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I am an employee at a small business in Maryland. We have a 401K plan with a 3% company match. However, we only have about 15-18 investment options through American funds and all the expense ratios are 1.35-1.90. How can I find lower expense ratio options?

Aug 15, 2013 by Adam from Germantown, MD in  |  Flag
9 Answers  |  10 Followers
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4 votes
A.J. Blackstone Level 14

Adam-

A lot of the fees you are paying come from the 12b-1 fee which go to the broker of record on your plan as a commission. And yes, you are paying way too much in fees for what you are receiving.

Take a look at yahoo.finance.com, and type in the ticker symbol RGABX. This is The Growth Fund of America, one of American Funds largest funds. Go to the chart and click on the 5 year option. Then click compare, and type in the ticker SPY. This is the S&P 500 Spyder which tracks the S&P 500. It is shocking how closely they track each other. One being a "managed fund" and the other being a large index. What is worse is that the fee on the R2 Class shares of RGABX is 1.41%, while the fee for the SPY is 0.09%.

You need to find a Registered Investment Advisor (RIA) with open 401(k) platform. A open platform will allow you to invest in any security available in a brokerage account. You would be able to invest in thousands of mutual funds, thousands of ETF's, and even individual stocks and bonds. Furthermore, you will be able to negotiate the fee the RIA charges for managing the 401(k).

If anybody tells you that lowering expenses is not possible, or that you are limited to mutual funds, they are either lying to you or do not understand the 401(k) industry. You need to drop the commissioned broker with the locked in fees and limited investment choices, and hire an RIA who can negotiate fee and open up your investment options.

If you have anymore questions or would like more help please check my brightscope page and contact me.

View all 7 Comments   |  Flag   |  Aug 15, 2013 from Tampa, FL
A.J. Blackstone

Adam- To add on to the discussion earlier. If you do not make the plan sponsor decision it is still important to bring it up to those who do. It is not a individual problem, but company wide, and everybody would benefit from a fee reduction.

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Flag |  Aug 15, 2013 near Tampa, FL
Adam

Yes A.J I understand that and that is why HR will listen and try to do this. Everyone in the company will benefit even the head of HR and owner who participate in the 401K plan. It is a shame it took mye 5 years to even take a look at the expense ratios I was paying - Thanks for the advice

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Flag |  Aug 15, 2013 near Germantown, MD

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3 votes

Adam, it is a difficult situation when a small business owner wants to provide an employee benefit of a retirement plan. Every 401(k) has to undergo non-discrimination testing, that is, testing to be certain that highly compensated employees and owners are not being treated more favorably than the rank and file. Because of this, every plan has to have a third party administrator, which adds a billable expense to your employer that you don't even know about. Additionally there are costs of recordkeeping. The fact is, on plans without a more substantial amount of 'assets under management', and with relatively few participants, it is more difficult to share this expense. Additionally, your employer has taken on a fiduciary responsibility to, among other things, provide proper investment choices at a reasonable cost.

So, you know the glass half empty version; you have limited investment choices and expenses are high.

Here's the glass half full version: Your employer has taken on the burden of starting a retirement plan for its few employees. I'd guess that most companies in your industry of similar size do not offer one. You are saving for retirement on a pre-tax basis, and you're getting a 3% match. Though your investment choices are limited, they cover all asset classes. I will argue that and there are studies that indicate, on average, 85-90% of returns come from proper asset allocation, and not from the specific asset choice. Your expense ratios are high by some comparisons, but maybe not so much if you compare to a front loaded 'A' share, or a 'C' share- remember this is the glass half full paragraph.

Despite what you think of the fund expenses, your employer is likely being very benevolent. They may find a 401(k) plan that is more competitive, but, depending on the actual size of plan, I don't know there would be a substantial difference; $!M in assets and 20k average account balance seems to be the magic numbers.

This is an employer function, so they may not be interested in what you, or for that matter I, have to say, but there are 3 possible things they can do. First, they can try to negotiate with the broker for a lower share class, or find another broker that will accept lesser compensation in a lower share class. It is easy to change a broker of record. Second, they can shop for another plan; it's really no cost, no obligation. Third there is something called a SIMPLE IRA. There are no admin fees, but logistically, a SIMPLE is a lot more paperwork. It typically uses loaded funds, which might hurt you even more than the expense ratios you are currently paying. It can, however, be set up without loaded funds. As a small plan, I just don't know if your employer will be able to find a local advisor that is willing and able to set it up properly

I hope this helps

1 Comment   |  Flag   |  Aug 15, 2013 from Delray Beach, FL
Adam

Thanks for the input Michael

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Flag |  Aug 15, 2013 near Germantown, MD

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3 votes
Ken Krausman Level 9

1. Let your current advisor know that your unhappy with the current fee arrangement and see if he can reduce those fees. He will likely have to reduce his compensation to do so and may not be willing. If you are still not satisfied, contact another qualified retirement plan consultant and get their professional opinion. You can find an advisor here on Brightscope if you don't already have one in mind. Best of luck to you!

Comment   |  Flag   |  Aug 15, 2013 from Bloomfield Hills, MI

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3 votes

Adam unfortunately you don't really have much of an option. Bring this to the attention of HR and see if they can negotiate lower expense fees with American Funds. If you are uncertain about which funds to pick email me the options and based on age, time horizon and risk tolerance i will look advise you.

View all 4 Comments   |  Flag   |  Aug 15, 2013 from Portsmouth, VA
Michael Steven Greenberg, CFP®

Adam, even though expenses are high, you do get the benefit of tax deferral, or in a Roth, tax free growth. There is value to that. Depending on income, you may be able to contribute to an individual IRA. Also, I don't know how disciplined you are; it could be advantageous to have the structure of payroll deduction, as opposed to intending to, but not actually contributing to another account

2 likes | 
Flag |  Aug 16, 2013 near Delray Beach, FL
Michael Steven Greenberg, CFP®

To add to that, it is also wise to save in a non-qualified account. You may have a different risk tolerance, and I would hope you have some goals before retirement.

Flag |  Aug 16, 2013 near Delray Beach, FL

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3 votes
James Holland Level 18

Adam You have LOTS of options and you need to bring this to the attention of HR & your Employer, they are personal liable for the plan and if they are not going to take the responsibility serious they should shut down the plan give everyone their money back and let you open IRAs. the generous match is being WASTED on fees. You should immediately move to an Open Arch. platform, pay flat dollar fees for Administration. there should be NO Rev.Share in any of the funds use an ALL institutional line up. If the Broker/Advisor is NOT going to sign on as a Fiduciary in writing, then they should be limited to flat dollar payments as well for offering general education, if they are not doing any education then they should be removed. Contrary to popular opinion , moving to Open Arch is less expensive for EVERYONE ( employer & participants) it reduces liability and enhances the plan for participants. If the right Partners are chosen it can also reduce the labor for HR. There are choices you just need an employer who is not apathetic and is willing to understand how a truly ERISA compliant plan can and needs to be run.

View all 5 Comments   |  Flag   |  Aug 16, 2013 from Charlotte, NC
Andrew David Baillie

James nicely written and totally agree.

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Flag |  Aug 16, 2013 near Portsmouth, VA
James Holland

Andrew Thank you

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Flag |  Aug 16, 2013 near Charlotte, NC

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3 votes
Dushyant Pandit Level 17

I think there are two things you can do:

1) See if your plan is listed on Brightscope and evaluate its competitiveness. I suspect it will look poor based on your comments. In any case, looking at comparable plans will give you some data as to how competitive your 401k plan is.

2) Take this printout to your HR and Management and remind them that the costs may be high and that lower cost options might be available.

Comment   |  Flag   |  Aug 16, 2013 from Summit, NJ

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2 votes
Alex Bentley Level 18

I'm not an expert in 401Ks, but I believe you are limited to the options selected by the plan. Is there a brokerage account option that would allow you to buy ETFs? If so you can construct a fully diversified and very low cost portfolio with VT, BND and BNDX. If not, do the best you can with the higher expense funds and lobby the people responsible for you plan to add low cost index funds as an option.

Comment   |  Flag   |  Aug 15, 2013 from Pacific Palisades, CA

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2 votes

Hi Adam,

It is unlikely that you can find lower expense options within the 401(k). Keep in mind that the company match more than doubles the average expense ratio for the American funds, so you are receiving a greater benefit despite the expenses associated with the fund.

Also, remember that lower is not always better.

One thing I would suggest is talking to the decision-maker(I'm guessing the owner) at the firm, and asking to have an advisor come in and present some options for a different plan.

Kind regards,

Mike

View all 7 Comments   |  Flag   |  Aug 15, 2013 from Apex, NC
Adam

Michael, if you have someone in the DC area - I would be happy to send his contact info to HR

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Flag |  Aug 16, 2013 near Germantown, MD
Michael Kothakota, CFP®, AFC®, CDFA™

Here is Keith's info. He divides his time between DC and NC - he is from Baltimore actually. http://newparadigmadvisory.com/

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Flag |  Aug 16, 2013 near Apex, NC

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2 votes

Adam, This is a common compliant that I hear from people invested in smaller 401(k) plans. I would recommend that you speak with your HR contact or the plan administrator and discuss your concern over fees. This is really the only option that you have and has been stated by others above.

1 Comment   |  Flag   |  Aug 15, 2013 from Leawood, KS
Adam

Thank you for your comment. Everyone has given me some good feedback and advice and I have passed it all along to HR. I am trying to do what I can for myself and the rest of our staff

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Flag |  Aug 15, 2013 near Germantown, MD

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