Office 401k fees High?

[Haole88]

I am a recent grad and started practicing at a small rural private practice as a W-2 employee. I am eligible to enroll in the office 401k starting in 2018 and I have some concerns. The owner doesn't seem to know much about finances and delegates everything to the local financial advisers down the street. I met with them and they walked me through the 401k through Transamerica. The expense ratios were an astounding 1.87%. I am very new to this stuff, but everything I've read tells me that that is high. The adviser told me that as the funds grew, it would go down to about 1%...and that I should focus on the savings on taxes by maxing my contributions. I also believe these guys are getting 50 base points out of the account as well. I assume that that is included in the 1.87%, but I don't know where to find that out.

I still plan on contributing the max because my employer has a 4% match, but I can't help but feel like I am throwing away thousands or more by leaving that money in there long term.

My questions" Are these fees normal for a small business 401k plan? I know that their 50bp is high, but what about the 401k? I've seen many plans on here from larger organizations with super low fees.  I'm considering buying into this practice, but this 401k concerns me.

[DMFA]

Those fees are ridiculous, and that's a paltry match, but if you're in a high bracket it would probably still be worth taking the tax deferral and just rolling over once you leave the practice.

Talk to whoever is in charge of it about switching to a major brokerage. The small business 401(k) fees at Fido, Schwab, VG have minimal fees (I know the independent ones have none if you hold their funds; small biz ones might not have any either) and excellent fund selection, including index funds often less than 10 bp.

[jhwkr542]

While some may consider those "normal"for a small plan, it's still considered outrageously high for those in the know. The best way would be to try to convince the owner of this. The advisors are essentially milking the retirement plan of its assets. A simple alternative for someone who seemingly has no interest would be employee fiduciary. Easy to roll over plans, cheap, and a good selection of funds.

[Haole88]

That's what I figured. Does anyone have some good resources I could use to show him this? Do I just show him vanguard fees and try to explain? Being a small town makes it complicated too since he has a personal relationship with his advisers. Going to be awkward.

[Zaphod]

Haole88 wrote:

The adviser told me that as the funds grew, it would go down to about 1%…and that I should focus on the savings on taxes by maxing my contributions.

Click to expand...

Thats some Jedi mind trick business, "these arent the fees you're looking for", "focus on taxes, basically anything but my precious fees".

[Craigy]

Once you've been there a little while, have a little money in the account, become someone that they want to keep around, etc., then you can apply some pressure to switch to a better firm.

The owner will only be motivated if he sees value.  There are some good resources posted elsewhere on here, but eventually you can go to the owner and show him how these 1.8% fees are going to cost him and his employees hundreds of thousands, millions of dollars over their careers.  If that doesn't work, you can show him how he might get sued for offering such poor options.   

[boglechu]

Post a list of funds available and ER. What u want to look for is when the ER class is lower. Sometimes it’s a threshold like $5k or 10k. So u can potentially easily gain access to 1% funds after a year.

That’s the nature of small biz 401k. Hard to get a deal for good funds.

https://www.transamerica.com/images/transamerica-stock-index-fund-fact-sheet_tcm73-96091.pdf?dt=1513436959822

See if u can get this funds.

[Haole88]

Black Rock is the fund they set me up with this year. All the funds I saw on a short list be handed me were at 1.87%. Life I said, I believe this includes their 50bp take. But even a five with an expense ratio of 1.37% seems very high compared to low cost options.

[AlexxT]

Blackrock probably isn't the cause of those high fees.  Your "advisers" are likely providing you with retail versions of their fees at higher expense ratios, which are probably going to the advisers.  ( I've seen a Blackrock index fund at .03 basis points )  Fidelity does the same thing.  A few years ago I saw  Fidelity funds sold at a local bank, but they charged higher fees and / commissions.

Explain to your group that if they are paying 1.83% more for their index funds,  when they have $3,000,000 in their 401k, they will each be paying an additional $54,900 a year to the advisers.  In other words, their entire 401k contribution will be going towards their advisers' retirement, and not their own.

[boglechu]

Just post names of a few of the individual fund. Curious which ones they are.

[billy]

My groups 401k has multiple active fund with high e/r also, but their blackrock index ones only charge about <0.1%(stocks)-0.4% (for bonds).  So I dont think its blackrock, I think its your groups arrangement that is part of the high fees.

[Hank]

Haole88 wrote:

Being a small town makes it complicated too since he has a personal relationship with his advisers. Going to be awkward.

Click to expand...

Your broker isn’t your buddy. If this financial advisor truly is the practice owner’s friend, he'll continue to golf with the practice owner even if he moves the retirement funds somewhere more affordable. Somehow I suspect the “personal relationship” is a one sided relationship to the detriment of the practice owner and the employees of the practice.

Your boss is being screwed over financially by this “financial advisor”. Worse still, your employer almost certainly is breaching his fiduciary duty as a plan sponsor and needlessly exposing himself to liability while getting crappy returns like the rest of the practice employees. The only ones benefiting from this arrangement are the high fee, low value-added retail brokers.

[G-pathy]

If you can't make headway with your boss, you might consider seeing if your plan permits IRA roll-overs while still employed.  Particularly if you can choose the Roth 401k to Roth IRA (otherwise you'll mess up your back door Roth).  That said, a good employer plan can have very low fees.  But...its hard to save enough tax-protected money as an employee and you are at the start of your career.  The best advice would be to become an owner/partner and set it up yourself.

[Bartl007]

You can actually find out the amount of plan assets in your practices plan with a quick search here:

https://www.efast.dol.gov/portal/app/disseminatePublic?execution=e1s1

Knowing the size of your current practices account may help in convincing the owner to make a switch when he/she sees the dollar amounts that those fees are costing.

You should know there's no such thing as a free lunch and plan providers that offer very low fees (employee fiduciary, Fidelity, litosky asset Management, etc) often have flat fees (a few thousand a year). Often plans that have high underlying fund fees (like yours) are "free" to the employer to administer, meaning there are no out of pocket costs to the business owner. But when you look at the cost of expense ratios to the plan, the overall costs are higher for these plans with high expense ratios.

For instance, our 401k/PS plan has around 2.5 mil in invested assets with an average fund expense ratio of 1.5%, all the fees and expenses to administer the plan are baked into that expense ratio so the owner never gets a bill that has to be paid to administer the plan.

Some quick math shows that $37,500 a year to pay for our plan is much higher than it needs to be, but since these fees are just subtracted from plan assets every year, they're easy to overlook.

I agree you should lobby to switch plans. Business owners like to lower overhead and reduce costs. It may help to frame your request as “an idea you had to help reduce costs” to the practice.

Good luck. Fwiw, I'm waiting on becoming a partner to make changes to our plan as Id rather not rock the boat as an employee.

[litovskyassetmanagement]

Haole88 wrote:

I am a recent grad and started practicing at a small rural private practice as a W-2 employee. I am eligible to enroll in the office 401k starting in 2018 and I have some concerns. The owner doesn’t seem to know much about finances and delegates everything to the local financial advisers down the street. I met with them and they walked me through the 401k through Transamerica. The expense ratios were an astounding 1.87%. I am very new to this stuff, but everything I’ve read tells me that that is high. The adviser told me that as the funds grew, it would go down to about 1%…and that I should focus on the savings on taxes by maxing my contributions. I also believe these guys are getting 50 base points out of the account as well. I assume that that is included in the 1.87%, but I don’t know where to find that out.

I still plan on contributing the max because my employer has a 4% match, but I can’t help but feel like I am throwing away thousands or more by leaving that money in there long term.

My questions” Are these fees normal for a small business 401k plan? I know that their 50bp is high, but what about the 401k? I’ve seen many plans on here from larger organizations with super low fees.  I’m considering buying into this practice, but this 401k concerns me.

Click to expand...

While those fees are common for small business plans, it does not mean that you can't decrease your fees significantly, and I've described in detail exactly how you can accomplish this, regardless of whether you have a small plan or a large plan:

https://whitecoatinvestor.com/how-to-reduce-your-practice-retirement-plan-cost

In a nutshell, the idea is to rebuild your plan ground up, and select only low cost and fixed/flat fee providers.  Your plan adviser has to act in an ERISA 3(38) fiduciary capacity, and should help you select a menu of low cost index funds with an average expense ratio of no more than 0.15% or so.  Your adviser should also assist you in selecting a record-keeper that does not have high asset-based fees (the one we use is 5 bps, and none of this is taken out of the account - instead it is billed directly to the plan sponsor, thereby giving you a tax deduction, rather than a hit on your rate of return).

Scrapping all AUM fees taken out of plan assets, adding only low cost investments (such as Vanguard and maybe some DFA funds), using an independent Third Party Administrator and open architecture record-keeper can help you save lots of money in the plan.  Presumably you might want to contribute profit sharing into the plan at some point, and this would also require having a good TPA who knows how to do cross-tested designs.  The reason small practice plans often cost a lot is because they are sold by local brokers who provide only bundled solutions so that there is no way to replace components, that's why using only open-architecture providers (as well as an adviser in an ERISA 3(38) fiduciary capacity) will help ensure that the costs you pay are reasonable and fixed and that the services you get are the best possible for the money.

So basically you are definitely not stuck with this plan.  One condition of you buying the practice should be that you will set up a new plan for the practice, and this shouldn't be a big deal since both partners will benefit from this.  Often, doctors don't know how much they are actually paying for the plan services and investments, so comparing various proposals side by side can be helpful using this calculator I've developed specifically for this purpose:

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

After looking at the fees over time, not a single person would pick asset-based fees vs. fixed-fee pricing provided they get the same services (which is not always the case - often asset-based fees are paid for rather sub-par services).