Help! - How to improve small company 401k?

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Monk
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Help! - How to improve small company 401k?

Post by Monk » Thu Sep 14, 2017 10:41 am

Howdy Bogleheads,

Dear Wife recently started a new position with a small (50ish people) engineering firm. The benefits are solid to good - appropriate salary, lots of vacation, passable health insurance. Pretty close to home, too, so even the commute is painless.

But the 401k... the expectation of decorum on this forum precludes the deployment of my full vocabulary in describing its qualities. It stinks.

The provider is American Funds, and all funds are R2 share class... meaning the lowest expense ratio is 1.35%! The money market option is 1.44%! No index options, naturally. My understanding is that American Funds frequently charges companies nothing (correct me if I'm wrong) to administer their 401k plan, pushing the burden onto employees. I don't blame the management, as I'm sure this is outside their expertise, may not appreciate how egregious these expense ratios are, and are simply happy to offer this benefit without much cost.

So my question is this: How do I, as the spouse of an employee, approach the management about improving the 401k? They have already shown some flexibility in this area - to hire my wife they moved the vesting period up to her first day, instead of a one year waiting period as had been the case with previous new hires. My wife thinks the management could be receptive to my help if I can find a way to work with them without spending a lot of their time and energy. Has anyone had success improving a small company 401k, and how did you do it?

Thanks - Monk

jimmyrules712
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Re: Help! - How to improve small company 401k?

Post by jimmyrules712 » Thu Sep 14, 2017 11:43 am

I can't speak from experience but I imagine the first step should be your wife asking around to find out who is in charge of the 401k program. Once she knows who it is she should contact them and ask if they'd be open to hearing her feedback on the plan and discussing ways in which she thinks it can be improved. If they respond positively then you have your open door. If they don't then you probably need to live with it.

If they are willing to discuss it I would come in with some information on what the cost would be to move it to Vanguard or another low expense option along with fund suggestions. Provide a comparison of a hypothetical account after 20 years in each location and show the difference that the fees can make.

bayview
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Re: Help! - How to improve small company 401k?

Post by bayview » Thu Sep 14, 2017 11:55 am

Monk, have you read this in the wiki?

https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

JBTX
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Re: Help! - How to improve small company 401k?

Post by JBTX » Thu Sep 14, 2017 1:42 pm

My wife works for a small company, and such expenses ratios are not abnormal for small companies, unfortunately. We have John Hancock and even the index funds are well over 1.0% A few years ago they switched from another plan where the fees averaged around 2.0%.

This article explains some of the challenges for employers find low fee plans

https://www.forusall.com/401k-blog/who- ... -business/

wfrobinette
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Re: Help! - How to improve small company 401k?

Post by wfrobinette » Thu Sep 14, 2017 3:24 pm

Monk wrote:
Thu Sep 14, 2017 10:41 am
Howdy Bogleheads,

Dear Wife recently started a new position with a small (50ish people) engineering firm. The benefits are solid to good - appropriate salary, lots of vacation, passable health insurance. Pretty close to home, too, so even the commute is painless.

But the 401k... the expectation of decorum on this forum precludes the deployment of my full vocabulary in describing its qualities. It stinks.

The provider is American Funds, and all funds are R2 share class... meaning the lowest expense ratio is 1.35%! The money market option is 1.44%! No index options, naturally. My understanding is that American Funds frequently charges companies nothing (correct me if I'm wrong) to administer their 401k plan, pushing the burden onto employees. I don't blame the management, as I'm sure this is outside their expertise, may not appreciate how egregious these expense ratios are, and are simply happy to offer this benefit without much cost.

So my question is this: How do I, as the spouse of an employee, approach the management about improving the 401k? They have already shown some flexibility in this area - to hire my wife they moved the vesting period up to her first day, instead of a one year waiting period as had been the case with previous new hires. My wife thinks the management could be receptive to my help if I can find a way to work with them without spending a lot of their time and energy. Has anyone had success improving a small company 401k, and how did you do it?

Thanks - Monk
I tried to do this in the spring. Basically most 401ks for small companies have higher fees because AUM is so small. I begged and pleaaded to go to Vanguard but the HR VP enlightened my on 1 key thing I was thinking about. The company has direct feeds from the payroll provider to the 401k provider. Those cost money and time to change. Both of which we didn't have.

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Re: Help! - How to improve small company 401k?

Post by pkcrafter » Thu Sep 14, 2017 5:42 pm

Wow, those ERs are really high, but what's worse, and the reason why they are so high, is R-2 funds contain a 0.75% 12b-1 fee (commission). That raises the question, is this plan really conforming to the new fiduciary standard? It's a terrible plan, and you have to wonder why it was selected. Is the company pres getting a kick-back or is he completely ignorant?

If he's getting a kick-back, he will not be interested in you butting in. On the other hand, I would not be surprised if some employees challenged the pres and the plan in court.

Here's an article from 2012 about American share classes and costs. They didn't like R-2 then.

https://money.usnews.com/money/blogs/th ... -your-401k

http://www.investmentnews.com/article/2 ... enue-share

https://www.americanfunds.com/advisor/t ... epare.html

I think if you are going to get involved in this, it would be best to wait until the new year.

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

retiredjg
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Re: Help! - How to improve small company 401k?

Post by retiredjg » Fri Sep 15, 2017 8:05 am

A company named Employee Fiduciary has been getting good reviews for awhile around here. Apparently they have low cost plans for smaller businesses.

The robos are also getting into the 401k business. Might look there.

Raabe34
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Re: Help! - How to improve small company 401k?

Post by Raabe34 » Fri Sep 15, 2017 8:56 am

pkcrafter wrote:
Thu Sep 14, 2017 5:42 pm
Wow, those ERs are really high, but what's worse, and the reason why they are so high, is R-2 funds contain a 0.75% 12b-1 fee (commission). That raises the question, is this plan really conforming to the new fiduciary standard? It's a terrible plan, and you have to wonder why it was selected. Is the company pres getting a kick-back or is he completely ignorant?

If he's getting a kick-back, he will not be interested in you butting in. On the other hand, I would not be surprised if some employees challenged the pres and the plan in court.

Here's an article from 2012 about American share classes and costs. They didn't like R-2 then.

https://money.usnews.com/money/blogs/th ... -your-401k

http://www.investmentnews.com/article/2 ... enue-share

https://www.americanfunds.com/advisor/t ... epare.html

I think if you are going to get involved in this, it would be best to wait until the new year.

Paul
You need to get yourself more educated on how the $ flows before you start telling people to accuse others of getting kickbacks.

There are different levels of fiduciary to a plan. The company(plan sponsor) is a fiduciary in terms of establishing plan, sending payroll timely, compliance of plan ect. The other type of fiduciary possibly comes from the person who sold the plan to the sponsor(advisor). That is where those 12b-1s are going, that guy. The only possible way the company president is getting that $ is if he is an advisor and then there is a nasty section in ERISA on self dealing. So the pres is not the one getting the money but it's probably his golf buddy or the like.

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Re: Help! - How to improve small company 401k?

Post by pkcrafter » Fri Sep 15, 2017 10:46 am

Raabe34 wrote:
Fri Sep 15, 2017 8:56 am
pkcrafter wrote:
Thu Sep 14, 2017 5:42 pm
Wow, those ERs are really high, but what's worse, and the reason why they are so high, is R-2 funds contain a 0.75% 12b-1 fee (commission). That raises the question, is this plan really conforming to the new fiduciary standard? It's a terrible plan, and you have to wonder why it was selected. Is the company pres getting a kick-back or is he completely ignorant?

If he's getting a kick-back, he will not be interested in you butting in. On the other hand, I would not be surprised if some employees challenged the pres and the plan in court.

Here's an article from 2012 about American share classes and costs. They didn't like R-2 then.

https://money.usnews.com/money/blogs/th ... -your-401k

http://www.investmentnews.com/article/2 ... enue-share

https://www.americanfunds.com/advisor/t ... epare.html

I think if you are going to get involved in this, it would be best to wait until the new year.

Paul
You need to get yourself more educated on how the $ flows before you start telling people to accuse others of getting kickbacks.

There are different levels of fiduciary to a plan. The company(plan sponsor) is a fiduciary in terms of establishing plan, sending payroll timely, compliance of plan ect. The other type of fiduciary possibly comes from the person who sold the plan to the sponsor(advisor). That is where those 12b-1s are going, that guy. The only possible way the company president is getting that $ is if he is an advisor and then there is a nasty section in ERISA on self dealing. So the pres is not the one getting the money but it's probably his golf buddy or the like.
Golf buddy. OK, fair enough.

12b-1 fees in a 401k? Come on, call it what you want, but it is outrageous. Maybe the CEO isn't getting some perk, but then how do we explain why anyone would opt for a plan like that? If the plan must be ERISA compliant, then there should be a fiduciary on board and maybe the OP's wife ought to find out who it is. Also, we don't know what type of business this is, maybe it's not under ERISA regulations. Anyway, I'm guessing that something here is going to change first of the year if it is under ERISA regs.

Also odd that the government is the one requiring fiduciary duty, but seems to have exempted governmental organization from those new rules.

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

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Monk
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Re: Help! - How to improve small company 401k?

Post by Monk » Fri Sep 15, 2017 11:36 am

All - Thanks so much for the help!

It never occurred to me to check the wiki for this topic - that is exactly what I need to guide me. I'll need to give that a close read.

According to my wife the only people within the company involved with this decision are the President and the Controller. The fee disclosure paperwork also indicates a third party administrator (recipient of the 12b-1 fees, no doubt). I sincerely doubt any shenanigans are going on between them - the President and Controller have their hands full and this subject is simply outside their wheelhouse.

Re: ERISA, from my 15 minutes of research, I fully expect the company is subject to it. The recent court ruling over what constitutes "fair and reasonable" fees likely provides me a good way to broach the subject.

Thanks again, everyone. I'll update this thread after I've had a chance to do my homework.

ved
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Re: Help! - How to improve small company 401k?

Post by ved » Fri Sep 15, 2017 11:46 am

I would be careful (especially as a new employee) even remotely insinuating about shenanigans with the executives. Sure way to have yourself blacklisted in the execs opinion (and that will flow down the management chain).

Agreed that the fund expenses are outrageous, but no where compare to your salary - which is what you will be putting at risk if you follow that path

Raabe34
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Re: Help! - How to improve small company 401k?

Post by Raabe34 » Fri Sep 15, 2017 11:52 am

Monk wrote:
Fri Sep 15, 2017 11:36 am
All - Thanks so much for the help!

It never occurred to me to check the wiki for this topic - that is exactly what I need to guide me. I'll need to give that a close read.

According to my wife the only people within the company involved with this decision are the President and the Controller. The fee disclosure paperwork also indicates a third party administrator (recipient of the 12b-1 fees, no doubt). I sincerely doubt any shenanigans are going on between them - the President and Controller have their hands full and this subject is simply outside their wheelhouse.

Re: ERISA, from my 15 minutes of research, I fully expect the company is subject to it. The recent court ruling over what constitutes "fair and reasonable" fees likely provides me a good way to broach the subject.

Thanks again, everyone. I'll update this thread after I've had a chance to do my homework.
Again, from my experience working in finance, the recipient of the 12-b1 is the "advisor" not the TPA. TPA's perform the hardest work generally in these situations and are generally not highly compensated for it. Follow the golf buddy.

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Portfolio7
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Re: Help! - How to improve small company 401k?

Post by Portfolio7 » Fri Sep 15, 2017 2:43 pm

my 2 cents, fwiw... there are a lot of players in this space now, but several don't publish their cost structure.

I've done some preliminary work for my wife's company, and I really liked what I learned about Employee Fiduciary, and I think the on-going analysis is trending towards selecting them. I haven't read anything about them that suggests any on-going customer service or record keeping issues, so that is in their favor. However it's not just cost and reliability - with every provider, there is a different level of service provided, and you have to understand what that means to you (and I'm not knowledgeable enough to understand it all, which is one reason I only did the preliminary work to point them in the right direction and handed it off). Some companies act as co-fiduciaries to some degree, but you have to decide if that's worth anything, and if so, what it's worth to you. Some companies like ADP grab your payroll data to whip up required reports that otherwise your company would have to handle. I think the expertise available within your company might have an impact on how important that is to you; in our case it's nominal, but in others it could be more important. However, you have to get bids and walk though all the different ways each company structures payments and who pays what to compare apples to apples (this usually requires a very detail oriented reviewer who is not afraid to ask questions). There are some very low rate providers that appear to beat EF on price, but some of them have blemishes when it comes to record-keeping (Ubiquity, I believe?. You will find in several boglehead threads) etc. Some of the providers I looked at: Dyatech, Emp Fid, Betterment, America's Best, Guideline, ADP, Vanguard, Fidelity. Be aware that Vanguard contracts through another provider who uses Vanguard funds.

One thing I'm clueless about, I would presume a low cost plan like EF would pretty much inure your company from most legal concerns(?) (whereas some higher cost firms might open you up to potential liability?), since I would think fiduciary responsibility would be mostly about suitability of investments for employees (and the low cost firms tend to have low fee funds). However, I really just don't know. I have no background regarding what the areas of concern should be from a legal standpoint in order to protect your company. I mention it just to point out it might be worth some research. Maybe someone on Bogleheads can weigh in.
An investment in knowledge pays the best interest.

ERISA Stone
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Re: Help! - How to improve small company 401k?

Post by ERISA Stone » Fri Sep 15, 2017 3:42 pm

A couple of things based on some comments in this post.

1. There isn't really a list of fiduciaries for a retirement plan. It really depends on the authority someone or a group has in making decisions. If one were the janitor in title but were making decisions on behalf of the plan, he would likely be a fiduciary. I can't think of any situations wherein the plan sponsor ISN"T a fiduciary. I can see some cases where the trustee would not be a fiduciary, or would be very limited in their fiduciary capacity. The term isn't clearly defined IMO and is really tricky to pin down.

2. There is nothing wrong with 12b-1 fees in the retirement plan industry. You may not like them and that's understandable. But a plan having them in no way indicates there is any sort of fiduciary breach. I have administered plans where the 12b-1 fees covered the entire amount of 401k fees. This was a huge benefit to the company. And perception was probably better to participants than taking the fees directly from participant accounts.

3. IMO, it's important to understand that not all sponsors think low-cost index funds are the way to go, and there's nothing wrong with that. Respectfully, if one doesn't like it, they can choose not to participate. That doesn't mean a participant shouldn't try and advocate for lower fee funds. But it's important to understand that this isn't a priority for some sponsors, and there's no mandate that it has to be as long as fees are reasonable.

4. The court cases we've seen in the news the last few years probably isn't going to change any of this. First, the retirement plans getting sued have been massive. The plans aren't indicative of "normal" sized plans. I just don't see attorneys taking on these cases if there isn't money to be made. Second, the cases are much more complicated than saying "the fees were too high." For example, in the Edison case, the advisor had higher-fee retail funds in the plan when the exact same funds were available at a lower cost as an institutional fund. As I've mentioned before, IMO, at a minimum, there was some serious neglect going on with monitoring funds. There were some other aspects of the case, but as I understand, this was the main issue.

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Re: Help! - How to improve small company 401k?

Post by ERISA Stone » Fri Sep 15, 2017 3:42 pm

Raabe34 wrote:
Fri Sep 15, 2017 11:52 am
Monk wrote:
Fri Sep 15, 2017 11:36 am
All - Thanks so much for the help!

It never occurred to me to check the wiki for this topic - that is exactly what I need to guide me. I'll need to give that a close read.

According to my wife the only people within the company involved with this decision are the President and the Controller. The fee disclosure paperwork also indicates a third party administrator (recipient of the 12b-1 fees, no doubt). I sincerely doubt any shenanigans are going on between them - the President and Controller have their hands full and this subject is simply outside their wheelhouse.

Re: ERISA, from my 15 minutes of research, I fully expect the company is subject to it. The recent court ruling over what constitutes "fair and reasonable" fees likely provides me a good way to broach the subject.

Thanks again, everyone. I'll update this thread after I've had a chance to do my homework.
Again, from my experience working in finance, the recipient of the 12-b1 is the "advisor" not the TPA. TPA's perform the hardest work generally in these situations and are generally not highly compensated for it. Follow the golf buddy.
I have worked for TPAs who collect 12b-1 fees.

dkturner
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Re: Help! - How to improve small company 401k?

Post by dkturner » Sat Sep 16, 2017 12:45 pm

pkcrafter wrote:
Thu Sep 14, 2017 5:42 pm
Wow, those ERs are really high, but what's worse, and the reason why they are so high, is R-2 funds contain a 0.75% 12b-1 fee (commission). That raises the question, is this plan really conforming to the new fiduciary standard? It's a terrible plan, and you have to wonder why it was selected. Is the company pres getting a kick-back or is he completely ignorant?

If he's getting a kick-back, he will not be interested in you butting in. On the other hand, I would not be surprised if some employees challenged the pres and the plan in court.

Here's an article from 2012 about American share classes and costs. They didn't like R-2 then.

https://money.usnews.com/money/blogs/th ... -your-401k

http://www.investmentnews.com/article/2 ... enue-share

https://www.americanfunds.com/advisor/t ... epare.html

I think if you are going to get involved in this, it would be best to wait until the new year.

Paul
Paul,

The company could use the American Funds Class R-6 shares, which have no 12b-1 fees, but if they went that route they would probably pass the administrative expenses on to the employees. Performance would immediately improve by 0.75% per year but employees would notice that 0.75% of their account balances were being deducted each year to cover annual administrative expenses. It's all relative. The bottom line for the employees is the same, regardless of whether their plan uses R-2 or R-6 shares. American funds have 6 different Retirement series share classes, with 12b-1 fees that run from 1% to 0%, in order to cover a variety of administrative expense ratios (the R-6 class shares are designed for large employers that intend to cover all plan administrative expenses).

pkcrafter
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Re: Help! - How to improve small company 401k?

Post by pkcrafter » Sat Sep 16, 2017 6:15 pm

Thanks, DK. It will be interesting to see if there are any changes in the 401k expenses at the first of the year.

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

Raabe34
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Re: Help! - How to improve small company 401k?

Post by Raabe34 » Sun Sep 17, 2017 9:07 pm

ERISA Stone wrote:
Fri Sep 15, 2017 3:42 pm
Raabe34 wrote:
Fri Sep 15, 2017 11:52 am
Monk wrote:
Fri Sep 15, 2017 11:36 am
All - Thanks so much for the help!

It never occurred to me to check the wiki for this topic - that is exactly what I need to guide me. I'll need to give that a close read.

According to my wife the only people within the company involved with this decision are the President and the Controller. The fee disclosure paperwork also indicates a third party administrator (recipient of the 12b-1 fees, no doubt). I sincerely doubt any shenanigans are going on between them - the President and Controller have their hands full and this subject is simply outside their wheelhouse.

Re: ERISA, from my 15 minutes of research, I fully expect the company is subject to it. The recent court ruling over what constitutes "fair and reasonable" fees likely provides me a good way to broach the subject.

Thanks again, everyone. I'll update this thread after I've had a chance to do my homework.
Again, from my experience working in finance, the recipient of the 12-b1 is the "advisor" not the TPA. TPA's perform the hardest work generally in these situations and are generally not highly compensated for it. Follow the golf buddy.
I have worked for TPAs who collect 12b-1 fees.
How can a TPA collect a 12-b1?

sixty40
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Re: Help! - How to improve small company 401k?

Post by sixty40 » Sun Sep 17, 2017 10:13 pm

To the OP,

We are also a small engineering firm and I am one of the trustees of our 401K and it is with American Funds (AF), but we have the R3 class and the expenses are in the 1.0% range. I think we picked up some upfront costs as a company to go with R3 shares so all the employees (I am also an employee) can have lower expense ratios. After I became more knowledgeable in invested, I looked into changing to Vanguard or Fidelity. The reality is that many people know nothing or close to nothing about investing. One can be an engineer and can be ignorant about investing. In fact in our firm of 9, including 2 partners, I am the only one who takes any interest in investing. With Vanguard and Fidelity, much of the correspondence, advice, investment discussions, etc. is thru the website or over the phone. No in person with VG and very limited with Fidelity unless you pay more for it. With AF there is an advisor and any employee can meet with them in person at our office to discuss their investments. In the end, even though it would be cheaper to go with VG and Fidelity, it was simpler and easier and "better" for the staff to stay with AF.

AF is really geared for company 401K's, and provides hand-holding to employees on investments. I do not see that with VG or Fidelity. VG and Fidelity is more for people who already knows something about investing or are really willing to learn.

Also it is amazing how few people know what an expense ratio is and how it can affect their investments over time. Yes, everyone in this forum knows, but that is not the case with the majority of people.

MnD
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Re: Help! - How to improve small company 401k?

Post by MnD » Mon Sep 18, 2017 11:16 pm

Monk wrote:
Thu Sep 14, 2017 10:41 am
So my question is this: How do I, as the spouse of an employee, approach the management about improving the 401k?
You as the spouse of an employee should not even think about approaching the management on this or any other issue.
Your spouse and her employer are primarily in a voluntary arrangement of exchanging work for money. Plus the salary, vacation and commute are good and insurance is OK. You might inform or suggest things to your spouse, but consider that if that translates to pressure from a new employee to alter a small percent of salary benefit subject to a 1.35% ER to say a .35% ER, it might result in a 100% loss of salary benefit along with good vacation and commute.

You are not a player in this game with little to gain and very much to lose.

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