Expense Ratio for Employer 401K High?

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cjhud32
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Expense Ratio for Employer 401K High?

Post by cjhud32 » Tue Jun 11, 2019 9:59 am

GF now eligible for 401K through work, but the choices are limited. Looks like everything is through American Funds. Employer matches up to 3% so want to take advantage of that, but something doesn't make sense. When I look up the expense ratio of the 2030 Target Dated Fund on the AF website, it is showing 0.72. However, when I look at the information provided to her by work, if she selects this fund, the expense ratio will be 1.54.

All of her paperwork was in a Morgan Stanley folder, so I am thinking this is some kind of mark-up that their "financial guy" as he put it to her, is putting on it. For a TGF where he doesn't have to do any work?? And knowing that the expense ratio should be 0.72, would you consider investing just to get the employer 3 percent match?

The corresponding Vanguard 2030 TGF has an expense ratio of 0.14. If she really wanted to put in 3 percent (salary - $35K per yr), would we just be better to open a Roth for her at Vanguard and forego the company 3 percent match since the expense ratio is so low? Or bite the bullet and take the 3 percent match and pay what I know is an expense ratio that is much higher than it should be?

Any suggestions would be welcomed!

MichCPA
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Re: Expense Ratio for Employer 401K High?

Post by MichCPA » Tue Jun 11, 2019 10:07 am

Conventional wisdom is to contribute up to the match (3% in this case) then do a Roth IRA as a next step. That would appear to be the best move because a match is similar to a 50 or 100% return right away. When she switches jobs, she can move to an IRA or a new 401k depending on options, simplicity and backdoor roth considerations..

retiredjg
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Re: Expense Ratio for Employer 401K High?

Post by retiredjg » Tue Jun 11, 2019 10:11 am

Sounds like a poor plan. But even a poor plan is worth using enough to get the employer match.

It appears that the employer is passing the cost of the plan on to the employees. That is why the expense ratio is 1.54%. Maybe she won't be at this job all that long. Put in enough to get the match and save at least as much in a Roth IRA.

Or maybe tIRA....with an income that low, she is probably eligibible for the saver's credit and/or the earned income credit on her taxes. See the wiki for information. Using tIRA instead of Roth IRA might get her a larger tax credit.

life in slices
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Re: Expense Ratio for Employer 401K High?

Post by life in slices » Tue Jun 11, 2019 10:13 am

cjhud32 wrote:
Tue Jun 11, 2019 9:59 am
GF now eligible for 401K through work, but the choices are limited. Looks like everything is through American Funds. Employer matches up to 3% so want to take advantage of that, but something doesn't make sense. When I look up the expense ratio of the 2030 Target Dated Fund on the AF website, it is showing 0.72. However, when I look at the information provided to her by work, if she selects this fund, the expense ratio will be 1.54.

All of her paperwork was in a Morgan Stanley folder, so I am thinking this is some kind of mark-up that their "financial guy" as he put it to her, is putting on it. For a TGF where he doesn't have to do any work?? And knowing that the expense ratio should be 0.72, would you consider investing just to get the employer 3 percent match?

The corresponding Vanguard 2030 TGF has an expense ratio of 0.14. If she really wanted to put in 3 percent (salary - $35K per yr), would we just be better to open a Roth for her at Vanguard and forego the company 3 percent match since the expense ratio is so low? Or bite the bullet and take the 3 percent match and pay what I know is an expense ratio that is much higher than it should be?

Any suggestions would be welcomed!
Does she have any other fund options in her 401(k)?

Usually the targeted date funds are the default 'opt-in' option, so hoping that is the case

in my 401k the targeted date funds had ER around the same 0.6-0.8% so I moved to SP500/Intl/Bond portfolio that had much lower ERs

The 1.54 ER is really insane

JW-Retired
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Re: Expense Ratio for Employer 401K High?

Post by JW-Retired » Tue Jun 11, 2019 10:22 am

cjhud32 wrote:
Tue Jun 11, 2019 9:59 am
Employer matches up to 3% so want to take advantage of that, but something doesn't make sense. When I look up the expense ratio of the 2030 Target Dated Fund on the AF website, it is showing 0.72. However, when I look at the information provided to her by work, if she selects this fund, the expense ratio will be 1.54.
................................
Any suggestions would be welcomed!
Can't say if it's sensible, but fairly often there are a couple of low cost choices sprinkled among a lot of high cost ones. Can you list us the 3 or 4 lowest cost funds in this 401k? I bet there is something in there significantly better than an ER of 1.54%

Regardless, she should not miss out on the 3% match.
JW
Retired at Last

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jeffyscott
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Re: Expense Ratio for Employer 401K High?

Post by jeffyscott » Tue Jun 11, 2019 10:54 am

You need to go by the ticker, American funds has a bunch of share classes, with different ERs. It appears her employer and the "guy" picked the worst possible one. The R1 share class (RAETX) has 1.5% ER: https://www.morningstar.com/funds/XNAS/RAETX/quote.html

On the filings tab there you can open the summary prospectus and see it is the highest cost of them all.
Time is your friend; impulse is your enemy. - John C. Bogle

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Nate79
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Re: Expense Ratio for Employer 401K High?

Post by Nate79 » Tue Jun 11, 2019 11:44 am

List out all the funds here for better advice. There are often a few lower cost options buried in the long list of funds.

NativeTxn
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Re: Expense Ratio for Employer 401K High?

Post by NativeTxn » Tue Jun 11, 2019 12:30 pm

There are lots of different share classes for each fund and in 401k plans, those different classes usually have different revenue sharing agreements between the fund family and the employer/plan sponsor.

The employer may have picked the higher ER funds as a way to move the costs of the plan to the participants

For example (and I'm just picking these numbers for easy math - I don't know the actual breakdown of the specific plan), the fund in question charges 1.54% to the participant. When that fee gets charged, 0.54% of it goes "back" to the employer/plan sponsor to apply against recordkeeping and other fees associated with offering and maintaining the plan, and the remaining 1.00% is sent to American Funds and the Morgan Stanley guy. Consequently, the net cost of the plan to the employer is reduced (possibly to $0) because the participants are paying for the plan through the higher fund fees.

Regardless, as others have said

1) It's still worth it to have her defer enough to get the match since that will likely represent a 50% or 100% immediate return on her money, which is substantially higher than the 1.54% ER of that particular fund. So, on a net basis, she is much better off by getting the match. Additionally, employers view the match as part of your salary (i.e. it's a cost they incur by having you as an employee), and from a purely financial standpoint, they would be more than happy if you didn't defer anything because unless it's a safe harbor plan with the non-elective 3% contribution, they don't have to match any money if you don't put money in and they get to have an employee at a lower than expected cost.

2) Once she has put in the minimum required to get the full match, it may be better to look elsewhere (like a Roth IRA) if the other funds are high expense like the one in question.

3) In relation to #2, if you can provide a list of the available funds/tickers, I bet there is a decent mix you can get her in at a much lower expense rate than the 1.54% of the TD fund in question. It may just mean a bit more setup and oversight than picking one TD fund.

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cjhud32
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Re: Expense Ratio for Employer 401K High?

Post by cjhud32 » Wed Jun 12, 2019 8:27 am

After looking at all of the fund choices, the ER is high on all of them. Anywhere from 1.42 to 1.9. Even the money market is 1.44. With that being said, it looks like the biggest mark-up are the target dated funds. There are two additional funds that appear to have index properties, and the ER is the same on the AF website as her offering.

American Funds Growth and Income, RGNBX. ER 1.42. Allocation 75% stock (54% US, 22% Int). Bond allocation is 15% US, 2% Int, balance in cash holdings.

American Fund Growth Portfolio, RGWBX. ER 1.48. Allocation 92% stock (66% US, 26% Int). Balance is cash holdings.

Even though it's not a target dated fund, RGNBX looks to have similar holdings as one would have, just without the glide path of a TGF. The ER is also 1.42, identical to their website offering so that makes me feel a little more comfortable as well. Is my thinking correct with this being an appropriate choice for her? She's 35, so the percentage of bonds doesn't quite equal her age, but I could look at it as age -10 for the 25 percent.

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J G Bankerton
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Re: Expense Ratio for Employer 401K High?

Post by J G Bankerton » Wed Jun 12, 2019 8:38 am

Contribute what the company will match and no more. Do they offer a S&P 500 fund? If so go 100% S&P, should be the lowest ER, and diversify with other investments.

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jeffyscott
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Re: Expense Ratio for Employer 401K High?

Post by jeffyscott » Wed Jun 12, 2019 8:39 am

cjhud32 wrote:
Wed Jun 12, 2019 8:27 am
..it looks like the biggest mark-up are the target dated funds.
Yeah, I think when I looked at the prospectus they had an add on of 0.10 for the target date in addition to the underlying fund ERs. So those seem like a particularly bad choice.

FWIW, American Funds Growth and Income is rated "silver" by M*, though that really should not be applicable to RGNBX with the terribly inflated ER at least it means they think it is a decent fund, aside from that.
Time is your friend; impulse is your enemy. - John C. Bogle

retiredjg
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Re: Expense Ratio for Employer 401K High?

Post by retiredjg » Wed Jun 12, 2019 10:45 am

cjhud32 wrote:
Wed Jun 12, 2019 8:27 am
American Funds Growth and Income, RGNBX. ER 1.42. Allocation 75% stock (54% US, 22% Int). Bond allocation is 15% US, 2% Int, balance in cash holdings.
From what you have told us, this does appear to be the fund to use. The American Funds funds are well run, just high cost. But this is reasonable to use up to the match.

If she can save any money over that, it should go in IRA or Roth IRA.

Topic Author
cjhud32
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Re: Expense Ratio for Employer 401K High?

Post by cjhud32 » Wed Jun 12, 2019 12:35 pm

J G Bankerton wrote:
Wed Jun 12, 2019 8:38 am
Contribute what the company will match and no more. Do they offer a S&P 500 fund? If so go 100% S&P, should be the lowest ER, and diversify with other investments.
No S&P unfortunately. Was hoping for at least that, but she’s very limited with her options!

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