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Not satisfied with your 401k options? You can change them!

Not satisfied with your 401k options? You can change them!

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A few years ago the small firm I was working for at the time rolled out a a new 401k program. I was initially ecstatic, as the company was matching contributions at 3% and I was able to start putting more money toward retirement. After some research however, I realized that all of the available funds had quite high expense ratios compared to some of the funds at Janus, Vanguard, Fidelity and a few other higher profile fund companies. The only choice with a low expense ratio was a single fund that tracked the S&P 500. The rest of the fund were entirely composed of actively managed funds. All of the funds were high cost (lowest expense ratio 0.80%, and all but 3 options > 1% ER). On top of that, there was a 1.05% net asset fee regardless of what funds a participant chose. This meant the lowest possible expense ratio of anything in the plan was 1.85%, with the plan average at ~2.33%. I decided to address the issue.

I talked to the people who were in charge of administering our plan (CFO, controller, and benefits) and demonstrated just how high the costs in our plan were. I think the biggest thing that got their attention was the Effect of Expenses graph. When I showed that over ~30 years, our level of expenses would eat over two-thirds of a person’s investment returns, there were some definite gasps and “wow”s.
Over the following couple of months, I did some research on plan providers to help out in our shopping around for a new provider. I made sure to extricate myself from any of the actual decision making, however, as I did not want to inadvertently take on any fiduciary liability regarding whatever we chose. I ended up putting out the names for Employee Fidicuary, The Online 401K, Vanguard, Fidelity, and one or two others as potential providers, and I know the finance people looked at some additional possible providers as well. Ultimately, they decided to go with Fidelity. (Note that smaller employers with <10-20 employees and fewer plan assets will likely find it much more cost effective to go with Employee Fiduciary, The Online 401K, or similar.)

Following that, the finance department went through a process of selecting funds for the plan. We had a “financial planner” attached to our plan from a local firm who the company contracts to make these kinds of decisions – I presume to shield the company from liability. This guy used to be a salesman at Northwestern Mutual and he didn’t give particularly good advice, in my opinion. Our new plan’s fund lineup still turned out to be mostly actively managed funds chosen by this guy, but I was involved in much of the communication during this process and I specifically requested low-cost, broad market index funds be included alongside whatever they wanted to include (which I didn’t really care about). Since our new provider was Fidelity, I pushed for inclusion of their basic total market stock, bond, and international Spartan index funds. After some back and forth, I got them to include all of those funds in our plan. (Fidelity was unwilling to include more than 4 Spartan funds in our plan, because they don’t make money from those via 12b-1 fees, compared to our other fund options).

So in the end, we switched to a new provider, eliminated the 1.05% Net Asset Fee (all we pay now are the expense ratios, according to the newly-minted fee disclosure), and the plan average expense ratio dropped a bit to around 1%. But the biggest win was the inclusion of Fidelity’s Spartan index funds — the four Spartan funds in our fund selection list average 0.09% expense ratio, and a person can construct an entire asset allocation using these funds. I was pretty happy with the outcome.

For anyone stuck in a high expense plan, change is possible. Oftentimes you’ll get the best results by not only showing how participants are impacted, but also how the company could save money and/or how the higher ups (likely with lots more money in their 401K accounts) are adversely affected by a high fee plan. The How to campaign for a better 401K plan on the Bogleheads Wiki is a also great resource.

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