Do These 401(K) Choices Seem Expensive To You?

January 15, 2013

A friend of mine asked me to help her allocate her 401(k) contributions.

Here are her choices (click on the graphic to see a PDF version):

As you can see, they’re all expensive choices. I’m sure this is because it’s a small company and one of the ways providers make the plan “cheaper” for employers is by giving the employees higher-cost choices. Unfortunately, a lot of employers don’t have the time or the desire to research their options.

These plans are more often sold than bought.

11 responses to Do These 401(K) Choices Seem Expensive To You?

  1. Yes they do seem expensive. I’m paying .22 for an index fund in my 401(k). BTW, your spreadsheet should be showing a 10 year return, not the most recent year. Last year showed good numbers only because all stocks were depressed — it gives the impression that the fees are no biggie, when they actually are. The way to handle this issue is to do the 401(k), get the match, and every year do a rollover to an IRA where you choose a better fund to invest in of the long-term. Investing is long-term, your view of the returns should be long-term as well.

  2. Brutal. I would only put enough in to get the match. The rest of my savings I would dump into an IRA and taxable account.

  3. Is it really that difficult to get Vanguard Index funds into a small business 401k offering?

  4. I’m going to find out, BG.

  5. Tim,

    Good point. I was in no way trying to make the fees look like they are no big deal. They are a very big deal.

  6. I was unaware that one could do a rollover while one was still with that employer.

  7. I typically knock off any fund that charges over 1% as one that I would participate with. That generally leaves a good menu of options to choose from, but in the case of your friend, it would leave barely anything to choose from. Definitely very expensive.

  8. They look like my 401(k) choices…so frustrating! But I can’t deny the match so I put up with the expenses.

  9. This looks like the typical lineup of funds I find in many of my clients’ plans. 401k salesmen do a great job of selling crappy plans with high fees paid by participants (in the form of high expense ratios) to make themselves rich. (That’s why you don’t see many Vanguard funds, other than the occassional “500 Index” thrown in as a bone.) And someone in HR gets promoted for being the company genius that selected a plan which is “free” (or very low cost) for the company to offer while unwittingly undermining their own retirement account!

  10. I’ve been in startups most of my career, and this is pretty typical of startups. The problem is most startup management knows as little about 401Ks as most employees, so if you mention it, you’ll probably get them to change. A good thing about small companies is these sorts of things aren’t stone tablets brought down from the mount and can be changed fairly easily if you mention it to the right people – senior management won’t like crappy fund choices either. (The biggest “danger” is you may get assigned to help find a better 401K plan…)

    The last couple of companies I’ve been at had more savvy management on finance issues, so we’ve had a decent mix of index funds. They aren’t the cheapest out there, but they’re lots cheaper than the 1%-up you often see.

  11. Yikes! TEMWX has a 5.75% load! Others may have a load as well.