Re: 401k Help. They are removing index funds.

Post by MichCPA » Wed Sep 05, 2018 2:37 pm

Jack FFR1846 wrote:
Wed Sep 05, 2018 2:14 pm
I'd be asking that at least one, current low cost index fund remain. My own 401k with Fidelity has that one single low cost index fund....the S&P 500 fund with a 0.015% ER. To me, that's all I need. Perhaps they'll leave one index fund in place.

Perhaps a nice, passive aggressive response if they won't leave one good fund might be "Is there a method to remove all funds from the upcoming, poor choice of high cost funds through an in service withdrawal, or must an employee terminate to initiate a withdrawal?".
^^This is threatening to quit. Don't threaten to quit unless you are willing to quit. Even a .75 ER increase on her 401k is only $120 this year. Let's keep this in perspective. You brought it to the employer once already. Bug the consultant and ask for the one fund you need, but don't mess up the relationship with her employer. It was already passed on the the 401k committee.

arf30
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Re: 401k Help. They are removing index funds.

Post by arf30 » Wed Sep 05, 2018 2:48 pm

This happened to me once when I worked at a smaller company - after enough complaining they added an S&P 500 fund (with an ER of .30, but still better than nothing). All the other funds were 1.3 or higher.

Kevin8696
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Re: 401k Help. They are removing index funds.

Post by Kevin8696 » Wed Sep 05, 2018 2:49 pm

Here's the advice on this problem that is offered on page 70 of the book, "The Coffeehouse Investor" by Bill Shultheis. (Amazon $15.00)

Plan A for solving this problem is to go to your employer and encourage them to include index funds in their choice of funds.

If they balk, politely ask whether they would be willing to make up the difference to the extent that the managed mutual funds under-perform their respective benchmark indices.

Plan B is to anonymously give your Boss a copy of this book, with the page 70 section highlighted.

My Plan C recommendation would be to put it all in writing and copy your corporate attorney.

Good luck !!
Last edited by Kevin8696 on Wed Sep 05, 2018 3:04 pm, edited 1 time in total.

livesoft
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Re: 401k Help. They are removing index funds.

Post by livesoft » Wed Sep 05, 2018 2:59 pm

I might try the following strategy:

"I am concerned that the removal of a few index funds from the plan will open up opportunities for the company to be sued just like has happened in a few instances (find these instances and link them). Such lawsuits have been costly to the employers to defend and could be easily avoided. Sure, the new funds can remain and that kick back 12b-1 fees to Pension Consultants, so no change needed with the new funds, but by also having a handful of low-expense ratio, passively-managed index funds, too. There seems to be no reason to not protect the company from a fiduciary standpoint. The index funds need not be the same ones offered now, but they do need to be low-expense ratio and passively managed."

If I had the phone number, I would call them and ask them how much money they expect to make from this 401(k) plan and from the funds they have selected. It will be in the Form 5500 anyways, so it will be public knowledge eventually. If you PM me the name of your company, I can look up the current Form 5500 that has been filed. Or you can do so yourself.

BTW, many HR directors are out of their league when deciding on 401(k) plans.
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smitcat
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Re: 401k Help. They are removing index funds.

Post by smitcat » Wed Sep 05, 2018 3:12 pm

Jaredc wrote:
Wed Sep 05, 2018 1:31 pm
Hello all,

I'm a 29 year old male with a wife and two young children (3 and 11 months).

Here is our current financial situation:

His salary: $45k/year
Her salary: Approximately $40k/year, working 24 hours per week.

My 401k (Roth): $30k, in Total Stock Index, Total International Index, Total Bond Index
Her 401k (Roth): $16k, in S&P Index, Mid Cap Index, Small Cap Index (to mimic Total Stock Market) and Total Bond Index
My Roth IRA: $11.5k, in Total Stock Index, Total International Index, Total Bond Index ETFs
Her Roth IRA: $11.5k in Total Stock Index, Total International Index, Total Bond Index ETFs
Son's 529 Plan: $3100 in Vanguard Growth Portfolio
Daughter's 529 Plan: $1500 in Vanguard Growth Portfolio
Joint Brokerage Account: $71k

Once my wife became eligible for her 401k plan through her hospital employer, I was very excited, as my contributions into my plan are very limited. While not a HCE, I am part of a family business and because my uncles own the company, I'm limited to 4-5% contribution per year. Her plan was great, and included three Fidelity indexes (S&P, Mid Cap, and Small Cap) and the Vanguard Total Bond Index. We are currently on track to max out her contributions this year.

We received notification a few weeks back that all the index funds were being scrapped, presumably in favor of shiny American Funds Target Date Funds. While there certainly could be a worse situation, I took offense. I used the "how to campaign for a better 401k plan" as a template for a letter she agreed to send to her employer. She sent the email to her boss and her boss forwarded it on to the HR Director. Her response was ridiculous, in my opinion. I need help in writing a civil reply, instead of my immediate reaction, PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS, or, "well, as long as you promise to beat the market, even if the fees are higher, I trust you." Give me a break.

See below for the emails, with names redacted.

My wife's email:

"Dear (Boss):

I am appreciative that (employer) provides a tax deferred plan to help employees prepare for retirement. However, after studying new investment options and those that are being removed from the plan with the upcoming change, I am concerned that there are few options for employees who wish to invest efficiently for the long-term.

Once this plan change takes effect, all available funds in the plan will be actively managed. Actively managed funds result in higher fees for the investor. Over long periods of time, increased fees can add up to tens of thousands of dollars for long-term retirement savers. Because many employees are counting on this plan to see them through a lengthy retirement, I believe (Employer) has a fiduciary duty to provide adequate fund investments to attain that goal. That fiduciary duty could be met by simply not removing the low-cost fund options that are already part of the plan.

Prior to this change, we had three low-cost index options from Fidelity and one from Vanguard. Once this change takes effect, (employer) employees will no longer have access to index funds. The new American Funds Target Date options have relatively reasonable fees, but the funds are still actively managed and the fees are significantly higher than those of the currently offered index funds. Personally, my best option for low-cost investing will be to move into one of the target date funds, but this will still increase my expenses by over 10 times.

This is a strategy that even Warren Buffett recommends:

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals." --Warren Buffett Berkshire Hathaway Annual Letter, 1996

Mr. Buffett’s recommendation is consistent with the great majority of academic research done on investment costs and index fund performance.

(Employer) currently offers low-cost options for its plan participants. Is there a reason for the plan to remove these option? I would like to ask that (Employer), please give participants the right to choose their own investment strategy.

Let me know if I misunderstood the changes to the plan. I do appreciate that (Employer) offers a 401K plan to help provide for retirement. I think the information that I have suggested may impact other (Employer) employees. Thanks for your assistance!"




And the response:

"Thanks for your email. I am always happy to see employees take an active role in their benefits, especially their retirement. :)

We utilize an investment advisory service, Pension Consultants, to select the choices for the 401k platform. Their investing philosophy is to select actively managed funds (that do have a higher cost structure) that outperform index funds. They select those they believe will net even more return after the fees. This is a different approach than index fund investing, and the reason of the fund line-up changes.

(Employer) meets regularly with Pension Consultants to understand what funds they have chosen, the returns on those funds, if they outperformed the index and if there are changes that need to be made. Our regular meeting with them is later this month and the selection of their fund line up is already on the agenda.

We are also working on bringing someone from Pension Consultants on site in the next few weeks to talk directly to employees about the changes and how that impacts them. We should have dates firmed up this week and will let everyone know. Hopefully you will be able to attend.

In the meantime, if you want to talk with them directly about why the change and how that may impact you, I would encourage you to contact (Consultant) from Pension Consultants, and I have actually copied him on this email. His direct phone number is xxx-xxx-xxxx or email: xxxxxx@pension-consultants.com/ I am sure he is much more articulate about the fund changes and can answer your individual questions.

Please let me know if you have any other questions. If I don’t know the answer, I will work to find it. I really, really appreciate your email and have shared your concerns with others on the committee that oversees the 401k plan."

Your wife's HR dept did not write a rediculous reply they farmed out the 401K managment and responsabilities to a company that specializes in that area - this is commom and is not at all ridiculous.
The HR department is challenged to do many things most of which do not include employed benefits and specifically not to be financial or investing experts in any fashion.
While we share your goals of having access to a spread of low cost funds in your 401K there are many companies that do not have a 401K at all and many others that are fairly restricitive.
So your best bet is to request that 'reasonable' choices be made available which include a subset of your funds so that employees can make their own choices after "Pension consultants" concludes their education of employees. You can include that the XXX and YYY funds would be the most valuable as the current employees have already selected and used them in the past at your company (if you know this to be true).
I would not advise to make this a confrontational event with your wife's HR dept as this is very likely just not generally important to them and will only constitute a poor future reputation for your wife at work.
Try to work with HR for a mutual inclusion of meager few funds which will solve your immediate problem.
I would not make the new pension company the enemy and draw lines in the sand - you will loose.
I would not enter into a position where your wife engages Pension Consultants (whoever they are) in a public challenge over anything.
I would not allow myself to think I know what motivates these chnages in total - shoot for a small win for your fund(s).
This is definatly a situation where you want to get a fund or a few but you do not want to 'win' anything else.
This is my opinion hoping to help - please consider your detailed potential upside and downside with the 401K changes.

Nate79
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Re: 401k Help. They are removing index funds.

Post by Nate79 » Wed Sep 05, 2018 3:32 pm

I think I would kindly ask for them to keep at least an S&P500 index fund. Based in the way their answer was written the advisor company knows exactly what they are doing. I can guarantee they will have the numbers already worked out in their favor to show their funds beat your index funds (whether correct or not). In fact you can look on American's target date fund site and see that they report their funds beat the S&P Target Date Index of the same year (for example can look at the 2040 fund and American reports it beats the index in 1, 3, 5, 10 years). That's going to be tough to argue against. They will also have point blank answers that they are thinking in the best interest of the employees in terms of return and offering simple target date funds. American funds is an excellent company as well and that will be explained. The American funds target date funds win tons of awards so it's going to be hard to say they are bad options in the eyes of HR and the employees.

Do you know the actual ER of the target date funds? American funds has many share classes. For example R-6 (typical employer plan) is 0.41% for the 2040 fund (just the one I clicked on first)
Did your employer offer target date funds before?

It's also possible that the costs to the company are reduced by going with these funds vs the old plan. My employer started adding in quarterly fees, passing along the costs to run the 401k.

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Jaredc
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Re: 401k Help. They are removing index funds.

Post by Jaredc » Wed Sep 05, 2018 3:44 pm

Thanks all. My wife wasn't comfortable being as confrontational as I wanted to be. I can get overly emotional about these sorts of things. And I know emotion has no place in long-term investing.

Looks like she's going with this:

"Thank you for the prompt response. I really appreciate you help with this issue.

While Pension Consultants may believe these funds will be better for employee-investors, there is no guarantee that the new funds will outperform an index in the future, even if they have in the past. While index funds will never outperform the market, they will also never under perform.

Please consider this simple solution: Continue with the plan to bring new funds into the plan, but allow the indexes to remain an option rather than removing them. If it is not possible to keep all four, leaving the Fidelity 500 Index in place, or adding a more-diversified index such as the Vanguard Total Stock Market Index in its place, will allow employee-investors a low-cost, diversified investment vehicle that will always track the market.

Thank you for your time and consideration,"


Will let you all know what comes of it.

Flyer24
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Re: 401k Help. They are removing index funds.

Post by Flyer24 » Wed Sep 05, 2018 3:54 pm

My opinion. Let it go. It is your wife’s job. I don’t think you need to push the issue. Be thankful she even has a 401K. An activity managed fund can still be a useful retirement tool. Kindly thank them for the response and move on. It is not going to be detrimental to your retirement to not have an index fund and certainly not worth causing any job issues for your wife. She doesn’t need to stand out with HR. Be smart.

goblue100
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Re: 401k Help. They are removing index funds.

Post by goblue100 » Wed Sep 05, 2018 3:56 pm

My wife worked for Fujitsu corporation, and just received a check from a class action law suit because they did not meet their fiduciary responsibility by offering low expense funds. While I wouldn't threaten a lawsuit, I would certainly point this out to her employer.

https://www.forbes.com/sites/davidmarot ... 2e36e06236
"We believe that every business should start a 401(k) and every non-profit should offer a 403(b). The potential tax savings for employees is tremendous. But every business owner or director of a non-profit should realize that if they don't take their fiduciary responsibility seriously, they are legally liable for their neglect and inaction."

https://www.dol.gov/sites/default/files ... lities.pdf
"There are other ways to reduce possible liability. Some plans, such as most 401(k) and profit sharing plans, can be set up to give the participants control over the investments in their accounts and limit a fiduciary’s liability for the investment decisions made by the participants. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives. Under Labor Department regulations, there must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is volatile."

"Fees are just one of several factors fiduciaries need to consider in deciding on service providers and plan investments. When the fees for services are paid out of plan assets, fiduciaries will want to understand the fees and expenses charged and the services provided. While the law does not specify a permissible level of fees, it does require that fees charged to a plan be “reasonable.” After careful evaluation during the initial selection, the plan’s fees and expenses should be monitored to determine whether they continue to be reasonable"

https://www.plansponsor.com/excessive-f ... ettlement/
"The lawsuit contended that among defined contribution plans with more than $1 billion in assets, the average plan has costs equal to 0.33% of assets per year; in 2013, total fees for the Fujitsu plan amounted to approximately 0.88% of plan assets."


"The plaintiffs in the lawsuit, all participants in the plan, attributed the high costs to three factors: “Defendants failed to utilize the least expensive available share class for many mutual funds within the plan; defendants caused the plan to pay recordkeeping and administrative expenses far in excess of what a prudent fiduciary would pay for those same services (plaintiffs estimate that after accounting for revenue sharing, the plan paid approximately eight to ten times what a prudent fiduciary would have paid for recordkeeping in 2014); and defendants systematically failed to manage the plan’s investments in a cost-conscious manner, selecting and retaining investments without regard for the cost of those investments and without considering the availability of far cheaper options that would have provided comparable or superior investment management services.”
Can't take it with you when you're gone | But I want enough to get there on - Rollin with the flow - Jerry Hayes

SelfEmployed123
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Re: 401k Help. They are removing index funds.

Post by SelfEmployed123 » Wed Sep 05, 2018 4:00 pm

Jaredc wrote:
Wed Sep 05, 2018 3:44 pm
Thanks all. My wife wasn't comfortable being as confrontational as I wanted to be. I can get overly emotional about these sorts of things. And I know emotion has no place in long-term investing.

Looks like she's going with this:

"Thank you for the prompt response. I really appreciate you help with this issue.

While Pension Consultants may believe these funds will be better for employee-investors, there is no guarantee that the new funds will outperform an index in the future, even if they have in the past. While index funds will never outperform the market, they will also never under perform.

Please consider this simple solution: Continue with the plan to bring new funds into the plan, but allow the indexes to remain an option rather than removing them. If it is not possible to keep all four, leaving the Fidelity 500 Index in place, or adding a more-diversified index such as the Vanguard Total Stock Market Index in its place, will allow employee-investors a low-cost, diversified investment vehicle that will always track the market.

Thank you for your time and consideration,"


Will let you all know what comes of it.
This is a difficult issue. I agree a non-confrontational approach is best. I would suspect there is some financial incentive on the 401k manager's part to remove index funds. You will probably not get much if any mileage out of trying to argue with them that passive management beats active management net of fees, so I wouldn't even go there. Related to your response, I think your best shot will be to emphasize leaving funds in place so that employees can make their own decisions. Personal choice is something that resonates very well with most people. We all value autonomy. Their decision to remove index funds is limiting your autonomy to make your own decisions about your retirement fund. Your request to have the index fund kept is in the service of allowing each employee to make their own decisions. Isn't that what saving for retirement and investing is all about? That to me is approach most likely to get you where you need to go. Best of luck to you!
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Re: 401k Help. They are removing index funds.

Post by Flyer24 » Wed Sep 05, 2018 4:02 pm

I would have never pushed the issue with her HR in the first place. You are letting your emotions interfere with her career. Let your wife control the direction.

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Re: 401k Help. They are removing index funds.

Post by pkcrafter » Wed Sep 05, 2018 4:16 pm

Livesoft has a good point, companies have been sued over high fee funds. That threat can be removed by adding just a few low cost index choice.

"These lawsuits are about high 401(k) fees and conflicts of interest,” said Grant Easterbrook, co-founder of Dream Forward Financial, a new low-cost 401(k) plan based in New York. “Employees are demanding plan sponsors or businesses to abide by their fiduciary duty to do what is in the employee's best interest.”

https://www.thestreet.com/story/1312935 ... mings.html

There are many examples of companies getting in trouble for 401k fees, so maybe your wife can approach this with her employer in a positive way instead of a negative way. By simply having one or two index funds, the company can avoid the potential problem.

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Re: 401k Help. They are removing index funds.

Post by Nate79 » Wed Sep 05, 2018 4:28 pm

Jaredc wrote:
Wed Sep 05, 2018 3:44 pm
Thanks all. My wife wasn't comfortable being as confrontational as I wanted to be. I can get overly emotional about these sorts of things. And I know emotion has no place in long-term investing.

Looks like she's going with this:

"Thank you for the prompt response. I really appreciate you help with this issue.

While Pension Consultants may believe these funds will be better for employee-investors, there is no guarantee that the new funds will outperform an index in the future, even if they have in the past. While index funds will never outperform the market, they will also never under perform.

Please consider this simple solution: Continue with the plan to bring new funds into the plan, but allow the indexes to remain an option rather than removing them. If it is not possible to keep all four, leaving the Fidelity 500 Index in place, or adding a more-diversified index such as the Vanguard Total Stock Market Index in its place, will allow employee-investors a low-cost, diversified investment vehicle that will always track the market.

Thank you for your time and consideration,"


Will let you all know what comes of it.
What is the share class or ER of the funds?

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Re: 401k Help. They are removing index funds.

Post by DoTheMath » Wed Sep 05, 2018 4:53 pm

Jaredc wrote:
Wed Sep 05, 2018 3:44 pm
Thanks all. My wife wasn't comfortable being as confrontational as I wanted to be. I can get overly emotional about these sorts of things. And I know emotion has no place in long-term investing.

Looks like she's going with this:

"Thank you for the prompt response. I really appreciate you help with this issue.

While Pension Consultants may believe these funds will be better for employee-investors, there is no guarantee that the new funds will outperform an index in the future, even if they have in the past. While index funds will never outperform the market, they will also never under perform.

Please consider this simple solution: Continue with the plan to bring new funds into the plan, but allow the indexes to remain an option rather than removing them. If it is not possible to keep all four, leaving the Fidelity 500 Index in place, or adding a more-diversified index such as the Vanguard Total Stock Market Index in its place, will allow employee-investors a low-cost, diversified investment vehicle that will always track the market.

Thank you for your time and consideration,"


Will let you all know what comes of it.
I agree with your wife's position. This should be framed as a right to choose issue. By taking away fund options, they are making financial decisions on your behalf. You want to argue that you should have the right to make the choice to invest in index funds if you so choose.

The goal here is not to convince them they are wrong. That is nearly impossible since, after all, the consultants presumably have strong financial incentives to make changes and long experience in making them look good. While ideally it would be good to protect your wife's co-workers from their shananigans, that is a tough battle and not the one you should be fighting right now. The real goal is to retain an array of options which will allow you (and others who know better) to invest as you prefer.
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Re: 401k Help. They are removing index funds.

Post by MJW » Wed Sep 05, 2018 5:52 pm

livesoft wrote:
Wed Sep 05, 2018 2:59 pm
BTW, many HR directors are out of their league when deciding on 401(k) plans.
This may be true, but there are also plenty that don't get to decide in the first place. The decision is made by a company executive based on outside relations -- i.e. friend, friend of spouse, friend of friend, exec just thought she was cute and said sure, etc. Then the HR person is stuck dealing with the brunt of dissatisfied employees.

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Re: 401k Help. They are removing index funds.

Post by livesoft » Wed Sep 05, 2018 5:54 pm

^I was going to mention that, but the HR person is sometimes the one with the outside relation.

You forgot to mention: somebody met at church.
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Re: 401k Help. They are removing index funds.

Post by bradpevans » Wed Sep 05, 2018 6:14 pm

Jaredc wrote:
Wed Sep 05, 2018 2:18 pm
I was thinking something along the lines of:

The average managed fund is, by definition, average. This means that, before fees, approximately half will outperform a market index, and half will underperform. After fees, the average managed fund is more likely to underperform the index.
I’m not at all suggesting managed + fees will beat the market

But I don’t think your logic holds - given enough bad trades (and fees) some 80% of funds don’t beat the market. 80% is typically the mark - about 80% if mutual funds don’t beat the index. I think it’s a matter of averaging stock performance VS averaging fund performance

Nitpick aside, This is even more to the point that low ER index funds have a lot of upside

Time will tell

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Re: 401k Help. They are removing index funds.

Post by nisiprius » Wed Sep 05, 2018 6:29 pm

I think that is best to avoid trying to make a case that index funds are better, and simply concentrate on making a case that employees want them.
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Re: 401k Help. They are removing index funds.

Post by jalbert » Wed Sep 05, 2018 6:31 pm

A few thoughts come to mind.

1. Tread lightly. The fees for American Funds products are not enough to risk your spouse’s employment experience.

2. American Funds products are not bad products if you can get them at reasonable cost.

3. You might see if there are 12b-1 fees in the expense ratios. Pension Consultants may be offering very low cost or free consulting from the perspective of the employer but making their money through 12b-1 kickbacks from the ER. This would explain why they want American Funds products instead of inexpensive index funds.

4. If item 3 is true, continued pushing on the matter will not lead to anything positive. Pointing out that other employers or consultants have been sued successfully may also be interpreted as a veiled threat. The potential for negative outcomes is not worth it.

5. See item 1 above.

Unless they are the pricier options, I would just use an American Funds target year or balanced fund option and don’t spend time managing the account. Just consider that you are getting portfolio management services for the extra fees.
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Re: 401k Help. They are removing index funds.

Post by megabad » Thu Sep 06, 2018 3:06 pm

I would not involve her boss in this any further. I would thank boss for his/her help in forwarding initial email to HR and remove him/her from this communication stream.

Otherwise I would not take any further action.

Your communication was appropriate and concise has been received at the correct level. HR director has acknowledged it's receipt. You should keep this documentation in paper form.

At a later time when spouse's employment is not dependent on said institution, you are prepared for legal action if you so choose. In my opinion, any further communication should be at a time when you have no relationship with employer and the next communication (if there is one at all) should be from a lawyer. Of course, such a communication would certainly burn all bridges with said employer.

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Re: 401k Help. They are removing index funds.

Post by JBTX » Thu Sep 06, 2018 11:38 pm

Agree with others that perspective is needed here. While in principle it is very irritating, the net result is maybe $100 in fees a year. American funds arent bad funds as far as active funds go. I'd politely follow up with the committee contact that was given but I'd keep it very cordial and non-confrontational.

I've put up with my spouses John Hancock plan with approx 2% fees for almost a decade. Finally this year we are getting a chance to implement something much better. In spite of the terrible fees the balance has still accumulated to a respectable amount.

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401k Removed Index Funds

Post by Jaredc » Fri Nov 09, 2018 12:09 pm

Hello all,

A few months ago, I started this thread:
viewtopic.php?f=1&t=258269&p=4105081#p4105081

Here's a quick recap: My wife's 401k is our primary retirement savings vehicle, as I'm unable to contribute any more than 4% of my salary. She had a great selection of funds, including a number of low-cost indexes. She received notice that the plan was going to be adding American Funds Target Date Funds, but the fine print showed that the plan would be removing the indexes as part of the change.

I wasn't happy with the change, and neither was she. We wrote to her HR director, were not confrontational. The HR director replied with a pre-packaged message, which frustrated me even more. I wrote her next email, which included all the typical lobbying for a better 401k plan points, but you all convinced me I needed to take a step back and not put her career/job/reputation in jeopardy.

Fast forward to today: They have implemented the changes, the indexes are gone and our funds were "mapped" into funds that have ERs of between 80 and 118 basis points. We moved all of her funds into one of the American Funds Target Date Funds, which is what they wanted us to do.

My wife received an email today. She is invited to a private lunch with the Director of HR, Hospital Vice President, and reps from "Pension Consultants," the folks that drove the initial change to discuss 401k options. Needless to stay, she is intimidated. Her knowledge of investing has come from me, and mostly she defers to me when making any investment decisions. She has decided to go to the lunch, but wants me to give her a crash course over the next 6 days.

Here are my thoughts on this, please critique as necessary:
1) I don't think she should bring up all the lawsuits that are so often cited. Wise?
2) Her main focus should be on investor choice. She's walking into a room with a few financial advisers that likely disagree with our investment philosophy, so I don't think she should try to convince anyone that indexed investing is the best way.
3) If she is going to make any specific stand, make it on fees and how that negatively impacts long-term returns.
4) In my job, among other things, I work with our 401k provider/broker and it's a very simple process to introduce funds to the mix. When I wanted Total Stock, Total International, and Total Bond, I just talked to the trustee, who filled out some paperwork and we had the options within a week. We all know why her employer did this, there is revenue to be shared that isn't there with the indexes. Should she tell them of my experience, how simple it was to add funds to the lineup?

Any more ideas? I appreciate your thoughts in advance.

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Re: 401k Removed Index Funds

Post by Nate79 » Fri Nov 09, 2018 12:32 pm

This is a very challenging environment and I would highly recommend that your wife tread carefully. Bringing up the lawsuits would be about the dumbest thing she could do.

What I would do is to explain that while American funds is an excellent fund family and you appreciate having access to a 401k that you would like to have access to a few index funds because that is your investing philosophy. Access to, for example, a simple low cost S&P500 fund and perhaps a bond index fund or stable value fund would be appreciated so that you can continue the investing strategy that you had been doing before.

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Re: 401k Removed Index Funds

Post by BogleMelon » Fri Nov 09, 2018 12:33 pm

Does she have to attend that lunch at all? It is highly unlikely that they would change anything in her plan just because she showed up in a lunch. I would be personally unable to sleep the night before, from the high level of anxiety knowing that I am about to meet the investing sharks the next day, and that I had to change their mind about investing choices in the 401K! My mind would go into imaginary dialogues the night before and even after the meeting ends,my mind would probably go into a "I should have said that not this" kind of phase! [excuse my second English langue]

IDK if other people here agree, but I advice that she forfeit the whole lunch idea..
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Re: 401k Removed Index Funds

Post by runner3081 » Fri Nov 09, 2018 1:13 pm

Nate79 wrote:
Fri Nov 09, 2018 12:32 pm
What I would do is to explain that while American funds is an excellent fund family and you appreciate having access to a 401k that you would like to have access to a few index funds because that is your investing philosophy.
I would not make this a conversation about your wife, that would be a wrong move (and could come off as being a whiner - of course, maybe too late already?)...

Keep it focused on expenses and their impact on retirement accounts. There are tons of data points out there to use.

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Re: 401k Removed Index Funds

Post by averagedude » Fri Nov 09, 2018 1:35 pm

In my opinion, most trustees who oversee work retirement plans are always performance chasing. That is why alot of them replace funds yearly. If i was sitting in the room, i would advocate for low fee passive asset classes (large,mid,small,developed,emerging,total bond,stable value). My two biggest points i would make are:
1. Past performance doesn't predict future returns. 2. Low fees are a guaranteed rate of return.

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Re: 401k Removed Index Funds

Post by Rupert » Fri Nov 09, 2018 1:57 pm

I actually wouldn't be afraid to bring up the lawsuits. That's exactly how I convinced the Board of Directors of my firm to completely overhaul our retirement plan. But how the lawsuits are brought up is key. She has to mention the lawsuits without being perceived as threatening a lawsuit. I find that playing dumb/naive works better than playing smart in these circumstances. So I wouldn't talk about my investment philosophy or how great American funds are (which isn't honest anyway, is it?). So educating her more might be the wrong way to go. She should just honestly ask why, in an environment in which some entities including major universities are getting sued for not offering the lowest-cost index funds (note, the universities offered index funds, just not the cheapest possible share class for those funds) in their plans, it makes sense to switch to a plan that offers only actively-managed funds with higher fees than the old plan. Wouldn't it be wiser for the company, from a risk management perspective, to offer at least a few index funds (a total stock market or S&P 500, a total bond market, and a total international)?

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Re: 401k Removed Index Funds

Post by Kenkat » Fri Nov 09, 2018 2:40 pm

Similar to the above, I would just put forth the argument that index funds are a significant part of the market and so should be represented in the plan. It is the responsibility of the investment committee to provide choices to the plan members, not make those choices for them.

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Re: 401k Removed Index Funds

Post by Thrifty Femme » Fri Nov 09, 2018 5:05 pm


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Re: 401k Removed Index Funds

Post by miriamele » Fri Nov 09, 2018 5:25 pm

I vote that she go. I must disclose that I work in HR (I know, I know...). I would stick to the talking point of choice for the participants. You could refer to satisfying fiduciary responsibility - here's an article that might help?

https://www.employeefiduciary.com/blog/ ... ility-easy

I've implemented many 401(k) plans and with this last one we really got it right. Most companies are very reluctant to make decisions themselves and want to have these third parties choose the lineup (for a fee) as they feel it absolves them of responsibility. Of course, someone has to pay for that and it's always the participants.

BTW I've put in an all index fund lineup. And still someone complained - "There's not much here" :oops: You can't win them all.

I wish her all the best, she is representing a group of people that may not know or appreciate her effort but just maybe she can make a difference!

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Re: 401k Removed Index Funds

Post by arcticpineapplecorp. » Fri Nov 09, 2018 5:36 pm

miriamele wrote:
Fri Nov 09, 2018 5:25 pm
I vote that she go. I must disclose that I work in HR (I know, I know...). I would stick to the talking point of choice for the participants. You could refer to satisfying fiduciary responsibility - here's an article that might help?

https://www.employeefiduciary.com/blog/ ... ility-easy

I've implemented many 401(k) plans and with this last one we really got it right. Most companies are very reluctant to make decisions themselves and want to have these third parties choose the lineup (for a fee) as they feel it absolves them of responsibility. Of course, someone has to pay for that and it's always the participants.

BTW I've put in an all index fund lineup. And still someone complained - "There's not much here" :oops: You can't win them all.

I wish her all the best, she is representing a group of people that may not know or appreciate her effort but just maybe she can make a difference!
the correct retort to that is that the Federal TSP has very few options and yet it's rated as the best retirement plan in the country:

source: https://www.google.com/search?q=tsp+one ... fox-b-1-ab

One of the reasons for that is because it only uses passively managed/index funds, is ultra low cost, and complexity doesn't in and of itself improve returns.
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Re: 401k Removed Index Funds

Post by arcticpineapplecorp. » Fri Nov 09, 2018 5:38 pm

Thrifty Femme wrote:
Fri Nov 09, 2018 5:05 pm
How to campaign for a better 401(k) plan might help.
+1

I was going to post that link to the wiki but Thrifty Femme beat me to it!
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Re: 401k Help. They are removing index funds.

Post by Dottie57 » Fri Nov 09, 2018 6:27 pm

American funds don’t have horrible fees if there is no font load. i don’t know about 12b-1 fees. I had amercan funds in tira for about 6 or 7 years. They made money and got me through the 2008-2009 time frame. What you don’t know is if the same stocks are held in the different funds and if you are overweight in some area.

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Re: 401k Help. They are removing index funds.

Post by wolf359 » Fri Nov 09, 2018 7:27 pm

I have had exactly the same issue with my wife's 401-k. They eventually "relented," and added back an S&P 500 index fund. It was the Dreyfus S&P 500 (PEOPX), with a net expense ratio of 0.5!

I considered it malicious compliance, but my wife doesn't want to pursue it any further. So, I just live with it. As soon as she leaves that company, though, we're transferring everything out.

I had a similar issue with a company I was working for. In that case, the HR person was relying on the 401-k administrator, who was running rings around her. My solution was to talk to the CEO (this was a small company). He had significant assets of his own in the plan. After I convinced him, he just told the HR person how to set it up right. (Management will do the right thing if they realize how they're personally affected.)

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Re: 401k Removed Index Funds

Post by dharrythomas » Fri Nov 09, 2018 7:58 pm

Part of your problem is that in general, American Funds is a good fund family with a pretty good long term track record. These are not the old Fidelity Destiny Funds sold by First Command. Depending on plan expenses, this plan doesn't sound too bad.

I've been in several plans where the options were worse. I got one small company to change by complaining about the new custodian, fund lineup, sales load, and salesman. Fidelity was a big upgrade, so I quit complaining.

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Re: 401k Removed Index Funds

Post by TIAX » Fri Nov 09, 2018 8:02 pm

Jaredc wrote:
Fri Nov 09, 2018 12:09 pm
1) I don't think she should bring up all the lawsuits that are so often cited. Wise?
I think she should mention all the lawsuits while making it clear that she is not interested in participating in such litigation.

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Re: 401k Help. They are removing index funds.

Post by Mr Winston » Fri Nov 09, 2018 8:05 pm

Ask if you can be appointed to the trustee committee. I did and I can now influence our choices. Also, google Brightscope, it is like Glassdoor for retirement programs. You can see where your companies plan stands in comparison to like companies.

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Re: 401k Help. They are removing index funds.

Post by LadyGeek » Fri Nov 09, 2018 8:54 pm

Jaredc - In order to give appropriate advice, it's best to keep all the information in one spot. (Both the original and current thread were getting replies.) The combined thread is now in the Personal Finance (Not Investing) forum (401k plan help).
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Re: 401k Help. They are removing index funds.

Post by celia » Fri Nov 09, 2018 9:06 pm

I think the original letter was well-written and shows that at least some employees care about their 401K plan. The employer response also shows understanding of your concerns and that they will discuss them with the Consultants:
Jaredc wrote:
Wed Sep 05, 2018 1:31 pm
(Employer) meets regularly with Pension Consultants to understand what funds they have chosen, the returns on those funds, if they outperformed the index and if there are changes that need to be made. Our regular meeting with them is later this month and the selection of their fund line up is already on the agenda.
So there is nothing you need to do at this time. Requesting that there be at least one index fund available will be an appropriate response should it come to that.

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Re: 401k Help. They are removing index funds.

Post by rgs92 » Fri Nov 09, 2018 11:37 pm

Personally I would drop everything and say thank you to the HR person and let it all go.
Your wife has a job and a salary. She is a direct employee (and not forced to be a contractor). That is a great privilege these days.
She seems to have a measure of job security (it seems here).

A secure job should not be taken lightly. It should be treasured as a precious gem. The expenses or returns of the company savings plan are microscopic compared to the total compensation package.

What if the company had no 401K? Would the job be that much less valuable? The main value of a 401K is the match. The tax deferral is a slight advantage. Just contribute into the lowest cost fund enough to get the match and be done with it.

The company really has no obligation to offer quality funds in a 401K, and actually many of them do not.

In fact, big companies are turning people by the boatload into contractors working for little companies that have 401Ks with no match and very high expenses. The American funds sound great compared to these microcompany 401Ks I had (and thousands of others like me).
Again, usually they offer no match at all.

Bottom line, the value of a company 401K is about the smallest thing to worry about in the work world.

Just save your money in IRAs and taxable accounts and be grateful every day you have a job.
Being unemployed is far worse.

For heaven's sake, do not label yourself as a complainer or an unhappy employee. That is the worst thing you can do. You are playing with fire. Drop it now.

The company is not there for your benefit. At all.

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Re: 401k Help. They are removing index funds.

Post by danaht » Fri Nov 09, 2018 11:51 pm

Does the 401k support a brokerage window? Seems like a lot of the mega company 401k plans do these days. Mine offers a brokerage window to Charles Schwab for free. I can invest in many low cost index funds and ETFs in this window. So, the simplest solution might be to open a brokerage window and invest in a set of commission free low cost broad based index ETFs. One thing that would keep me from doing this is if the brokerage window charged an additional annual fee or some other fee based on the % of assets in the window. (note: My employer's brokerage window has no fees other than what Charles Schwab normally charges in IRA accounts (ie $4.95 trades).

Here is a thought - if you have a Fidelity brokerage window - you might be able to invest in the new "zero fee" Fidelity index funds -that even beat the low fees on Vanguard's Institutional Funds that are found in a lot of the elite 401ks. I am hoping Charles Schwab follows Fidelity - and introduces a set of Charles Schwab zero fee index funds. If this happens - I'll put 100% of my 401k in those funds.
Last edited by danaht on Sat Nov 10, 2018 12:09 am, edited 1 time in total.

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Re: 401k Help. They are removing index funds.

Post by Slacker » Sat Nov 10, 2018 12:06 am

rgs92 wrote:
Fri Nov 09, 2018 11:37 pm
...A secure job should not be taken lightly. It should be treasured as a precious gem. The expenses or returns of the company savings plan are microscopic compared to the total compensation package...

The company really has no obligation to offer quality funds in a 401K, and actually many of them do not...

Just save your money in IRAs and taxable accounts and be grateful every day you have a job.
Being unemployed is far worse.
Sounds like advice from 2008-2013.
For heaven's sake, do not label yourself as a complainer or an unhappy employee. That is the worst thing you can do. You are playing with fire. Drop it now.

The company is not there for your benefit. At all.
Agree about not being a complainer. Just lobby for change without "complaining".

The company isn't there to lobby on the employees behalf for the best benefits for your labor, that is on each individual. If you accept poor salary and/or benefits and don't try to get more, the company won't typically just provide it charitably. As noted "the company is not there for your benefit. At all"

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