Saturday, April 07, 2007

401K Expenses

Earlier this evening I read this excellent article on All Financial Matters. The post deals with the impact of 401K expenses on plan returns. It also cites this article from the WSJ that covers different aspects of the same story.

This post struck a cord with me for a number of reasons. First, as a member of my company's 401K management committee, I can testify first hand to the fact that 401K plan fees are not transparent. They are not even transparent to the people who manage the plans and that have full access to all the information. Plan providers have all sorts of obscure fees, which are hidden in a variety of places and written in extra fine print. It is only now that I am truly starting to understand what it is costing our employees (myself included) to participate in this plan.

Second, outside of our 401K's all of our assets are invested in low cost index funds. When I joined my company's 401K management committee, I immediately started advocating for us to move to a lower cost provider. We interviewed several plan providers, including Fidelity, ADP, Vanguard and our existing provider ING. However, with the exception of Vanguard, whose representative left some doubt in my mind as to the level of service that they can provide, it appears practically impossible to get a well balanced porfolio of low cost funds that we can offer our team. It seems that the best we can do at this point is get an average expense ratio of approximately 1.2%. We have $8 million dollars to invest and we are being charged 1.2%? How is that possible? My own comparatively tiny personal investments bear expense ratios of about 0.5% on average.

Yes, I recognize that running a 401K plan is more complex, and I recognize that providers of 401K plans are subject to much more stringent regulations. I also realize that there are costs associated with running a plan of this type that a private investor does not incurr. But seriously, $8 million for 1.2% per year? Something is clearly wrong with the system.

I will keep you posted as I try to help my company navigate through this mess and find a better retirement savings option for my colleagues (and for myself). In the mean time, if anyone can offer any advice, I would much appreciate it.

1 comment:

TFB said...

I posted the 401k plan providers I found for my former employer and the lineup I chose on the Bogleheads forum:

The plan had less than $1 million at the time and our all-in cost, including expense ratio and admin fees, was about 0.5%.

Hope that helps.