401k Expense Ratio - How high is too high?

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Topic Author
IRouteIP
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Joined: Mon Aug 31, 2020 7:51 pm

401k Expense Ratio - How high is too high?

Post by IRouteIP »

My employer announced we are switching 401k providers. New provider is Voya. I just received the packet in the mail with fund choices and was excited to see they include Vanguard index funds, including Total Stock, Total Bond, and Total International. Everything growing Boglehead needs.

Then I found the expense ratios:

Vanguard Total Stock: 0.54%
Vanguard Total International: 0.61%
Vanguard Total Bond: 0.55%

They also offer American Funds Target Date funds with ERs ranging from 0.80% for 2010 to 0.90% for 2065.

While far from ideal, how bad is this? I figure these are my options:

Grumble, and go with it

or...

Contribute the 4% to get 100% employer matching, then fully fund my Roth IRA (Vanguard LifeStrategy Growth Fund), then come back to 401k as much as I am able

I cannot afford to max both. 22% tax bracket. Previous advice from this forum was to focus on the traditional 401k to get the tax savings now.
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Nate79
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Re: 401k Expense Ratio - How high is too high?

Post by Nate79 »

What is too high? 1.5%.

Yours are pretty low expense for the individual funds. But doing an IRA after the match is smart.
wetgear
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Re: 401k Expense Ratio - How high is too high?

Post by wetgear »

Those aren't great but they are serviceable. Could you instead contribute to a Trad IRA and still enjoy the tax savings now, while reducing the fees on some of your contributions? Depending on where you are in the 22% bracket this could be possible. With more information it might even make sense to do roth IRA now and the Trad IRA in 2025 and beyond when income tax rates are scheduled to go back up because of the TCJA.
Topic Author
IRouteIP
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Re: 401k Expense Ratio - How high is too high?

Post by IRouteIP »

Nate79 wrote: Sun Sep 12, 2021 6:15 pm What is too high? 1.5%.

Yours are pretty low expense for the individual funds. But doing an IRA after the match is smart.
I guess it's sticker shock. My current 401k is:

SSGA S&P 500 Index - ER 0.01%
SSGA International Index NL - ER 0.07% - (MSCI EAFE Index)
SSGA US Bond Index NL - ER 0.05% - (Barclays Capital U.S. Aggregate Bond Index)
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retired@50
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Re: 401k Expense Ratio - How high is too high?

Post by retired@50 »

IRouteIP wrote: Sun Sep 12, 2021 6:09 pm Grumble, and go with it

or...
Or, this...
https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

Eventually, the new agreement with Voya will run out, or need to be renewed. Maybe you can convince management that a decent 401k plan can work as an employee retention tool, just like a crappy 401k plan can serve as a tool to assist in employee turnover.

Regards,
This is one person's opinion. Nothing more.
stan1
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Re: 401k Expense Ratio - How high is too high?

Post by stan1 »

IRouteIP wrote: Sun Sep 12, 2021 6:37 pm
Nate79 wrote: Sun Sep 12, 2021 6:15 pm What is too high? 1.5%.

Yours are pretty low expense for the individual funds. But doing an IRA after the match is smart.
I guess it's sticker shock. My current 401k is:

SSGA S&P 500 Index - ER 0.01%
SSGA International Index NL - ER 0.07% - (MSCI EAFE Index)
SSGA US Bond Index NL - ER 0.05% - (Barclays Capital U.S. Aggregate Bond Index)
Wow, very unusual for an employer to switch from a plan like the old one to the new plan. The fee increase like you are seeing may mean they are no longer subsidizing the 401K plan administration costs. Or, there could be advantages to executives in the company.

Was the company bought out or have a major management change? How many employees? Do you plan on staying with this company for a long time or leave after a short amount of time? Is it small enough that you could talk to the Head of HR about the change?

I don't like the administratie fees but would probably invest in it anyways. If you switch jobs you'll most likely have a better plan.
HomeStretch
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Re: 401k Expense Ratio - How high is too high?

Post by HomeStretch »

If your old 401k does not charge administrative expenses (either as a % added to the fund ER or as a flat fee periodically deducted from your account) to participants but your new 401k plan does, it sounds like your employer has decided to no longer pay the plan’s expenses and instead will pass them onto participants in the new plan.

Increasing plan fees is unusual but your company certainly has the right to pass on plan costs to participants (although that’s likely not popular with employees). Consider asking your company’s benefits person if you are in fact interpreting the new plan’s cost to you correctly.
JBTX
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Re: 401k Expense Ratio - How high is too high?

Post by JBTX »

IRouteIP wrote: Sun Sep 12, 2021 6:09 pm My employer announced we are switching 401k providers. New provider is Voya. I just received the packet in the mail with fund choices and was excited to see they include Vanguard index funds, including Total Stock, Total Bond, and Total International. Everything growing Boglehead needs.

Then I found the expense ratios:

Vanguard Total Stock: 0.54%
Vanguard Total International: 0.61%
Vanguard Total Bond: 0.55%

They also offer American Funds Target Date funds with ERs ranging from 0.80% for 2010 to 0.90% for 2065.

While far from ideal, how bad is this? I figure these are my options:

Grumble, and go with it

or...

Contribute the 4% to get 100% employer matching, then fully fund my Roth IRA (Vanguard LifeStrategy Growth Fund), then come back to 401k as much as I am able

I cannot afford to max both. 22% tax bracket. Previous advice from this forum was to focus on the traditional 401k to get the tax savings now.
Put in as much as you can. 0.5% isn't terrible. There are administrative fees associated with 401ks and some employers choose to pass some of it on in fees (which is unfortunate because it isn't the most tax efficient way of doing it)

My spouse maxed out for many years at 1.5-2.0% fees. It grew anyway and now it is a healthy sum. Plus they changed to a much lower fee provider a few years ago.

You won't be at this employer forever. They could change programs. Or you leave and rollover to a better 401k or a rollover IRA.
Topic Author
IRouteIP
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Re: 401k Expense Ratio - How high is too high?

Post by IRouteIP »

HomeStretch wrote: Sun Sep 12, 2021 6:51 pm Consider asking your company’s benefits person if you are in fact interpreting the new plan’s cost to you correctly.
Yes, I definitely will. I just received the packet in the mail yesterday. We are small enough that I can easily call the head of HR on Monday.

Currently plan with the low ERs did have an approx 0.3% per year admin fee, paid quarterly. I have not seen anything about such fees in the new plan packet.
Retired Bill
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Re: 401k Expense Ratio - How high is too high?

Post by Retired Bill »

I would do what it takes to get the 4% match. Then make Roth IRA contributions with Vanguard up to the max allowed or as much as can do at this point. It's a no brainer for the match amount. At a 100% match you have twice the dollars in the account to invest and should be easy to more than make enough on the match to cover the higher expenses associated with the investment choices in the new plan. Don't like the higher than necessary fees, so assuming the employer pushing plan administrative expenses onto the employees.
cbs2002
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Re: 401k Expense Ratio - How high is too high?

Post by cbs2002 »

been buying funds around that ER in my plan for years. Performance has been, oh, about a half point off VOO :P

I wouldn't sweat it too much.

if you are young, maxing Roth every year after getting match in your employer plan can be a smart move. But the world won't end if you just max out your 401K.
nix4me
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Re: 401k Expense Ratio - How high is too high?

Post by nix4me »

I would contribute minimum to get match. Then max Roth IRAs. Then contribute rest to taxable account. This will avoid higher fees and will help prevent a tax bomb in your retirement account come RMD time. It will also save you taxes in the future as LTCG rates are favorable.
an_asker
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Re: 401k Expense Ratio - How high is too high?

Post by an_asker »

IRouteIP wrote: Sun Sep 12, 2021 6:09 pm [...]While far from ideal, how bad is this? I figure these are my options:

Grumble, and go with it

or...

Contribute the 4% to get 100% employer matching, then fully fund my Roth IRA (Vanguard LifeStrategy Growth Fund), then come back to 401k as much as I am able
[...]
I would say Both. In other words, Grumble, go with it ... in the same order you said. First get the employer matching, then fully fund Roth IRA, then back to 401k.

One possible exception to this order of the buckets would be if you would drop to a lower bracket while filling your 401k to the legal limit.

PS: Also, I suggest you use a judicious mix of the three index funds (0.5-0.6%) as opposed to paying a higher fee for the lifecycle fund (0.8-0.9%)

PPS: In fact, I would suggest the same approach to your Roth IRA as well. If you can purchase the constituent index funds for a lower fee, I believe you ought to purchase those rather than the bundled LifeStrategy Fund.
fortunefavored
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Re: 401k Expense Ratio - How high is too high?

Post by fortunefavored »

Yes, you need to add all the fees together.. and there can be a lot, including hidden ones. My guess is the "all-in" cost is probably very similar to what you had before.

To really analyze all the fees, you need to see the 408b-2 fee disclosure form - https://www.dol.gov/sites/dolgov/files/ ... -408b2.pdf

There can be quite a few hidden fees that can add up, this may also be helpful: https://www.employeefiduciary.com/how-t ... -401k-fees

To answer your question, it would also depend on how long you intend to stay at this employer. If it is only a couple of years, I'd say anything up to 1 to 1.5% is acceptable. If you plan to stay there 20 or 30 years.. I'd probably go with the previous advice of going up to the match if it is more than .5% or so.
HomeStretch
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Re: 401k Expense Ratio - How high is too high?

Post by HomeStretch »

IRouteIP wrote: Sun Sep 12, 2021 7:10 pm … Currently plan with the low ERs did have an approx 0.3% per year admin fee, paid quarterly. I have not seen anything about such fees in the new plan packet.
Based on your post, your new plan appears to have an administrative fee of ~0.5% of AUM (i.e. Vanguard Total Stock Market of 0.54% - VTSAX ER .04% = Admin fee of 0.5%). That’s an increase in admin fees of ~0.2% over the old plan admin fees of 0.3%. Definitely an increase, just not as bad as it first appeared (it looked like you went from admin fees of 0% to 0.5%).
Topic Author
IRouteIP
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Joined: Mon Aug 31, 2020 7:51 pm

Re: 401k Expense Ratio - How high is too high?

Post by IRouteIP »

To follow up on this... I heard back from HR and as some of you had guessed, the administrative fees of the new provider are rolled into the individual fund ERs instead of being a separate line item on the quarterly statement as the current plan does.

So, not as bad as it first appeared.
ChrisRx
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Re: 401k Expense Ratio - How high is too high?

Post by ChrisRx »

Perhaps I am spoiled, but anything >50 basis points gets ignored.
exodusNH
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Re: 401k Expense Ratio - How high is too high?

Post by exodusNH »

IRouteIP wrote: Sun Sep 12, 2021 6:09 pm My employer announced we are switching 401k providers. New provider is Voya. I just received the packet in the mail with fund choices and was excited to see they include Vanguard index funds, including Total Stock, Total Bond, and Total International. Everything growing Boglehead needs.

Then I found the expense ratios:

Vanguard Total Stock: 0.54%
Vanguard Total International: 0.61%
Vanguard Total Bond: 0.55%

They also offer American Funds Target Date funds with ERs ranging from 0.80% for 2010 to 0.90% for 2065.

While far from ideal, how bad is this? I figure these are my options:

Grumble, and go with it

or...

Contribute the 4% to get 100% employer matching, then fully fund my Roth IRA (Vanguard LifeStrategy Growth Fund), then come back to 401k as much as I am able

I cannot afford to max both. 22% tax bracket. Previous advice from this forum was to focus on the traditional 401k to get the tax savings now.
I wouldn't hold a fund with bonds in your Roth unless you need to. You're better off holding them in the 401k and go 100% stocks in the Roth. This maximizes the long-term tax-free growth. You don't need to maintain your AA in each account. Do it across accounts. E.g. if you can afford to save $10,000/yr and want to be 80/20, go for $6000 of stocks in your Roth, $2000 of stocks in the 401k, and $2000 of bonds in the 401k.

Other than that, getting the match, maximizing Roth, then back to the 401k is a good plan.

Just be aware that you might not get a match if you don't contribute. E.g. if you pause 401k contributions to fund your Roth, you may out on the match. In other words, the company's 4% match per pay period may be contingent on you putting 4% in each pay period.

I run into this issue because I'm able to hit the 19.5 limit before the end of the year. If I let that happen, I miss out on those match dollars. I recently had to lower my contribution % so that I hit the max on the last pay period. In the scheme of things it's not a lot of money, but it's free money, which is the sweetest kind!
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