Am I being ripped off in my 401K?

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DTSC
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Am I being ripped off in my 401K?

Post by DTSC » Mon Nov 17, 2008 1:42 am

Here's the situation:

The 401K committee at my job actually gets some input from employees and I attended the last meeting. For the last 20 years, apparently they hire a consultant (who gets 0.07% of total assets annually) to advise the company on which mutual funds to select as possible choices for employees. They also set up several asset allocation portfolios (conservative, aggressive growth, etc) containing these mutual fund choices for participants to just check the box. Or one could set up his own custom asset allocation. The consultant does not actually manage the $100M portfolio.

Currently, the plan is with Schwab and apparently Schwab assesses an annual fee of 0.18% of all assets in the plan - regardless. The fund choices in the plan are usually on the Schwab "preferred list" and kicks back to Schwab a cut of the expenses collected by the fund in order to be listed. For example, a fund usually with an expense ratio of 0.50% would kick 0.18% of that to Schwab, supposedly without passing the expense on to the participant.

Vanguard Institutional Index Fund (VINIX) is the only index choice. This is mainly due to popular demand, even though it is not on the Schwab preferred list. However, if all participants invested 100% in VINIX, Schwab will still charge the 0.18% to the company.

I suggested that they place more index funds choices and was met with stiff resistance from the consultant. He claims that while index funds are good for US Large Caps versus the S&P 500, he is able to select relatively low cost, index beating Small Cap and International Funds, like those on our menu. Thus, he feels that Small Cap and International index funds are unnecessary.

For example, he showed data comparing performance of American Funds EuroPacific Growth Fund (AEPGX) versus MSCI EAFE Index through 9/30/08

Quarter: AEPGX -18.0% vs MSCI EAFE -20.6%
YTD: -26.3% vs -29.3%
5 yr: 12.1% vs 9.7%
10 yr: 9.1% vs 5.0%
inception: 9.0% vs 4.5%

(If you have Morningstar plot out AEPGX, it does look rather impressive compared to the EAFE index)

Also, he showed data comparing 10 year annualized returns of Artisan Mid Cap (ARTMX), Janus Mid Cap Value (JMCVX) of 12.7% and 15.0% after fees, respectively, versus Vanguard Small Cap Index at 8.2%

His contention is that Small Cap and International markets are not as efficient as US Large Caps, and therefore unlike the S&P 500, such that active managers can beat the index.

Being a fledgling Boglehead, I am hoping someone can explain whether he's pulling a fast one on me, or whether these really are index-beating funds worthy of my investment, or just funds which have not reverted to the mean yet have higher expenses. I've read Bernstein's Intelligent Asset Allocator but I must admit that some of it is over my head.

Supposedly this consultant is paid a percentage of the total assets in the 401K plan, so it would appear that his interest in the fund doing well is aligned with the participants. However, if we had just Vanguard or Fidelity target retirement funds, he wouldn't be needed either...


Just for informational purposes, the following are the other funds selected by the consultant.


Balance Fund - Dodge and Cox Balanced (DODBX) 0.53% expense ratio

Western Asset Core Plus Bond Instl (WACPX) 0.46% expense ratio

Custom Large Cap Value composed of - must buy both in a package -
50% Dodge & Cox Stock (DODGX) 0.52% expense ratio
50% High Pointe Select Value (HPSVX) ? expense ratio

Custom Large Cap Growth composed of - must buy both in a package -
50% Harbor Capital Appreciation Inst’l (HACAX) 0.67% expense ratio
50% Janus Adviser (Intech) Risk Managed Growth Class I (JRMGX) 0.56% expense ratio

Custom Small/Mid Value composed of - must buy both in a package -
50% Janus Mid Cap Value Inv (JMCVX) 0.87% expense ratio
50% Wells Fargo Adv Small Cap Value Z (SSMVX) 1.61% expense ratio

Custom Small/Mid Growth composed of - must buy both in a package -
50% Artisan Mid Cap Inv (ARTMX) 1.22% expense ratio
50% Wasatch Ultra Growth (WAMCX) 1.50% expense ratio

Custom International Portfolio composed of - must buy both in a package -
50% Julius Baer International Equity II (JETIX) 1.01% expense ratio
10% Dodge&Cox International Stock (DODFX) 0.65% expense ratio
40% American Funds EuroPacific Gr A (AEPGX) 0.79% expense ratio


Thanks!


Dom

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PiperWarrior
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Post by PiperWarrior » Mon Nov 17, 2008 2:26 am

Can you just select the S&P 500 fund in your 401(k) (and possibly one or two not-too-expensive funds) and take care of the rest in other accounts, such as IRAs and taxable account? If you are married, can you use your spouse's retirement plan more effectively? This is pretty much what I personally do. While it's nice to have a 401(k) plan in which every fund is low cost, I wouldn't spend too much time/effort there.

Easy Rhino
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Post by Easy Rhino » Mon Nov 17, 2008 3:12 am

Hey Dom, I think I saw all these choices in your previous "pimp my portfolio" post.

Anyway, let's get the numbers straight. Does the 0.07% get paid out of assets, or does the company pay it as an administrative expense?

And, are the expenses you're listing for each fund truly the net expense paid by each investor? No other wrap fees or anything? And for load funds, like AEPGX, do you have to pay the front load?

I still don't like the plan, though, mainly the "bundling" of different funds together. Listen, if I wanted to mix together enough actively managed funds so I end up with the performance of the index, I'll just buy the index and save myself a few bucks. The international portfolio seems exceptionally arbitrary.

livesoft
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Post by livesoft » Mon Nov 17, 2008 7:37 am

There is probably not much you can do to change the plan. The company has a fiduciary duty to the plan which it partially fulfills by having the consultant.

I would not compare mid-cap value nor mid-cap index to small-cap index. They ain't the same. So I have to wonder why he did this.

Also, instead of comparing to 9/30/2008 you should try to compare to today's date since October 2008 changed the long-term story on some funds drastically.

Was the AEPGX fund in the plan for the last 10+ years? If it wasn't, then the employees didn't get its returns.

How often are the fund choices switched in the plan? If the average fund tenure in the plan is only 2 or 3 years, then the employees are probably not getting published returns. Jeff Troutner wrote a couple of good articles on this phenomenom which you can read, then hand to the 401(k) committee members:
http://www.equiuspartners.com/pdf/asset ... b07ac2.pdf
http://www.equiuspartners.com/pdf/asset ... r07ac2.pdf

Unfortunately, the committee members won't make a drastic change without some drastic failure in the plan. Maybe October 2008 was the drastic failure in the plan?

Auream
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Post by Auream » Mon Nov 17, 2008 9:08 am

livesoft wrote: Unfortunately, the committee members won't make a drastic change without some drastic failure in the plan. Maybe October 2008 was the drastic failure in the plan?
I'm also hoping that recent events will be the impetus needed to get my small company to ditch our high-cost Gabelli plan and replace it with something from Vanguard or that at least offers low-cost index funds. I've already suggested Employee Fiduciary to them, but they didn't seem too interested in changing.

One "benefit" we do get from our current plan is that we have an "advisor" that comes in regularly who does informational sessions that might be of some value. Mostly he just tries to answer questions, and spouts the typical "stay in for the long run" and "diversify" lines. I believe having this guy is one reason that the higher ups didn't want to change plans. I can see how this kind of reinforcement might actually be of value to some of our employees... I've heard a few over the past month saying things like "man I'm really considering just dumping everything and getting back in when the market starts to recover."

Does anyone know if it would be legal for someone like me (I do not work in the financial industry) to offer similar kind of advice? Where would I be crossing the line between just trying to help out fellow employees and "selling securities without a license" or whatever? Would sitting down with someone for a few minutes and helping them with their asset allocation be something they could try to come back and sue me for when they lost money?

Unfortunately, I'm kind of assuming the answer to my above questions are "yes," meaning that we may actually benefit from keeping our stupid plan just because we can legally have someone to tell people not to dump all their stocks.

pkcrafter
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401k

Post by pkcrafter » Mon Nov 17, 2008 9:56 am

Dom,

Your 401k, even with its flaws, is better than most. It could be improved with the addition of a few more low cost index funds and TR funds. The bundled packages of funds is a bit curious.

Auream,

Your 401k sounds sounds like it has higher expenses and poorer choices. You can't give investing advice, but you can initiate educational meetings (lunch meetings?) with other employees.

Here is a link to an article on the Boglehead Wiki that might help both of you.

http://www.bogleheads.org/wiki/index.ph ... 8k%29_Plan
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.

Easy Rhino
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Post by Easy Rhino » Mon Nov 17, 2008 10:36 am

Dom, I forgot to mention that while I hate your 401k, I also agree that it's better than average. It covers most major asset classes, and expenses are probably lower than average.

Topic Author
DTSC
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Post by DTSC » Mon Nov 17, 2008 12:36 pm

Thanks to everyone for their input and advice

I am still a bit confused about the efficiency of foreign markets and whether one can beat the index. AEPGX does look impressive compared to the index, even over a number of years, especially since we don’t pay the front load as an institutional investor. Bogle and Bernstein do show the the superiority of indexing versus US Large Cap managed funds, but their evidence for foreign and small caps are less solid. What am I missing here?

Easy Rhino: I’m pretty sure they have these “combo packs” to make things more cryptic and harder for one to track the funds’ performance. I know for a fact that we have not been investing in these funds for the entire duration of the purported high performance. Thus, they are adding high flying funds and chasing past performance like everyone else.

Another fund that the “advisor” was pushing is the Schwab Stable Value Fund. (http://www.schwabplan.com/FundDetail/SSV3Z.pdf) It is a Collective Investment Trust run by the Charles Schwab Trust Company and is not open to individual investors. He is selling it as a conservative bond-like capital preservation investment. Can anyone comment on this type of investment? If it’s so good, why don’t they sell it to everyone else?

I am realizing how entrenched the whole "financial advice" industry is and it's probably not worth my while to pick a fight to change things, especially as the 0.07% paid to this "advisor" comes out of the whole $100M fund, so my personal cost is only about $14 per year.

Still, it's no fun to learn that they are pulling a fast one on you and your fellow employees. Bernstein is right - there are those who can't predict the future and know it, there are those who think they can predict the future, and then there are those who know they can't predict the future, but their livelihood depends on pretending that they do!

Dom

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tfb
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Post by tfb » Mon Nov 17, 2008 12:56 pm

While your plan may not be ideal or as much as you'd like, you are very far from being ripped off, unless there are additional hidden fees you don't know about. It's an acceptable plan as far as 401k plans go.
Harry Sit, taking a break from the forums.

Auream
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Re: 401k

Post by Auream » Mon Nov 17, 2008 2:04 pm

pkcrafter wrote: Auream,

Your 401k sounds sounds like it has higher expenses and poorer choices. You can't give investing advice, but you can initiate educational meetings (lunch meetings?) with other employees.
So... where is the line drawn between "giving advice" and running an "educational meeting?" What exactly would an educational meeting consist of, if not giving advice? Or is it more like, explain the benefits of diversification and low cost funds in general terms, rather than recommending a specific asset allocation?

What about if I did something like recommend different asset allocations for people at different ages and risk tolerances, again, without telling a specific person that I "recommend" that specific allocation?[/quote]

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DTSC
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Post by DTSC » Mon Nov 17, 2008 2:50 pm

Auream,

Maybe you can start an "Investment Interest Club" for your co-workers. Obviously attendence would be voluntary and you'll be a peer rather than an "advisor" so hopefully you will be less on the hook liability-wise.

Dom

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