The performance of the Goldfarb 10

[Jurgis]

OT 401(k)s

 

I've heard people complaining about 401(k)s and their fees in the past, but I am completely not sure where they are coming from.

 

I've had couple 401(k)s in the past and my wife had couple too. None of them had fees that employee had to pay. All of them had cheap index funds at least (some of them had much more than that, but we probably all agree that cheap index funds are enough). Have I just been lucky to be in right companies/401(k)s?

 

I would be willing to make a significant wager that the 401ks you and your wife participated in did in-fact charge significant fees that you never saw.

 

How? Employer may have paid the fee, but how do you charge a fee that I never see? I see what comes out from my paycheck. I see what goes into 401(k). Nothing disappears in between. It's not that suddenly I have 98% of what I contributed. Tell me what's the trick. How can you remove the fee without hitting the statement?

 

Consumers (rightly so) have caused a big stir in recent years because they finally figured out that huge fees were being charged within 401k plans without any transparency.  I'm in the business and have seen it first hand.  Most 401k participants wrongly assume they pay no fees.  But what is actually happening is the fees are being charged through a special share class or at the plan level. 

 

Special share class, I can understand. What I saw was the opposite: 401(k) gets the big mutual fund classes that have lower fees than retail. I did not check share classes and fees for every single fund in the offering.

 

Edit: I also understand that they can have crappy funds that charge more than equivalent. I guess they can also have a crappy cash (money market) fund, though it's tough to skim much from cash fund nowadays.

 

This trick doesn't work very well for them if person puts 100% into SP500 index fund that's a Vanguard or equivalent. I looked at couple plans. Best SP500 "equivalent" I see has 0.04% fees, so they are not skimming from this one. Another plan has 0.32% fee SP500 "equivalent". So that one could be giving them 0.25% or so of delta fee vs 0.04%. Can't get to 1-2% though.

 

The "fee" never hits the participants statement but it is definitely there.  The highest I've seen was a 2% wrap fee being charged to a group of fire fighters by one of the big brokerage firms.  1% was a lot more common up until the last 5 years. 

 

I seriously want to know: how do you remove money from the plan without hitting the statement apart from bad funds or bad fund classes?

 

Edit: not that this forum's participants need warning, but sure if you put money in crappy "target date" funds or funds-of-funds or some "special" products they sometimes have in 401(k) - I forget the names - these can definitely have 1-2%+ overhead. But that's not what I am asking about. I am asking how they can charge 1-2% hidden fee on 401(k) participant that puts all money into SP500 index "equivalent" fund.

[tede02]

It is possible that the employer pays the admin expenses.  This is an option every employer has when they establish a 401k plan (though it isn't very common in my experience).

 

The short answer to your question is the fees are simply netted from the fund returns, thus the participant never sees them directly.  The 401k plan providers (Fidelity, Principal, John Hancock, etc.) have different levels of pricing on the same funds depending on the size of the plan.  With small plans in particular (less than $1 million in assets), you'll actually find the opposite of what you described; the mutual fund expenses within the plan will be higher than what you would pay if you bought the fund at retail price.  For these reasons, the fees/expenses never hit the statement and people believe they aren't paying anything. 

 

However, it is true that big 401k plans have much more favorable pricing because of economies of scale.  If you and your wife only worked for fFrtune 500 companies for example, the expenses you paid were much more likely to be fair.  But in the small plan market (businesses with less than 100 employees typically), the fees can be extremely high (and again, they are usually buried). 

 

 

[Jurgis]

Thank you tede02. I think this clarifies things to me and helps me to be more aware of these in the future.

 

For full disclosure (which I did not want to do before I got the info, so the info would be unbiased ;) ): yes, these were big companies (>10K employees). The "good" (or better) plans used Fido. The worse one (see SP500 equivalent fees) used Prudential. One of the plans even had brokerage option, so I could buy stocks there as in regular Fido account.

 

But as I said, this gives me the color for things to be careful about.

[oddballstocks]

Thank you tede02. I think this clarifies things to me and helps me to be more aware of these in the future.

 

For full disclosure (which I did not want to do before I got the info, so the info would be unbiased ;) ): yes, these were big companies (>10K employees). The "good" (or better) plans used Fido. The worse one (see SP500 equivalent fees) used Prudential. One of the plans even had brokerage option, so I could buy stocks there as in regular Fido account.

 

But as I said, this gives me the color for things to be careful about.

 

Had a bad plan at a small company years ago.  They charged a service fee quarterly, plus a % of assets fee at the end of the year capped at 5%.  I brought this up to management, they said I shouldn't be reading the fine print, and the company probably wouldn't charge it, that it was just there for legal reasons.  This bad 401k also had high expense funds.

 

Someone could have had the following:

 

$10,000 invested in a fund with a 2-3% expense ratio.  There was the underlying expense ratio then the fund admin cost layered on top.  The S&P fund was over 1% if I remember correctly.

Then a 5% surcharge each year

A quarterly fee of $25 or so

 

$200 expense ratio

$500 asset fee

$100 quarterly fee

 

$800 in fees, that's 8% off the top.  The only reason to be in this plan was the employer match.  Once you received the match the funds started to whittle away at what was in there quickly.  Anything less than an 8% return and you're losing money each year.

[Jurgis]

Thanks oddballstocks!  8) Wow, that's a really bad plan.

[Guest longinvestor]

Thank you tede02. I think this clarifies things to me and helps me to be more aware of these in the future.

 

For full disclosure (which I did not want to do before I got the info, so the info would be unbiased ;) ): yes, these were big companies (>10K employees). The "good" (or better) plans used Fido. The worse one (see SP500 equivalent fees) used Prudential. One of the plans even had brokerage option, so I could buy stocks there as in regular Fido account.

 

But as I said, this gives me the color for things to be careful about.

 

Had a bad plan at a small company years ago.  They charged a service fee quarterly, plus a % of assets fee at the end of the year capped at 5%.  I brought this up to management, they said I shouldn't be reading the fine print, and the company probably wouldn't charge it, that it was just there for legal reasons.  This bad 401k also had high expense funds.

 

Someone could have had the following:

 

$10,000 invested in a fund with a 2-3% expense ratio.  There was the underlying expense ratio then the fund admin cost layered on top.  The S&P fund was over 1% if I remember correctly.

Then a 5% surcharge each year

A quarterly fee of $25 or so

 

$200 expense ratio

$500 asset fee

$100 quarterly fee

 

$800 in fees, that's 8% off the top.  The only reason to be in this plan was the employer match.  Once you received the match the funds started to whittle away at what was in there quickly.  Anything less than an 8% return and you're losing money each year.

 

I worked for a large Corp and had a 401K with Fidelity. Some of the very best performing Fidelity funds available to us. FLPSX- Low Price Stock Fund; FDIVX - Diversified Intl...If I went by Morningstar / fund's reported 1- 3- 5- year performance, my balance would have to have skyrocketed. These funds were 5 Star for a long time, reporting mid-teens performance. But all I got a muted effective performance, like I stated before my+ER contributions saw a 1.5x increase over 15 years. The fees were such a drag.This is from a while ago,  I wish I had kept a spreadsheet with contributions and actual performance that I saw, not what they reported, but oh well. Rollover IRA, completely different story.