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What Do You Do When Your Company’s 401(k) Fees Are High?
By JLP | July 14, 2007
I received this email from a reader:
JLP,
I am starting a new job with a small firm that offers a 401k through Principal Financial Group. The company matches dollar for dollar up to $5000 per year. There are 17 funds in the plan including lifetime funds and funds covering all the major asset classes. The problem is that the fees for the funds are exorbitant, averaging about 2.3% for the active funds and 1.6% for the two index funds. What’s more, the performance of the active funds is poor for the respective asset class across nearly all funds.
I read your post from April 3, 2007 about 401k fees (How Much is Your 401(k) Costing You?), as well as the comments, but I still wonder what to do here. Should I a) forget the 401k and invest in the IRA ($8000 max for wife and me), b) invest in the 401k up to the matching, then supplement with the IRA, or c) forget about the fees and invest in the 401k as much as I can afford.
My company is small, so I imagine they are getting a raw deal from 401k providers. I used to work for a different small firm that used a simple IRA through Fidelity that let me invest in anything I want via Fidelity. Maybe I’ll see if my new company could be persuaded to go that route.
Any advice or comments on this topic?
Thanks!
Those fees are high. My guess is that the fees are high because it is a small firm and they either went with an annuity or they are spreading the costs of the plan among the employees. Administration of a 401(k) plan is not cheap and providers would much rather service large plans than small plans. In any case, those fees are high and I think you should bring it up with your employer. Hopefully it’s not a political issue (like the boss’ brother is a broker or something like that). Be careful though. As the “new guy,” you don’t want to cause any problems.
Under these circumstances I would put in just enough to get the company match and use Roth IRAs for the rest. Even with the high fees, it is hard to walk away from free money. Even at 1.6% (wow, 1.6% for an INDEX fund!), I would stick with the index funds and use the Roth IRAs for diversification.
Good luck!
Topics: 401(k), IRAs, Retirement Planning, Roth IRA | 14 Comments »
July 15th, 2007 at 7:30 am
I agree. I know someone in a similar situation. The only issue I see is that even with the match, the fees will eventually eat all that away. Do the match first, then max out roth IRAs. If you have any left over, put it in a lifecycle or index fund yourself. Also, if you plan to be at that employer for 13 years or more, take all the money out of the 401k right after you get the match. Even with the 10% penalty and paying a little capital gains tax every year, the difference between the fees you will pay through the 401k and more appropriate fees will eventually kill the value of the 401k.
July 15th, 2007 at 8:54 am
“Small company” does not have to mean “expensive plan.” Employers don’t buy expensive plans like this one; they are sold plans like this. The owner/decision maker probably does not realize that there are better options available, and given that the owner(s) and upper management usually have a larger portion of plan assets, being subjected to the same return eroding fees, they may be just as motivated to have lower fees if it is brought to their attention.
Unfortunately, to protect against such revelations and tie sponsors down, plan providers often use back end loads and/or provisions to recapture returns on stable value funds, leaving many plan sponsors feeling trapped.
July 15th, 2007 at 9:30 am
The practical advice offered in the previous comment and article are of course, well practical. It makes sense to tread carefully when discussing that plan with the new employer. As JLP points out, there may be political considerations.
With that said, I respectfully want to squash a myth that I hear all of the time, “Administration of a 401(k) plan is not cheap”.
The reality today is that as record keeping and administration moved to web interfaced software, costs have dropped like a rock. Just as DELL built an empire through direct selling by eliminating wholesale and retail mark ups, new entrants like Employee Fiduciary are doing the same. Vendors rely on this myth and reinforce the expectation of higher costs with small employers.
It remains VERY expensive however to pay all the related parties involved in the marketing and distribution of plans. The big fund families have affiliated entities that collect fees as distributors and administrators.
I would suggest asking the employer to offer a brokerage window through TD Ameritrade or another low cost firm. Then you can direct your funds into virtually any exchange-traded vehicle including Vanguard. This would sound to the employer like an enhancement, rather than sour grapes over high costs.
Regards,
Jim Bigham
July 16th, 2007 at 6:42 am
expensive or not? that is an age old question. put in everything you can. 100% return of $5000 is very generous of your employer. Oh, by the way, tell them “Thank you” for the match. Don’t get to caught up straining at the gnat…
July 16th, 2007 at 3:30 pm
Star Money Articles for Last Week
Here are some recent interesting posts from the MoneyBlogNetwork and beyond: All Financial Matters discusses high 401k fees. MightyBargainHunter highlights a $10,000 test. Five Cent Nickel covers the latest Wal-mart roll back. Blueprint for Financial P…
July 16th, 2007 at 4:19 pm
Hi,
I actually ruminated about this a bit on my blog, too.
My recommendation is to contribute in order to maximize your companies match, then rollover the proceeds *each* year into a free IRA, managed by somebody like Fidelity or Vanguard. I believe that you can roll over your assets from the 401(k) even if you stay with your employer. At least, I know that I can with my 401(k) plan.
That way you can get the $5000 match each year, avoid early withdrawal penalties and taxes, and still watch the money grow tax-deferred until you retire in a fund or stocks with much lower expenses.
Cheers,
Jonathan
July 17th, 2007 at 10:40 am
to Jonothan,
Most 401(k) plans do not allow “in service” rollovers.
July 18th, 2007 at 1:27 pm
My employer switched 401(k) administrators a couple years ago. I suspect that high fees played a role in the decision. Our previous plan had the dubious benefit of a financial advisor to help us pick which funds to put our money into. The “advisor” I talked to disagreed with my assertion that the selection of high-fee funds was lousy.
July 18th, 2007 at 2:38 pm
“I would suggest asking the employer to offer a brokerage window through TD Ameritrade or another low cost firm. This would sound to the employer like an enhancement, rather than sour grapes over high costs.”
I like the sound of Jim Bigham’s suggestion. Can you elaborate a bit? Would the brokerage window be separate from the high fee 401k plan? Would it use pretax $$?
Thanks!
July 18th, 2007 at 3:31 pm
Going with the index funds in your 401k and suggesting your employer check out a few companies and sites at the same time seems the way to go. As a Costco lover, be aware that Costco is now offering 401ks for small businesses provided by ShareBuilder with some good pricing. ShareBuilder looks impressive and has a fairly unbiased educational site on costs and fees for your boss at 401kcostguide.com. They promote are promoting that participants should not not pay more than 1% fees all in (expense ratios, mgmt fees, etc…. Hope this helps,
Stuart
October 17th, 2007 at 11:04 am
When my small business began researching 401Ks, I invited employees to any sales meetings. One sales rep slyly suggested that a private meeting might be desirable, slyly hinting that some benefit might accrue to the employer that selects their plan. Knowing this is happening “out there,” you might have even more care: those high fees might be more than meets the eye.
December 2nd, 2007 at 4:50 pm
In service rollovers are sometimes allowed when someone
turns 59 1/2 or they work for a division which is sold or merged with another firm.
The options depend on the what the provider allows.
Those 401k fees are very high, but the $5000 match should
make up for a LOT!
I once saw a Principal plan were a business owner was paying $4500in fees to cover 2 employees!
January 29th, 2008 at 2:17 pm
While the fees are excessive, the match makes up for a lot, but there’s no reason to put up with excessive fees. I picked up a copy of this book that actually shows you how to proactively get your employer to change your 401k without political whiplash. It’s called Stop the 401(k) rip-off by David Loeper (www.401kripoff.com) and there’s a link on the right to Fundgrades.com which actually considers expenses in the grading of funds.
Also, I’d be careful of those target date and lifecycle funds…while they’re easy, they can cost your lifestyle dearly. See this educational article that was written for financial advisors if you want to learn more about it: http://www.financeware.com/homepage.asp?showsnippet=01.02.08.wem
August 19th, 2008 at 3:54 pm
I think there is a lot of shady stuff that happens. I work for a small company (250 employees) and the CFO made our decision with a broker.
The problem is, the broker who is part of some local business community that essentially passes business between each other that our owner supports. There are apparently political considerations in selecting the broker and “what’s best for the employees” isn’t really the primary factor.
So now we’re stuck with ING offering 12 plans, no index funds, and averaging 1.5-2.5% total cost. The better part is, they don’t disclose sales fees on shares and half the time the share prices don’t match up with the statements because they’re designated as some obscure share class.
What we really need to be able to do is pass a law allowing free withdrawal of money after 1 year. Why the hell are we not allowed to move our own retirement money?