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Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 9:30 pm
by bestisfree
After a year and a quarter, I am finally able to participate at my (<10 employees) organization's 401(k) plan.

I wasn't expecting great expense ratios, but I was surprised with the combination of high expense ratios, few selections, and basically a lack of index funds (only one!!! :oops: ) I've tried to study the prospectus and try to come up with a mix that would at least minimize ER while give me exposure similar to my Vanguard AA, which is about 80/20. Should I prioritize ER minimization over fund mix? Any thoughts and comments on how you might choose the funds if you were me?

The silver lining (I think) is that the employer matches 6% and there is a safe harbor non-elective matching at 3%. I hope to max out 401(k) for the first time in my life (40 yr). The 401(k) does accept traditional IRA roll-in which I'll have to leverage to so I can start doing backdoor Roth IRA (total tIRA balance=$19k).

Thank you all in advance! Here is the list of funds -- expense ratio in bold:
  • Oppenheimer Senior Floating Rate R 1.38%
    Diversified Bond OOSNX
    One Year: 3.80%
    Three Year: 4.29%
  • Ivy International Core Equity R 1.56%
    International Stock IYITX
    One Year: 4.38%
    Three Year: 3.45%
  • Hartford Core Equity Fund R3 1.12%
    Large Cap U.S. Stock HGIRX
    One Year: 14.39%
    Three Year: 10.38%
  • Alger Capital Appreciation Instl R 1.62%
    Large Cap U.S. Stock ACARX
    One Year: 22.90%
    Three Year: 12.38%
  • Delaware Value R 1.20%
    Large Cap U.S. Stock DDVRX
    One Year: 11.52%
    Three Year: 9.06%
  • Goldman Sachs Managed Futures Strat R 2.11%
    Alternative GFFRX
    One Year: -0.71%
    Three Year: N/A
  • BlackRock Mid-Cap Growth Equity R 1.65%
    Mid Cap U.S. Stock BMRRX
    One Year: 26.21%
    Three Year: 13.58%
  • DWS Mid Cap Value Fund R 1.59%
    Mid Cap U.S. Stock MIDQX
    One Year: 4.39%
    Three Year: 3.51%
  • JPMorgan U.S. Small Company R2 1.50%
    Small Cap U.S. Stock JSCZX
    One Year: 15.07%
    Three Year: 8.57%
  • Janus Henderson Triton R 1.42%
    Small Cap U.S. Stock JGMRX
    One Year: 22.02%
    Three Year: 12.58%
  • Undiscovered Mgrs Behavioral Value R2 1.73%
    Small Cap U.S. Stock UBVRX
    One Year: 13.57%
    Three Year: 10.71%
  • Templeton Global Bond R 1.28%
    Diversified Bond FGBRX
    One Year: -2.28%
    Three Year: 0.75%
  • PIMCO Total Return R 1.15%
    Diversified Bond PTRRX
    One Year: -0.76%
    Three Year: 1.45%
  • PIMCO All Asset R 1.77%
    Balanced PATRX
    One Year: 3.58%
    Three Year: 4.18%
  • Oppenheimer Emerging Markets Debt R 1.71%
    Diversified Bond OEMNX
    One Year: -3.76%
    Three Year: 2.94%
  • AC Alternatives Discip Long Short R 2.55%
    Alternative ACDWX
    One Year: 4.54%
    Three Year: 5.37%
  • Invesco Bal Risk Commodity Strat R 1.90%
    Commodities BRCRX
    One Year: 9.55%
    Three Year: -1.05%
  • Cohen & Steers Real Estate Secs R 1.30%
    Specialty U.S. Stock CIRRX
    One Year: 4.19%
    Three Year: 9.20%
  • Nationwide Mid Cap Market Index R 0.97%
    Mid Cap U.S. Stock GMXRX
    One Year: 12.44%
    Three Year: 9.84%
  • Cohen & Steers Global Realty R 1.37%
    Specialty Intl Stock GRSRX
    One Year: 5.18%
    Three Year: 6.28%
  • Ivy Emerging Markets Equity R 1.82%
    International Stock IYPCX
    One Year: 5.22%
    Three Year: 4.30%
  • Lord Abbett International Opp R3 1.47%
    International Stock LINRX
    One Year: 7.78%
    Three Year: 6.71%
  • Cohen & Steers MLP & Energy Opp R 1.93%
    Specialty U.S. Stock MLORX
    One Year: 3.71%
    Three Year: -3.72%
  • American Funds U.S. Govt Money Mkt R3 0.98%
    Capital Preservation RACXX
    One Year: 0.33%
    Three Year: 0.12%
  • Calamos Market Neutral Income A 1.28%
    Alternative CVSIX
    One Year: 3.96%
    Three Year: 3.66%

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 9:44 pm
by 2pedals
:shock:

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 9:55 pm
by bestisfree
2pedals wrote:
Wed Sep 12, 2018 9:44 pm
:shock:
The avatar captured my reaction 100% when I first saw the list. I mean that American Funds U.S. Govt Money Mkt R3 has a .98% ER! That's .13% more than their advertised interest rate, on a MONEY MARKET fund! Highway rubbery I say.

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 10:03 pm
by HEDGEFUNDIE
Not ideal. But also not the end of the world. Run some back tests on these funds on Portfolio Visualizer against some common index funds (S&P 500, S&P 600, etc.). Find the ones that come closest to the benchmarks.

For example, it looks like HGIRX has tracked the S&P 500 very closely since inception. I would make that your core equity holding.

As for bonds, PTTRX is a decent active bond fund and suitable as a core bond holding.

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 10:16 pm
by ExitStageLeft
Those really bite. How long until retirement, and what is present tax bracket?

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 10:28 pm
by bestisfree
HEDGEFUNDIE wrote:
Wed Sep 12, 2018 10:03 pm
Not ideal. But also not the end of the world. Run some back tests on these funds on Portfolio Visualizer against some common index funds (S&P 500, S&P 600, etc.). Find the ones that come closest to the benchmarks.

For example, it looks like HGIRX has tracked the S&P 500 very closely since inception. I would make that your core equity holding.

As for bonds, PTTRX is a decent active bond fund and suitable as a core bond holding.
I didn't even know Portfolio Visualizer existed! That is super helpful. Any thoughts on exposure to international or emerging markets?

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 10:34 pm
by bestisfree
ExitStageLeft wrote:
Wed Sep 12, 2018 10:16 pm
Those really bite. How long until retirement, and what is present tax bracket?
Current age: 40
Planned retirement: 65
Present tax bracket: barely low end of 33% (married filed jointly) if no pre-tax 401(k) contribution, most likely 28% bracket

Note: this is the first year I earn enough that I'd need to consider backdoor roth IRA.. so not complaining about the salary jump when I switched job last year.

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 10:36 pm
by HEDGEFUNDIE
bestisfree wrote:
Wed Sep 12, 2018 10:28 pm
HEDGEFUNDIE wrote:
Wed Sep 12, 2018 10:03 pm
Not ideal. But also not the end of the world. Run some back tests on these funds on Portfolio Visualizer against some common index funds (S&P 500, S&P 600, etc.). Find the ones that come closest to the benchmarks.

For example, it looks like HGIRX has tracked the S&P 500 very closely since inception. I would make that your core equity holding.

As for bonds, PTTRX is a decent active bond fund and suitable as a core bond holding.
I didn't even know Portfolio Visualizer existed! That is super helpful. Any thoughts on exposure to international or emerging markets?
Well you don’t have much choice as far as international. IYITX is a large cap international fund while LINRX is a small/mid cap international fund. You can either hold both, or just the latter (some of us overweight international small caps).

And there’s only one emerging markets equity fund offered...

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 10:46 pm
by 2pedals
Use Ivy International Core Equity if you must have international. Agree with Hartford Core Equity Fund (us stocks) and PIMCO Total Return (bonds). Trying to control my gagging reflexes.

You should request your employer add some low cost index funds such as a S&P 500 index, extended market index funds, total US market index and total ex-us market index.

Starting with a 70% stock and 30% bond allocation could look like this

50% Hartford Core Equity Fund
20% Ivy International Core Equity
30% PIMCO Total Return

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 11:04 pm
by ExitStageLeft
I'm slow! I reread your original post and realize you say you are 40. Doh! :oops:

You'll max out your 401k, that's a given even though the fund selection is awful. The question is what to do with the $5500 per year that you want to put in the Roth IRA?

Your options are:
  1. Roll the tIRA into the 401k and backdoor Roth $5500 every year.
  2. Convert the tIRA to Roth and pay the tax hit. Backdoor Roth $5500 every year.
  3. Leave the tIRA where it is and invest $5500 in taxable.
I drew up an unsophisticated spreadsheet guessing at what you might expect from your three options. Assuming 6% return, 1% extra expense in the 401k, 22% tax bracket and 15% LTCG tax rate charged annually.

After 10 years the $19k and subsequent $5500 contributions would become:
  1. $29,475.24 tax-deferred and $72,494.37 tax-free
  2. $97,532.45 tax-free
  3. $32,100.10 tax-deferred and $69,502.16 taxable
After 15 years:
  1. $37,618.70 tax-deferred and $128,017.83 tax-free
  2. $161,524.43 tax-free
  3. $42,957.18 tax-deferred and $119,579.27 taxable
After 20 years:
  1. $48,012.05 tax-deferred and $202,320.75 tax-free
  2. $247,160.14 tax-free
  3. $57,486.39 tax-deferred and $183,796.69 taxable
If your tax rate in retirement is 12%, then you can figure spendable by taking income tax out of tax-deferred. In the early years Option 1 results in higher spendable. Over time though, the higher 401k fees cut into growth such that by year 14 the advantage goes to Option 2. Actually, I did that calc assuming the funds to pay the income tax comes for the Roth conversion come out of the converted funds. If think you're much better off with Option 2 if you can pay the income tax out of taxable.

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 11:09 pm
by BL
I would skip international and consider picking it up in Roth or taxable.

Maybe wait a bit and then campaign for an S&P 500 type index fund.

You need to contribute to defer taxes.

Re: Another high expense-ratio 401(k), Help!

Posted: Wed Sep 12, 2018 11:13 pm
by ExitStageLeft
bestisfree wrote:
Wed Sep 12, 2018 10:34 pm
ExitStageLeft wrote:
Wed Sep 12, 2018 10:16 pm
Those really bite. How long until retirement, and what is present tax bracket?
Current age: 40
Planned retirement: 65
Present tax bracket: barely low end of 33% (married filed jointly) if no pre-tax 401(k) contribution, most likely 28% bracket

Note: this is the first year I earn enough that I'd need to consider backdoor roth IRA.. so not complaining about the salary jump when I switched job last year.
it turns out to be pretty much a wash between Option 1 and Option 2. Definitely pick either of those over putting it in taxable.

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 7:20 am
by aristotelian
You mention this is a small company. Any chance you have enough influence to get them to change to a new plan if you help them set it up?

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 7:47 am
by goblue100
aristotelian wrote:
Thu Sep 13, 2018 7:20 am
You mention this is a small company. Any chance you have enough influence to get them to change to a new plan if you help them set it up?
Or at least add some low ER index funds?

I will say that when I started investing in "low load" mutual funds the ER's you listed above were considered normal, and on the lower end. We patted ourselves on the backs for not investing in the front end loaded funds with an up front er of 5%. :shock:

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 7:57 am
by ryman554
2pedals wrote:
Wed Sep 12, 2018 10:46 pm
Use Ivy International Core Equity if you must have international. Agree with Hartford Core Equity Fund (us stocks) and PIMCO Total Return (bonds). Trying to control my gagging reflexes.

You should request your employer add some low cost index funds such as a S&P 500 index, extended market index funds, total US market index and total ex-us market index.
The employer can add whatever index they want, they will still be very expensive (see the "cash" fund ~1%). For whatever reason, it looks like the employer has constructed a plan to pass off all the fees to the employee.

I would use the 1% MM fund to explain the the employer that the fees are outrageous and lower-cost options are likely available from another provider.

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 8:34 am
by JW-Retired
bestisfree wrote:
Wed Sep 12, 2018 9:30 pm
After a year and a quarter, I am finally able to participate at my (<10 employees) organization's 401(k) plan.

I wasn't expecting great expense ratios, but I was surprised with the combination of high expense ratios, few selections, and basically a lack of index funds (only one!!! :oops: ) I've tried to study the prospectus and try to come up with a mix that would at least minimize ER while give me exposure similar to my Vanguard AA, which is about 80/20.
I would pick one or two of the lowest ER equity funds and settle for those. The expenses could get better as your organization and the 401k balance grows.

But one worry about your listing of the ERs. Did you get these costs from the 401k information or from the internet? I looked up a few and what you listed seems to be exactly the same ER numbers as Morningstar gives for individual investor accounts.

Usually the ERs + other costs in a 401k are different (larger) than retail ERs. Especially in a small 401k.
JW

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 10:21 am
by 2pedals
ryman554 wrote:
Thu Sep 13, 2018 7:57 am
2pedals wrote:
Wed Sep 12, 2018 10:46 pm
Use Ivy International Core Equity if you must have international. Agree with Hartford Core Equity Fund (us stocks) and PIMCO Total Return (bonds). Trying to control my gagging reflexes.

You should request your employer add some low cost index funds such as a S&P 500 index, extended market index funds, total US market index and total ex-us market index.
The employer can add whatever index they want, they will still be very expensive (see the "cash" fund ~1%). For whatever reason, it looks like the employer has constructed a plan to pass off all the fees to the employee.

I would use the 1% MM fund to explain the the employer that the fees are outrageous and lower-cost options are likely available from another provider.
Employers are legally required to manage their 401(k) plan in the best interest of the participants (fiduciary responsibility).
aka they have an obligation to seek out the best plans for the employers. 401k administrators sometimes can negotiate lower fees, but they must take some initiative and encourage the plan sponsors to do so. The plan sponsors and advisers are making decent money and will be reluctant to change but the plan administrator must be adamant about charging reasonable fees. The squeaky wheel gets the grease and squeaking and squawking starts with the employee.

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 3:07 pm
by ryman554
2pedals wrote:
Thu Sep 13, 2018 10:21 am
ryman554 wrote:
Thu Sep 13, 2018 7:57 am
2pedals wrote:
Wed Sep 12, 2018 10:46 pm
Use Ivy International Core Equity if you must have international. Agree with Hartford Core Equity Fund (us stocks) and PIMCO Total Return (bonds). Trying to control my gagging reflexes.

You should request your employer add some low cost index funds such as a S&P 500 index, extended market index funds, total US market index and total ex-us market index.
The employer can add whatever index they want, they will still be very expensive (see the "cash" fund ~1%). For whatever reason, it looks like the employer has constructed a plan to pass off all the fees to the employee.

I would use the 1% MM fund to explain the the employer that the fees are outrageous and lower-cost options are likely available from another provider.
Employers are legally required to manage their 401(k) plan in the best interest of the participants (fiduciary responsibility).
aka they have an obligation to seek out the best plans for the employers. 401k administrators sometimes can negotiate lower fees, but they must take some initiative and encourage the plan sponsors to do so. The plan sponsors and advisers are making decent money and will be reluctant to change but the plan administrator must be adamant about charging reasonable fees. The squeaky wheel gets the grease and squeaking and squawking starts with the employee.
Oh, I 100% agree with you. Just commenting that asking to put in a low-cost "S&P 500 index, extended market index funds, total US market index and total ex-us market index" will likely get the OP a fund with ~1.1% ER, since that's low cost to the plan, given the cost for the cash account.

Granted, the employer seems good (great, really!) in giving 3+6(?)% matching, so the employee is already up ~10% just on contributions.

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 5:46 pm
by bestisfree
JW-Retired wrote:
Thu Sep 13, 2018 8:34 am

I would pick one or two of the lowest ER equity funds and settle for those. The expenses could get better as your organization and the 401k balance grows.

But one worry about your listing of the ERs. Did you get these costs from the 401k information or from the internet? I looked up a few and what you listed seems to be exactly the same ER numbers as Morningstar gives for individual investor accounts.

Usually the ERs + other costs in a 401k are different (larger) than retail ERs. Especially in a small 401k.
JW
Good point JW. Yes they are taken off from the plan listings. I did see morningstar in several places on the plan's website, so I suspect the administration company, Asensus, had some sort of arrangement with morningstar.

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 6:21 pm
by bestisfree
ryman554 wrote:
Thu Sep 13, 2018 3:07 pm
2pedals wrote:
Thu Sep 13, 2018 10:21 am
ryman554 wrote:
Thu Sep 13, 2018 7:57 am
2pedals wrote:
Wed Sep 12, 2018 10:46 pm
Use Ivy International Core Equity if you must have international. Agree with Hartford Core Equity Fund (us stocks) and PIMCO Total Return (bonds). Trying to control my gagging reflexes.

You should request your employer add some low cost index funds such as a S&P 500 index, extended market index funds, total US market index and total ex-us market index.
The employer can add whatever index they want, they will still be very expensive (see the "cash" fund ~1%). For whatever reason, it looks like the employer has constructed a plan to pass off all the fees to the employee.

I would use the 1% MM fund to explain the the employer that the fees are outrageous and lower-cost options are likely available from another provider.
Employers are legally required to manage their 401(k) plan in the best interest of the participants (fiduciary responsibility).
aka they have an obligation to seek out the best plans for the employers. 401k administrators sometimes can negotiate lower fees, but they must take some initiative and encourage the plan sponsors to do so. The plan sponsors and advisers are making decent money and will be reluctant to change but the plan administrator must be adamant about charging reasonable fees. The squeaky wheel gets the grease and squeaking and squawking starts with the employee.
Oh, I 100% agree with you. Just commenting that asking to put in a low-cost "S&P 500 index, extended market index funds, total US market index and total ex-us market index" will likely get the OP a fund with ~1.1% ER, since that's low cost to the plan, given the cost for the cash account.

Granted, the employer seems good (great, really!) in giving 3+6(?)% matching, so the employee is already up ~10% just on contributions.
Thanks 2pedals and ryman. I don't quite know how or who the 401k was originally set up. The fact that it was probably only 2 or 3 people when it was set up a couple of years ago, and the fact that we are a nonprofit probably contributed to the selection. That said, if I were to help picking funds and maybe new plan,, given how busy the boss is, it would have to be seen as compelling and an easy - spoon fed solution.

I am happy to start looking into it... But how does one go about this? Any pointers?

Re: Another high expense-ratio 401(k), Help!

Posted: Thu Sep 13, 2018 8:28 pm
by 2pedals
bestisfree wrote:
Thu Sep 13, 2018 6:21 pm

Thanks 2pedals and ryman. I don't quite know how or who the 401k was originally set up. The fact that it was probably only 2 or 3 people when it was set up a couple of years ago, and the fact that we are a nonprofit probably contributed to the selection. That said, if I were to help picking funds and maybe new plan,, given how busy the boss is, it would have to be seen as compelling and an easy - spoon fed solution.

I am happy to start looking into it... But how does one go about this? Any pointers?
Sorry I can not answer your question, maybe if you open up a new topic -- Employee of small nonprofit company needs help in getting a low cost 401k established. Keep posting questions so that it gets listed as the latest post every once and a while, bogleheads are very helpful.

Re: Another high expense-ratio 401(k), Help!

Posted: Fri Sep 14, 2018 4:09 pm
by bestisfree
Thanks. I think I will have to think like the organisation startup and learn what one needs to do to start from scratch.

Thank you all for your inputs.

Re: Another high expense-ratio 401(k), Help!

Posted: Fri Sep 14, 2018 4:48 pm
by michaeljc70
Assuming you think your tax rate in retirement will be the same or higher, I would contribute the minimum to get the matching and put the rest in a Roth. Those look like ERs on funds I had 25 years ago. As someone else said, the employer is passing the cost of the plan onto the employees.

Re: Another high expense-ratio 401(k), Help!

Posted: Tue Nov 20, 2018 11:50 am
by blackcat allie
2pedals wrote:
Thu Sep 13, 2018 10:21 am

Employers are legally required to manage their 401(k) plan in the best interest of the participants (fiduciary responsibility).
aka they have an obligation to seek out the best plans for the employers. 401k administrators sometimes can negotiate lower fees, but they must take some initiative and encourage the plan sponsors to do so. The plan sponsors and advisers are making decent money and will be reluctant to change but the plan administrator must be adamant about charging reasonable fees. The squeaky wheel gets the grease and squeaking and squawking starts with the employee.
Trying to figure out, exactly *who* is the fiduciary with my plan :?:
Is it the Administrator from HR, or the outsourced insurance benefits packaging outfit (NFP in my case).. is it a specific designation to one person, or a general duty/principle?

Re: Another high expense-ratio 401(k), Help!

Posted: Tue Nov 20, 2018 5:20 pm
by 2pedals
blackcat allie wrote:
Tue Nov 20, 2018 11:50 am
2pedals wrote:
Thu Sep 13, 2018 10:21 am

Employers are legally required to manage their 401(k) plan in the best interest of the participants (fiduciary responsibility).
aka they have an obligation to seek out the best plans for the employers. 401k administrators sometimes can negotiate lower fees, but they must take some initiative and encourage the plan sponsors to do so. The plan sponsors and advisers are making decent money and will be reluctant to change but the plan administrator must be adamant about charging reasonable fees. The squeaky wheel gets the grease and squeaking and squawking starts with the employee.
Trying to figure out, exactly *who* is the fiduciary with my plan :?:
Is it the Administrator from HR, or the outsourced insurance benefits packaging outfit (NFP in my case).. is it a specific designation to one person, or a general duty/principle?
Ultimately, anyone who makes a decision for your organization’s retirement plan is a fiduciary. Each company is different. Many times the fiduciary role is at least partially contracted to a 3rd party.