Trying to get my company to switch to Vanguard 401(k)

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JamesSF
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Trying to get my company to switch to Vanguard 401(k)

Post by JamesSF »

I've been trying to get my company to provide low-cost index funds as part of our 401(k), and even switch to Vanguard to provide our 401(k) plan. Here's the response I got back from our current 401(k) advisor and administrator. They have put us in a MassMutual plan, and the only close-to-index fund is the Hartford Index HLS 1b fund, which tracks the S&P 500 and has about a .70% expense ratio, including 12b-1 fees. There are no passive index fund offerings at all. I'm trying to change that, but it's sounding bleak.

Below is the response I got from our 401(k) investment advisor and plan administrator.

Wondering if the below response I received is true, and if anyone has advice about how to proceed.

-JamesSF

From [My Company's Investment Advisor], after I queried him about providing low-fee index funds as part of our 401(k) offering:
==========================================

To give you one further data point, I just priced out a 401(k) plan of similar asset size to [My Company], and got a quote from Vanguard directly. Here's approximately how it broke down on a percentage basis for fees:

- 30 basis points (average weighted) for the recordkeeping system (which is Ascensus, which Vanguard doesn't really tell you). Ascensus's recordkeeping platform has some severe limitations that simply aren't present with the Mass Mutual recordkeeping system.

- 30 basis points (average weighted) for the underlying Vanguard index funds.

- 30 basis points for our advisory services.

So the all in costs for a completely passive index fund based portfolio is about 90 basis points. On the Mass Mutual system, the all in costs for your plan on an average weighted basis are very close to 1%, and you have actively managed funds, a substantially better recordkeeper, and a cash account yielding a minimum of 1.5%.

Although it may seem like the average expense of the Vanguard funds are lower, the all in costs end up being very close to the same, and at a time where in our opinion as your financial advisors, actively managed funds have a high likelihood of outperforming passive investments.

Just some food for thought and an additional data point for your reference. Please let us know if you have any questions!

--[My Company's 401(k) Investment Advisor]

On Sep 2, 2014, at 4:53 PM, [401(k) Administrator] <XXX@XXX.com> wrote:

Regarding the expenses inside the plan:

In 95% + of 401(k) platforms and environments, the costs for funds is always going to be more than what is available inside of a brokerage account or IRA. This goes back to our original discussions we had back in April.

In the 401(k) environment, there are a wide range of extra costs that are associated with the maintenance and performance of the plan VS. an individual account. They include:

-Daily valuation system for recordkeeping
-Technology that allows for integration with third party administrators
-Advisory costs
-Legal costs
-Trading in and out of funds (this is no cost to employees per transaction)

and more.

There are some platforms that provide lower costs with respect to funds for employees and in exchange, have the employer take on more of the costs. But back in 2012/2013 when the discussions began around changing the 401k platform up, Mass Mutual proved to be the winner with respect to what [My Company] needed as a company. The overall costs were competitive for a larger company, especially the administration cost, there was now advisory support, better performing funds, custom models that would slowly take over for target date funds, and a cleaner web portal.

Annually, we will review the service providers on the plans and take a look at costs. We did this in July with you and everything seemed to be in-line and where it should be.

If [My Company] wanted to explore reducing the expense ratios paid by employees by having [My Company] as an organization take on more of the costs, we could explore this.

Does this help?

-[My Company's 401(k) Administrator]
avalpert
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by avalpert »

How large is your company? Maybe we can help give some recommendations on administrators.

His statement "- 30 basis points (average weighted) for the underlying Vanguard index funds" is at best intentionally misleading if not an outright attempt to deceive. Frankly, this advisor's response should be an immediate red flag to fire the guy regardless of whether they shift to Vanguard. Can you work directly with whoever in your company makes the decision on which firm to use?
mhalley
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by mhalley »

Why do you need "advisory services" at .3 basis points? Exactly what do you get for that?
How about this... Invest in the target date fund of the date you want to retire. .that will be.3 bp please and thank you.
Sheesh. How about the co gives everyone a copy of bogleheads guide instead.
Mike
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JamesSF
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by JamesSF »

The company is about 180 people in size.

The 30 basis points estimated average for Vanguard funds did seem strangely high, given the low expense ratios of most funds, unless he's selecting only the most expensive to skew the average.

Not sure about the "advisory services" - is this a typical feature of a 401(k) plan? I'm not all that fond of the advice that is being provided.

One of our executives has been appointed the 401(k) plan representative / custodian for the firm, and I'm trying to get her to consider changing providers. Wondering how much a Vanguard 401(k) plan would additionally charge for record keeping / administration past the basic fund fees.
mhalley
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by mhalley »

Came accross this article about 401k, one quote from the article was "A colleague of mine recently requested a 401(k) analysis from Vanguard’s Small Business division. Including all fees and offsets to those fees provided by Vanguard, the weighted average of the total fees for the plan came to 0.63% per fund. This plan in particular used half ETFs which have lower expense ratios than funds, and half investor share class funds."
http://www.forbes.com/sites/feeonlyplan ... -that-bad/
Here is one of the few places that I have seen actual fees for a 401k plan:
http://www.sharebuilder401k.com/401k-pr ... d401k.aspx
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ajcp
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by ajcp »

JamesSF wrote: - 30 basis points (average weighted) for the recordkeeping system (which is Ascensus, which Vanguard doesn't really tell you). Ascensus's recordkeeping platform has some severe limitations that simply aren't present with the Mass Mutual recordkeeping system.

- 30 basis points (average weighted) for the underlying Vanguard index funds.

- 30 basis points for our advisory services.
This (mostly) passes the smell test to me.

1. Vanguard or anyone else will charge a fee for administrating, my 401k takes 25 basis points out for it. So this seems reasonable.
2. Here's where I'm skeptical. You can obviously get better, but if the adviser is espousing active management maybe he wouldn't give you TSM, etc. (It's also in his benefit to overestimate this even if he would)
3. Obviously we can debate whether it's worth it, but if that's what he charges there's nothing you can do about that (unless you can convince your bosses)

So you could probably get TSM for a .65% ER. Now it's just up to you to convince someone who can make that happen.
mhalley wrote:Why do you need "advisory services" at .3 basis points? Exactly what do you get for that?
How about this... Invest in the target date fund of the date you want to retire. .that will be.3 bp please and thank you.
Sheesh. How about the co gives everyone a copy of bogleheads guide instead.
Mike
Unless you've got my adviser..."We don't recommend putting any of your money in target retirement funds, our research shows they don't perform as well. Just meet with us every year and we'll go over a plan and update it as you get older"
Translation: If the people keep picking those target date funds, our advice won't be needed. Let's scare people away from picking them so we can justify our fee to the employer. :oops:
avalpert
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by avalpert »

ajcp wrote:
1. Vanguard or anyone else will charge a fee for administrating, my 401k takes 25 basis points out for it. So this seems reasonable.
We are a firm of ~50, so on the small meaning expensive end as far as providers are concerned. When I looked at options last year for a place to move us to I landed on 4 places charging total costs of 7, 11, 22 and 74 basis points - so 30 is definitely on the high end and I can guarantee (from personal knowledge) not what you can get from a custodian who offers all Vanguard funds.
So you could probably get TSM for a .65% ER.
TSM, all in, costs us 12 basis points - of course our firm picks up the custodial and admin costs but we can assume that is coming out of my salary somewhere...
avalpert
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by avalpert »

JamesSF wrote:The company is about 180 people in size.

The 30 basis points estimated average for Vanguard funds did seem strangely high, given the low expense ratios of most funds, unless he's selecting only the most expensive to skew the average.

Not sure about the "advisory services" - is this a typical feature of a 401(k) plan? I'm not all that fond of the advice that is being provided.

One of our executives has been appointed the 401(k) plan representative / custodian for the firm, and I'm trying to get her to consider changing providers. Wondering how much a Vanguard 401(k) plan would additionally charge for record keeping / administration past the basic fund fees.
He probably took an average of all Vanguard funds (including the active ones) using investor class fees - of course you wouldn't include the more expensive sector-based funds in your plan or the active ones and you can probably get access to Signal or Admiral share classes.

May companies do buy 'advisory services' as part of their 401k plan from the advisor they hire to help them structure it - I'm not a fan and we dropped that service when we switched plans. If your company really wants to provide it I would highly recommend they do it through an independent advisor pay them a flat fee for their time to give presentations and offer to reimburse employees for some fixed amount of financial advisory services throughout the year. It likely ends up cheaper for the company overall, removes any conflicts of interest and ensures they only pay for services their employees actually use.

As for what to do, I would focus on the executive who is the plan representative and build the case for why it is in both the firms and employees best interest to switch away from this charlatan. You could start by reaching out to a few providers and getting quotes on your own (Vanguard/Ascensus, Online 401K and Daily Access Corporation might be a good place to start) and showing the true costs of other options.
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Alskar
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by Alskar »

OP: Please search this forum and the wiki as this topic has been discussed at length very recently. There are at least three recent threads on this topic.

Vanguard is extremely transparent about their 401k plan. They openly say that the record keeper is Acensus. The cost of the Vanguard 401k plan are as follows:

BUNDLED (Start-up: $1,000, Conversion: $1,500)
Participants Pricing
< 16 Participants $3,475
Participants 16 – 50 $3,475 + $75 per participant above 15 Participants
Participants 51 – 100 $6,100 + $70 per participant above 50 Participants
Participants 101 – 500 $9,600 + $65 per participant above 100 Participants
Participants 501 – 1K $35,600 + $60 per participant above 500 Participants
Participants 1K $65,600 + $55 per participant above 1,000 Participants

UNBUNDLED (Start-up: $500, Conversion: $850)
Participants Pricing
< 16 Participants $2,500
Participants 16 – 50 $2,500+ $70 per participant above 15 Participants
Participants 51 – 100 $4,950 + $65 per participant above 50 Participants
Participants 101 – 500 $8,200 + $60 per participant above 100 Participants
Participants 501 – 1K $32,200 + $55 per participant above 500 Participants
Participants 1K $59,700 + $50 per participant above 1,000 Participants

With the Unbundled program - the TPA would provide the plan document and plan compliance testing services - as well as preparation of the annual IRS Form 5500. With the Bundled program Vanguard provides these services.

So the cost for 180 particpants in the unbundled program (with the adviser) would be $13,300. For the bundled program (without the adviser) the cost is $15,125. The difference in cost is because in the bundled program, Vanguard is providing the Form 5500 and other prep services. In the unbundled program the adviser (TPA) is providing these services at an additional cost. IME advisers are charging 50-200 bps for their services.

The costs shown above are for Vanguard Admiral Class shares. If you choose Investor Class shares, Vanguard will reduce the expenses shown above by 9 bps of the plan assets. If Investor share class funds are selected the participants are essentially helping to pay for the cost of plan administration by being charged a higher ER for their funds. Using investor class funds it is easy to get an average ER around 20 bps.

The Vanguard pricing includes trading costs, recording keeping, web support, etc. There are only two optional services that can be added. For 3 bps of AuM you can choose to add ERISA Section 3(21) fiduciary support. For 6 bps you can choose to add ERISA Section 3(38) support. Fiduciary services are offered by Mesirow Financial but are bundled with the Vanguard plan at your request. In my view, if you choose ERISA Section 3(38) then the company's exposure is reduced solely to being responsible for picking Vanguard as the TPA; that is, essentially zero.

I have no idea where the adviser got his figures of 30 bps for the various Vanguard services. He is either just making stuff up, or is very confused. The numbers I gave you above are less than 4 months old. I stand by them. Your adviser does not have his facts straight in any case.

Of course, the adviser is going to discourage you from moving to Vanguard. Despite all academic research to the contrary, he also believes that active management will out perform passive management. It might happen, but I wouldn't count on it.

FWIW, the spiel you got from the adviser is typical. I think they teach this spiel at adviser 101 training. Advisers like to create FUD (Fear, Uncertainty, and Doubt) in the minds of CFO's. CFO's think, incorrectly, that by hiring an adviser they are reducing their exposure to legal action.

In my view, there is absolutely no reason to pay for an adviser. That is, the bundled plan is your best bet. If your company is nervous about liability they can pay for either Section 3(21) or 3(38) support. Section 3(21) is called "Investment Advisory Program" whereas Section 3(38) is called "Investment Management Program. The company maintains discretion over the plan investment lineup with 3(21) support.

I recently got a quote from Daily Access as well. It was higher than Vanguard's but not by much. I think the Daily Access platform is a bit snazzier, but the Acensus platform used by Vanguard is also very nice.
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Zoomer
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by Zoomer »

I wouldn't just push vanguard; you might come across as a shill for the company. Many other companies provide great indexed offerings.

You could try referring to these:
http://www.investmentnews.com/article/2 ... 01-k-funds#
http://blogs.marketwatch.com/encore/201 ... -own-plan/
" the company neglected its fiduciary duty to them by stocking their 401(k) plan with relatively expensive mutual funds when cheaper ones were available."
bornloser
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by bornloser »

+1 on Alskars post. I can soooo identify with your frustration. I have recently concluded a very lengthy investigation of our small company (around 10 persons) 401k fees and convinced our company to go with Employee Fiduciary out of Mobile, AL. They are a very low cost TPA (like Ascensius), very transparent with fees, and offer up to 40 fund choices. We will have no official advisor so our fees are 0.08% of assets plus a small annual fee. This was an uphill battle and sort of bloody but I succeeded only because of the knowledge of this awesome forum and being able to "call out" all the BS that the other vendors were spewing. I had to be an anal retentive fascist to get this done; just fair warning. As pointed out already, Vanguard clearly states Ascensius does there record keeping on the website. And the record keeping is standard fare, the same for everyone. So your current TPA claim that they do something "better" with the record keeping is complete baloney. Wishing you luck with this endeavor.
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by 555 »

Alskar, do you have a source/link for those numbers? Also do you know if it is different for 403b's? (My employer enquired about Vanguard being a 403b provider and was told it would cost >$100 per participant.)
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Alskar
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by Alskar »

555 wrote:Alskar, do you have a source/link for those numbers? Also do you know if it is different for 403b's? (My employer enquired about Vanguard being a 403b provider and was told it would cost >$100 per participant.)
I don't have a link to them, but I got them directly from John Lent at Vanguard in Phoenix. I will PM his contact information. Other people on this forum have been given the same data.

I don't know anything about 403b plans so I can't help you there.
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555
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by 555 »

Alskar wrote:
555 wrote:Alskar, do you have a source/link for those numbers? Also do you know if it is different for 403b's? (My employer enquired about Vanguard being a 403b provider and was told it would cost >$100 per participant.)
I don't have a link to them, but I got them directly from John Lent at Vanguard in Phoenix. I will PM his contact information. Other people on this forum have been given the same data.

I don't know anything about 403b plans so I can't help you there.
Thanks.
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by C8H18Engineer »

Alskar wrote:...
Vanguard is extremely transparent about their 401k plan. They openly say that the record keeper is Acensus. The cost of the Vanguard 401k plan are as follows:

BUNDLED (Start-up: $1,000, Conversion: $1,500)
Participants Pricing
< 16 Participants $3,475
Participants 16 – 50 $3,475 + $75 per participant above 15 Participants
...
Alskar:

Thanks for this detailed info. I have also been looking for the cost picture as I'm sure my company's provider is non-optimal (401k established in 2001).

Can you clarify two things with the pricing?
1) Which charges are recurring, and which are one-time?
2) Without any additional features (e.g. advisor services), what would be the ER for admiral shares - same as for a personal investor, or is there some additional AUM charge?
TRC
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by TRC »

You might want to try Fidelity. I convinced my company (200 employee) to switch about 3 years ago from ING to Fidelity.
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by Alskar »

C8H18Engineer wrote: Alskar:

Thanks for this detailed info. I have also been looking for the cost picture as I'm sure my company's provider is non-optimal (401k established in 2001).

Can you clarify two things with the pricing?
1) Which charges are recurring, and which are one-time?
2) Without any additional features (e.g. advisor services), what would be the ER for admiral shares - same as for a personal investor, or is there some additional AUM charge?
All of the charges I showed above are annual expenses (reoccurring) except for the start-up or the conversion cost which are one time. The start-up fee is for starting up a 401k plan from scratch. The conversion fee is to move an existing plan from the existing TPA to Vanguard.

The ER's for Admiral Shares are identical to those for personal investors. The advantage is that each plan participant does not have to meet the minimum purchase for Admiral shares that retail investors do. Vanguard recently eliminated the Signal Class shares that had similar or identical ER's as the Admiral Class shares, but without the minimum purchase requirement. The Signal Class shares were for 401k plans. Vanguard dropped the Signal Class shares and began allowing 401k plans to have the Admiral Class shares.

If your plan chooses to offer Investor Class shares instead of Admiral Class shares, Vanguard will reduce the annual expenses I showed above by 9 bps of the AuM. Essentially, this is a way for a company to push some of the expense of operating the plan onto the participants. This is the one quibble I have with the Vanguard small-business 401k plan. I think it would be more transparent to just show a deduction of 9 bps from each participant's statement every quarter. Making the charge invisible to the participants by raising the ER is not very transparent and not what I would expect from Vanguard.

The costs I've shown above are all-inclusive except for advisory services and fiduciary services (ERISA Section 3(21) or Section 3(38) fiduciary support), both of which are optional.
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Alskar
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by Alskar »

TRC wrote:You might want to try Fidelity. I convinced my company (200 employee) to switch about 3 years ago from ING to Fidelity.
Fidelity told me that they generally are not competitive for plans with less than 200 employees. The plan I'm currently in has only ~120 participants. In any case, I have all of my retirement assets except for my 401k plan at Fidelity. In my experience, Fidelity does a fine job.
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by jay22 »

Alskar wrote:
TRC wrote:You might want to try Fidelity. I convinced my company (200 employee) to switch about 3 years ago from ING to Fidelity.
Fidelity told me that they generally are not competitive for plans with less than 200 employees. The plan I'm currently in has only ~120 participants. In any case, I have all of my retirement assets except for my 401k plan at Fidelity. In my experience, Fidelity does a fine job.
Can you give me any recommendations for a plan administrator for a company of around 70 employees? The funds in my 401k are pretty awful, and I am trying to talk to them to make a switch to an administrator which offers more index funds. Thanks.
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Alskar
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by Alskar »

jay22 wrote:Can you give me any recommendations for a plan administrator for a company of around 70 employees? The funds in my 401k are pretty awful, and I am trying to talk to them to make a switch to an administrator which offers more index funds. Thanks.
The Vanguard small-business plan we've been discussing on this thread is certainly a great option. Another great option would be the Employee Fiduciary plan. I had it at my last employer. They charge 8 bps of AuM as a custodial fee, but you can get Admiral Class funds. See http://www.employeefiduciary.com/401k-plan-pricing/ for pricing details on the EF plan.

I'm sure there are other good options, but these two are the one's with which I have direct experience.
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by jay22 »

Alskar wrote:
jay22 wrote:Can you give me any recommendations for a plan administrator for a company of around 70 employees? The funds in my 401k are pretty awful, and I am trying to talk to them to make a switch to an administrator which offers more index funds. Thanks.
The Vanguard small-business plan we've been discussing on this thread is certainly a great option. Another great option would be the Employee Fiduciary plan. I had it at my last employer. They charge 8 bps of AuM as a custodial fee, but you can get Admiral Class funds. See http://www.employeefiduciary.com/401k-plan-pricing/ for pricing details on the EF plan.

I'm sure there are other good options, but these two are the one's with which I have direct experience.
Thank you.
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by ajcp »

jay22 wrote:
Alskar wrote:
TRC wrote:You might want to try Fidelity. I convinced my company (200 employee) to switch about 3 years ago from ING to Fidelity.
Fidelity told me that they generally are not competitive for plans with less than 200 employees. The plan I'm currently in has only ~120 participants. In any case, I have all of my retirement assets except for my 401k plan at Fidelity. In my experience, Fidelity does a fine job.
Can you give me any recommendations for a plan administrator for a company of around 70 employees? The funds in my 401k are pretty awful, and I am trying to talk to them to make a switch to an administrator which offers more index funds. Thanks.
My company has ~70 employees and recently switched to ADP with mostly Vanguard index funds.
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by rustymutt »

Good luck getting that done. Whose paying who behind the scenes for 401K management firms.
I think that all investors should be able to invest their own 401k however they see fit.
Lets get that changed at the Federal Level, and make investing cheaper for all.
Stop the new middle men from starting a new industry that takes more from us.
Even educators need education. And some can be hard headed to the point of needing time out.
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Alskar
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by Alskar »

ajcp wrote:My company has ~70 employees and recently switched to ADP with mostly Vanguard index funds.
That's interesting. My current employer has an ADP plan, but none of the funds in the plan are Vanguard. The fund with the lowest ER in our ADP plan is a commingled S&P 500 fund from SSGA with an ER of 0.72%. I wonder why we can't get Vanguard funds in our plan.
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Re: Trying to get my company to switch to Vanguard 401(k)

Post by avalpert »

Alskar wrote:
ajcp wrote:My company has ~70 employees and recently switched to ADP with mostly Vanguard index funds.
That's interesting. My current employer has an ADP plan, but none of the funds in the plan are Vanguard. The fund with the lowest ER in our ADP plan is a commingled S&P 500 fund from SSGA with an ER of 0.72%. I wonder why we can't get Vanguard funds in our plan.
You could get them - your company (probably following the guidance of a plan advisor) chose the funds they did.
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