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  • 401k ER/Base Point Question

    I have been reviewing my 401k options. About a year ago I set up my 401k with all Vanguard Index funds.

    The ER's listed were all 0.05 - 0.09 for the Large, Mid and Small cap funds. The international was 0.14.

    i recently noticed that my plan sponsor additionally charges 30 base points to each of the aforementioned funds.

    Example, for my S&P fund which carries an ER of 0.05 with the base point fee does that in essence make that fund cost 0.35?

    is this normal?  To me this seems excessive for an index fund but may a standard fee from these companys that manage ones 401k.

     

    thanks,

    CJ

     

     

  • #2
    When there is an intermediary, they have to get paid, otherwise why bother? The cost is a factor - but not the main factor so don't get too wrapped up in it. Your plan sounds reasonable, imo. Now focus on proper allocation, diversification, and (most important) behavior management. You can have the lowest cost portfolio in all 50 states and blow it up by letting your emotions get in the way at a critical time.

    Don't simply focus on the easily measurable - dig a little deeper and remember that you have the ultimate responsibility for appropriate education and application.I cannot over-emphasize the importance of making appropriate choices in your portfolio and then making appropriate decisions when managing it. I firmly believe that behavior accounts for at least 90% of long-term returns.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3




      I have been reviewing my 401k options. About a year ago I set up my 401k with all Vanguard Index funds.

      The ER’s listed were all 0.05 – 0.09 for the Large, Mid and Small cap funds. The international was 0.14.

      i recently noticed that my plan sponsor additionally charges 30 base points to each of the aforementioned funds.

      Example, for my S&P fund which carries an ER of 0.05 with the base point fee does that in essence make that fund cost 0.35?

      is this normal?  To me this seems excessive for an index fund but may a standard fee from these companys that manage ones 401k.

       

      thanks,

      CJ

       

       
      Click to expand...


      Actually, while this is often done, this is NOT normal.  In fact, there are many recent lawsuits dealing with excessive fees, and this might be considered to be an excessive fee if it is charged for something that's available at a much lower cost elsewhere. Your plan sponsor is a fiduciary, and as a fiduciary they have the duty to work in the best interest of plan participants.  Can you find out whether this is a recordkeeper or advisory fee?  Usually you can tell by looking at a 408b2 disclosure that the plan sponsor must provide to you annually.  If this is a relatively large plan sponsor (not a tiny practice), they have a duty to negotiate fees.  There are very few services for larger plans that warrant 30 bps on top of the mutual fund expenses.  Usually the fund lineup might include a number of other high cost funds in addition to the Vanguard ones, but recordkeepers shouldn't be charging any basis points nowadays, and while some plans do hire advisers (such as ERISA 3(21) or ERISA 3(38) fiduciaries), for a large enough plan these types of fees can also be negotiated to be paid by the plan sponsor directly rather than be taken out of plan assets.

      Yes, 30 bps can be a lot of money over time, so it is always better to eliminate as much of the asset based expense ratio as possible.

      While the chart below is typically used to compare flat fee vs. asset-based fee, in this case I just looked at the cost of adding 30 bps on top of the mutual fund expense ratio.

       
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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