401k Expenses ~0.35% on top of fund expense ratio -> max this out, right?

[Craigy]

Looking for a little confirmation bias here...  

I am finally in the position where I will begin making my own contributions to my employer's 401k.

For our company plan, we have third party administrator fees, investment advisor fees, and custodian fees, all totaling about 0.35% annually.  Luckily, I have access to Vanguard admiral shares with expense ratios of .04, .07, .11, etc.  So total expenses somewhere .4 to .5%.  Which is literally an order of magnitude more expensive than my individual Roths at Vanguard, but, all things considered, not totally horrible.

So, I shouldn't be sweating the plan expenses, right?  Just wanted to check with you guys before I pulled the trigger to send a huge chunk of my check to the 401k in order to his 18k before year end.

Alternative would be taxable account or just paying off student loans faster, and then taxable account.  Maxing out 401k will be in addition to backdoor roth money, and paying off student loans somewhat aggressively.

Thanks!!!  8-)

[Donnie]

Yes. Paying 50bps more in fees is better than being taxed twice.

[jfoxcpacfp]

Contribute to the 401k. I think there is too much hyperventilation on fees in this forum. Sure, they matter, but they are far from the most important consideration.

[Craigy]

jfoxcpacfp wrote:

Contribute to the 401k. I think there is too much hyperventilation on fees in this forum. Sure, they matter, but they are far from the most important consideration.

Click to expand...

Half of it isn't just the mathematical consideration of the fees, but knowing I'm essentially being swindled, ripped off, for near-zero service.

But there is definitely an obsession with fees on WCI.

[Donnie]

I think people focus on fees because it's Just about the only thing you can easily control. That said, if the choice is between contributing to taxable versus tax sheltered, the fees would have to be really high (like 100bps higher) to make this close over 30 years.

[Craigy]

Donnie wrote:

I think people focus on fees because it’s Just about the only thing you can easily control. That said, if the choice is between contributing to taxable versus tax sheltered, the fees would have to be really high (like 100bps higher) to make this close over 30 years.

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That's the thing.  At what point in the spectrum do you make the choice to just keep your money in a taxable account.  By choice, I could just stick my money with fidelity or vanguard and just pay 0.05% or whatever.  And I could tell myself that I've got access to my money anytime, it's all post-tax money like a Roth, and I get to pay taxes at favorable capital gain and dividend rates on the income instead of paying much higher income tax rates on all of it.  And I'm gloom and doom, and expect taxes to be more when I retire than they are now.  Easy to talk myself out of things.    

But at this point, even in my cheapskate mentality, I think the pros of the 401k outweigh the cons.

 

 

[East coast]

My plan is almost exactly the same. .34% AUM fee + .05% for a few index funds - definitely a no brainer. Roll it over the moment you leave. Also if it really bugs you, confirm if you can do an in service rollover or not.

[litovskyassetmanagement]

Craigy wrote:

Looking for a little confirmation bias here…

I am finally in the position where I will begin making my own contributions to my employer’s 401k.

For our company plan, we have third party administrator fees, investment advisor fees, and custodian fees, all totaling about 0.35% annually.  Luckily, I have access to Vanguard admiral shares with expense ratios of .04, .07, .11, etc.  So total expenses somewhere .4 to .5%.  Which is literally an order of magnitude more expensive than my individual Roths at Vanguard, but, all things considered, not totally horrible.

So, I shouldn’t be sweating the plan expenses, right?  Just wanted to check with you guys before I pulled the trigger to send a huge chunk of my check to the 401k in order to his 18k before year end.

Alternative would be taxable account or just paying off student loans faster, and then taxable account.  Maxing out 401k will be in addition to backdoor roth money, and paying off student loans somewhat aggressively.

Thanks!!!

Click to expand...

I'd say that this is better than most plans out here, but this still does not look right to me.  How big is the practice?  If I can get flat/fixed fees negotiated with a record-keeper for a plan of ANY size, the plan sponsor should not have to pay anything but a reasonable fee, which in most cases is ~5 bps for custodian that they SHOULD choose to pay directly vs. from plan assets (as they get a tax deduction on it, and it would keep the costs to participants low), and a fixed fee for record-keeping/admin.  Even if they didn't want to pay the custodial fee directly, a practice that has any size to it should absolutely negotiate the fees they are paying for administration, record-keeping and advice, and they should not have to pay AUM fees for anything.  Especially if the practice has several M in plan assets, this is really easy to do.  If anything, the adviser (who is ideally an ERISA 3(38) fiduciary) should be telling the plan sponsor to negotiate AUM fees, if they are worth their fee themselves.  I don't understand why plan sponsors which are relatively large hire advisers who do not give them valuable advice and who do not use their size to negotiate lower fees.  If I can do it for a tiny plan, there is no excuse for a plan sponsor not to do it for a larger one given the huge number of flat fee open architecture record-keepers out there.  While this is still a relatively low fee compared to similar plans, I still think there is no excuse for the plan sponsor to get the best value for their staff when it comes to their own retirement plan.

[Craigy]

Kon Litovsky wrote:

Craigy wrote:

Looking for a little confirmation bias here…

I am finally in the position where I will begin making my own contributions to my employer’s 401k.

For our company plan, we have third party administrator fees, investment advisor fees, and custodian fees, all totaling about 0.35% annually.  Luckily, I have access to Vanguard admiral shares with expense ratios of .04, .07, .11, etc.  So total expenses somewhere .4 to .5%.  Which is literally an order of magnitude more expensive than my individual Roths at Vanguard, but, all things considered, not totally horrible.

So, I shouldn’t be sweating the plan expenses, right?  Just wanted to check with you guys before I pulled the trigger to send a huge chunk of my check to the 401k in order to his 18k before year end.

Alternative would be taxable account or just paying off student loans faster, and then taxable account.  Maxing out 401k will be in addition to backdoor roth money, and paying off student loans somewhat aggressively.

Thanks!!!

Click to expand…

I’d say that this is better than most plans out here, but this still does not look right to me.  How big is the practice?  If I can get flat/fixed fees negotiated with a record-keeper for a plan of ANY size, the plan sponsor should not have to pay anything but a reasonable fee, which in most cases is ~5 bps for custodian that they SHOULD choose to pay directly vs. from plan assets (as they get a tax deduction on it, and it would keep the costs to participants low), and a fixed fee for record-keeping/admin.  Even if they didn’t want to pay the custodial fee directly, a practice that has any size to it should absolutely negotiate the fees they are paying for administration, record-keeping and advice, and they should not have to pay AUM fees for anything.  Especially if the practice has several M in plan assets, this is really easy to do.  If anything, the adviser (who is ideally an ERISA 3(38) fiduciary) should be telling the plan sponsor to negotiate AUM fees, if they are worth their fee themselves.  I don’t understand why plan sponsors which are relatively large hire advisers who do not give them valuable advice and who do not use their size to negotiate lower fees.  If I can do it for a tiny plan, there is no excuse for a plan sponsor not to do it for a larger one given the huge number of flat fee open architecture record-keepers out there.  While this is still a relatively low fee compared to similar plans, I still think there is no excuse for the plan sponsor to get the best value for their staff when it comes to their own retirement plan.

Click to expand...

We're a pretty small firm, probably about ~20 participants.  I want to say last annual report had our plan value at $2.5M.  Not tiny tiny but pretty small.

I recently had the plan fees broken down to me and they are 0.09% to the service provider (vanguard) and 0.25% to the plan advisor, plus fund expense ratio. Our current advisor is pretty good, and very responsive to getting new funds added to the plan, but still .25% is a little rich IMO for what amounts to one ten minute visit per year.  Still on a $2.5M plan that's only $6,250 per year so perhaps it's quite reasonable, just wish it wasn't passed on to the employees.

Just a couple of years ago we used to have a horrible arrangement with much higher fees from the service provider and investment advisor, along with horrible investment choices, so these fees are probably less than half of what we used to have.  I was the squeaky wheel that got the ball rolling on the switch to what we have now, but like I said above I can't help but be a cheapskate and pore over the additional fees I'm charged on the 401k over my other investment accounts, which I have been told are solely there just to cover the firm's ****************** in event of a suit.

 

[litovskyassetmanagement]

Craigy wrote:

Kon Litovsky wrote:

Craigy wrote:

Looking for a little confirmation bias here…

I am finally in the position where I will begin making my own contributions to my employer’s 401k.

For our company plan, we have third party administrator fees, investment advisor fees, and custodian fees, all totaling about 0.35% annually.  Luckily, I have access to Vanguard admiral shares with expense ratios of .04, .07, .11, etc.  So total expenses somewhere .4 to .5%.  Which is literally an order of magnitude more expensive than my individual Roths at Vanguard, but, all things considered, not totally horrible.

So, I shouldn’t be sweating the plan expenses, right?  Just wanted to check with you guys before I pulled the trigger to send a huge chunk of my check to the 401k in order to his 18k before year end.

Alternative would be taxable account or just paying off student loans faster, and then taxable account.  Maxing out 401k will be in addition to backdoor roth money, and paying off student loans somewhat aggressively.

Thanks!!!

Click to expand…

I’d say that this is better than most plans out here, but this still does not look right to me.  How big is the practice?  If I can get flat/fixed fees negotiated with a record-keeper for a plan of ANY size, the plan sponsor should not have to pay anything but a reasonable fee, which in most cases is ~5 bps for custodian that they SHOULD choose to pay directly vs. from plan assets (as they get a tax deduction on it, and it would keep the costs to participants low), and a fixed fee for record-keeping/admin.  Even if they didn’t want to pay the custodial fee directly, a practice that has any size to it should absolutely negotiate the fees they are paying for administration, record-keeping and advice, and they should not have to pay AUM fees for anything.  Especially if the practice has several M in plan assets, this is really easy to do.  If anything, the adviser (who is ideally an ERISA 3(38) fiduciary) should be telling the plan sponsor to negotiate AUM fees, if they are worth their fee themselves.  I don’t understand why plan sponsors which are relatively large hire advisers who do not give them valuable advice and who do not use their size to negotiate lower fees.  If I can do it for a tiny plan, there is no excuse for a plan sponsor not to do it for a larger one given the huge number of flat fee open architecture record-keepers out there.  While this is still a relatively low fee compared to similar plans, I still think there is no excuse for the plan sponsor to get the best value for their staff when it comes to their own retirement plan.

Click to expand…

We’re a pretty small firm, probably about ~20 participants.  I want to say last annual report had our plan value at $2.5M.  Not tiny tiny but pretty small.

I recently had the plan fees broken down to me and they are 0.09% to the service provider (vanguard) and 0.25% to the plan advisor, plus fund expense ratio. Our current advisor is pretty good, and very responsive to getting new funds added to the plan, but still .25% is a little rich IMO for what amounts to one ten minute visit per year.  Still on a $2.5M plan that’s only $6,250 per year so perhaps it’s quite reasonable, just wish it wasn’t passed on to the employees.

Just a couple of years ago we used to have a horrible arrangement with much higher fees from the service provider and investment advisor, along with horrible investment choices, so these fees are probably less than half of what we used to have.  I was the squeaky wheel that got the ball rolling on the switch to what we have now, but like I said above I can’t help but be a cheapskate and pore over the additional fees I’m charged on the 401k over my other investment accounts, which I have been told are solely there just to cover the firm’s ****************** in event of a suit.

 

Click to expand...

I'm not sure why you are paying 9 bps to Vanguard.  I have several Vanguard plans, and they don't charge AUM fees because they work with Ascensus. Unless that's for advisory services, but why have an adviser in the first place then?

In any case, I'm assuming that you might contribute as much as $1M a year in total, so those AUM fees are going to kill you long term.  Even assuming 6% return, the net cost over 30 years is $5M (attached example). Moreover, if/when you decide to add a Cash Balance plan, that can add significant cost because of AUM fees, so it helps getting a long-term flat fee platform with the custodial fee that's payable outside of the plan's assets.

Please verify this yourself:

http://retirementplanhub.com/retirement-plan-cost-calculator/

That's why for plans like yours I recommend ALL fixed/flat fees.  You are not a cheapskate - millions of $ paid by your plan participants over several decades is a very compelling reason to get rid of all AUM fees in favor of fixed/flat fees.

 

[Craigy]

Thanks, I'll definitely keep this for the future!

Expenses are described as Vanguard/Ascensus - .09%.  This could be a flat fee simply illustrated as a percentage of assets, and not actually a fee charged on a percentage basis, but I do not know for sure.  I have also seen it described as approx $1 per $1,000, and in previous years it was $2 per $1,000.

The third-party advisor certainly does charge a quarter point on assets under management, though.

[litovskyassetmanagement]

Craigy wrote:

Thanks, I’ll definitely keep this for the future!

Expenses are described as Vanguard/Ascensus – .09%.  This could be a flat fee simply illustrated as a percentage of assets, and not actually a fee charged on a percentage basis, but I do not know for sure.  I have also seen it described as approx $1 per $1,000, and in previous years it was $2 per $1,000.

The third-party advisor certainly does charge a quarter point on assets under management, though.

Click to expand...

Yes, there is no 9 bps, Ascensus charges a fixed fee.  I'm attaching an updated illustration: 25 bps vs. $10k fixed fee (just as an example).  Still about $4.6M over 30 years.  AUM fees have no place in retirement plans.  This is just easy money for advisers who don't really do very much (and many of whom are not ERISA 3(38) to begin with).

[East coast]

From what I've seen having gone through setting up a plan at my current employer is that plans like these arise from an employer not wanting to foot the bill for the costs of the plan. Instead the provider adds the 'small' AUM fee to each employee. Definitely ends up costing the overall plan more, but the employer gets to wash their hand of having to pay for the benefit.

If that's the case, then there's no incentive for the employer to change it Unfortunately.

From memory, I didn't think vanguard allowed the employer to charge the employees for the flat fee through the plan.

[childay]

My work 401k I pay 0.5% for a S&P500 fund, but that's just the fund expense.  I agree the 0.35% fee seems odd.  BUT overall 0.5% total you should still max it

[litovskyassetmanagement]

East coast wrote:

From what I’ve seen having gone through setting up a plan at my current employer is that plans like these arise from an employer not wanting to foot the bill for the costs of the plan. Instead the provider adds the ‘small’ AUM fee to each employee. Definitely ends up costing the overall plan more, but the employer gets to wash their hand of having to pay for the benefit.

If that’s the case, then there’s no incentive for the employer to change it Unfortunately.

From memory, I didn’t think vanguard allowed the employer to charge the employees for the flat fee through the plan.

Click to expand...

The employer is the fiduciary.  They always have to act in the best interest of the plan participants.  If they offload the plan expenses to employees, this can be groups for a lawsuit, if such expenses are excessive (and this is where lots of due diligence has to be done on the part of the plan sponsor).  And in the case of a small/medium practice, the employer are the doctors, so they are the ones footing the bill, in which case they have all of the incentives to pay the plan expenses with outside money that comes from the cash flow, and not with their personal money.