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Old 05-17-2013, 09:38 AM   #1
yousharenow
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Fee's charged to your 401k

I heard a great story on NPR yesterday concerning 401k management fees.

Basically this economist calculated that over 20-30 years of having the 401k funded, your account will lose ~30% of its end value in feels over the life of the account.

So what are the options? Most employers fund a 401k, but for people with big-names like Prudential or Fidelity what can we do?

He went on to mention something about index funds and how the fees on those accounts are way lower, but again I'm kind of locked into a 401k with my employer.

Thoughts?
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Old 05-17-2013, 09:42 AM   #2
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I would love to see actual evidence of 30% loss.
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Old 05-17-2013, 09:42 AM   #3
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how does he figure? I just did a 401k withdrawal for an employee and it was $50. She'll probably take a few withdrawals. I could see if they do it every week but every few months isn't terrible.

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Old 05-17-2013, 09:44 AM   #4
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I would love to see actual evidence of 30% loss.
there's no way in hell. Unless some how he's talking about 20% taxes lol
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Old 05-17-2013, 09:46 AM   #5
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Re: Fee's charged to your 401k

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how does he figure? I just did a 401k withdrawal and it was $50. She'll probably take a few withdrawals. I could see if they do it every week but every few months isn't terrible.
You're taking early withdrawals from your 401k?!

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Old 05-17-2013, 09:48 AM   #6
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30% of your contributions are not going towards fees.
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Old 05-17-2013, 09:56 AM   #7
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That's not what I am saying.

Lets say you have a 1% fee schedule annually.

Year 1 you have 10k in there. You pay $100
Year 2 you have 20k. You pay $200.

The idea is that you are paying fees on the money over and over again and again.

http://www.npr.org/2012/06/21/154952...than-you-think


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Imagine you were 35 years away from retirement with a $25,000 401(k) balance and an average annual return of 7 percent. If fees were 0.5 percent, your investment will be worth $227,000 after 35 years. However, if fees were 1.5 percent, your balance will be worth $163,000. A 1-percentage-point fee difference reduces your savings by 28 percent.

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Old 05-17-2013, 10:01 AM   #8
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Most 401ks total less than 2% net fees. You "could" invest the money yourself in an index fund, lose out on the employer match, and pay transaction costs each time you buy additional shares of index funds. Of course, if you took what you put in your 401k each week (or whatever frequency) and looked at what the cost would be to you to buy at that frequency through a brokerage you'd likely be paying just as much in brokerage fees (or losing out on returns by not buying additional shares of the fund each time you would be contributing to your 401k. Take a "Scottrade" buy fee of $7 and someone contributing each week up until the max allowable limit currently in their 401k. So each week this person would be putting in ~$336.54, but instead puts the same amount into funds in a Scottrade account, minus the $7 commission. Well, $7 is more than 2% of that amount so they're still losing that much anyway (or losing out on returns).

A 2% or less fee isn't really a bad cost to have someone else manage your investments (for the most part) for you. Not to mention, it does let you get that employer match and provides a tax break at the same time.

$336 invested each week at 8% return for 35 years would give a future value of $3,127,288.03
$336 invested each week at 6% return for 35 years would give a future value of $2,003,707.86 (that's 2% gone each year in fees) so a 2% average fee will "reduce your growth" by about 1/3rd.
$336 invested each week at 7% return for 35 years would give a future value of $2,497,230.86 (that's 1% gone each year in fees) so a 1% average fee will "reduce your growth" by about 1/5th.

Large plan 401k fees average around 1% annually and smaller plans average closer to 1.5% annually. Seems like a fairly small price to pay for all you get out of it in my opinion. You aren't "losing" 30% of it's value, you're not gaining as much as you would if you could invest for free. I don't know many companies that don't charge their customers anything at all though so don't hold your breath waiting for the free investment management company to open up.

Last edited by Wraisil; 05-17-2013 at 10:03 AM.
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Old 05-17-2013, 10:02 AM   #9
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You're taking early withdrawals from your 401k?!

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sorry messed up my post. For an employee. Not myself. She's 61 years old.
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Old 05-17-2013, 10:13 AM   #10
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I just looked at my 2012 401k transaction record and when you combine my fund's expense ratios and the broker's record keeping fees, I pay an average of .3% per year in fees and expenses on the value of my portfolio. It's not the lowest it could be (~.07% on a tax-advantaged brokerage account), but it's more than acceptable.

I think that 30% figure is overinflated. That could happen if all of your money was put in actively managed funds with outrageously high expense ratios, but if you keep it in passive index-tracking funds, then you'd never leave that much money on the table.
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Old 05-17-2013, 10:42 AM   #11
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NPR fail...big surprise.
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Old 05-17-2013, 10:56 AM   #12
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Re: Fee's charged to your 401k

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sorry messed up my post. For an employee. Not myself. She's 61 years old.
Lol oh ok. I was going to ask if you were crazy. Carry on sir.

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Old 05-17-2013, 10:59 AM   #13
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Lol oh ok. I was going to ask if you were crazy. Carry on sir.

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I was like opps lol.
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Old 05-17-2013, 11:02 AM   #14
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I just looked at my 2012 401k transaction record and when you combine my fund's expense ratios and the broker's record keeping fees, I pay an average of .3% per year in fees and expenses on the value of my portfolio. It's not the lowest it could be (~.07% on a tax-advantaged brokerage account), but it's more than acceptable.

I think that 30% figure is overinflated. That could happen if all of your money was put in actively managed funds with outrageously high expense ratios, but if you keep it in passive index-tracking funds, then you'd never leave that much money on the table.
This. You pay two types of fees in a 401k (someone correct me if I'm wrong, I'm not exactly a benefits coordinator):

- Fees to the administrator. Ie. Fidelity, Vanguard, etc. This will vary according to who you work for, and what kind of deal they have with the administrator (ie. many companies just pay the fees themselves).

- Fund expenses. This varies heavily according to what you invest in. Ranges from less than a tenth of a percent for a great deal on an index fund, to a couple of percent on a managed fund.

You have little control over the former. Your only real option is not to participate, or work somewhere with a better 401k.

Depending on your investment options, you may have a lot of control over the latter. Don't choose investments with high fund expenses. For some people, it's worth it to pay the extra fund expenses to invest in a target-date fund and have someone else handle the rebalancing. For someone young, like most of us, you're probably better off being 100% in equities anyway, so don't bother with that, just choose a couple of index funds.

I think I mentioned this in the other thread, but my primary holdings are:

- Yacktman (managed fund)
- Oppenheimer Developing Markets (managed fund)
- a REIT Index fund
- a foreign market index fund
- a large cap growth index fund
- a small cap growth index fund
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Old 05-17-2013, 12:08 PM   #15
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NPR fail...big surprise.
Cripes. I like NPR, but when they do crap like this, it only enforces why people hate uber libs.

Not that uber conserves aren't douches too, but I have to listen to a different radio station to hear them talk ****.
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Old 05-17-2013, 01:38 PM   #16
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Quote:
Originally Posted by Wraisil View Post
Most 401ks total less than 2% net fees. You "could" invest the money yourself in an index fund, lose out on the employer match, and pay transaction costs each time you buy additional shares of index funds. Of course, if you took what you put in your 401k each week (or whatever frequency) and looked at what the cost would be to you to buy at that frequency through a brokerage you'd likely be paying just as much in brokerage fees (or losing out on returns by not buying additional shares of the fund each time you would be contributing to your 401k. Take a "Scottrade" buy fee of $7 and someone contributing each week up until the max allowable limit currently in their 401k. So each week this person would be putting in ~$336.54, but instead puts the same amount into funds in a Scottrade account, minus the $7 commission. Well, $7 is more than 2% of that amount so they're still losing that much anyway (or losing out on returns).

A 2% or less fee isn't really a bad cost to have someone else manage your investments (for the most part) for you. Not to mention, it does let you get that employer match and provides a tax break at the same time.

$336 invested each week at 8% return for 35 years would give a future value of $3,127,288.03
$336 invested each week at 6% return for 35 years would give a future value of $2,003,707.86 (that's 2% gone each year in fees) so a 2% average fee will "reduce your growth" by about 1/3rd.
$336 invested each week at 7% return for 35 years would give a future value of $2,497,230.86 (that's 1% gone each year in fees) so a 1% average fee will "reduce your growth" by about 1/5th.

Large plan 401k fees average around 1% annually and smaller plans average closer to 1.5% annually. Seems like a fairly small price to pay for all you get out of it in my opinion. You aren't "losing" 30% of it's value, you're not gaining as much as you would if you could invest for free. I don't know many companies that don't charge their customers anything at all though so don't hold your breath waiting for the free investment management company to open up.

Super informative - great reply!

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NPR fail...big surprise.
Not sure I understand this. Wraisil just agreed with it and explained it.
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Old 05-17-2013, 02:08 PM   #17
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It was pretty eye-opening documentary. Watch it before you dog it. It has some pretty compelling facts about 401K fees. Higher fee funds will kill you over time- the power of compounded fees.

The PHD economist who put together the study got a lot of press at the time. They talk to some top industry experts, including John Bogle, the founder of Vangaurd.

Cliff notes: Managed funds are not worth the fees. Over time, there is not evidence that they offer any measurable performance advantage over low-fee index funds.
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Old 05-17-2013, 02:17 PM   #18
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It was pretty eye-opening documentary. Watch it before you dog it. It has some pretty compelling facts about 401K fees. Higher fee funds will kill you over time- the power of compounded fees.

The PHD economist who put together the study got a lot of press at the time. They talk to some top industry experts, including John Bogle, the founder of Vangaurd.

Cliff notes: Managed funds are not worth the fees. Over time, there is not evidence that they offer any measurable performance advantage over low-fee index funds.
Addendum to cliff notes:
Managed funds are generally not worth the fees in comparison to low-fee index funds *IF* all other things are equal.

Not many tax advantaged accounts which offer employer matching, however, offer low-fee index funds as an option available to establish a properly diversified portfolio.

When tax advantages and employer matching are added into the equation, the higher fee funds generally provide a total individual contributions-to-retirement funds ratio more favorable than using non-tax advantaged accounts without employer matching invested in low-fee index funds. A recent study showed that less than 40% of all 401k programs offer a sufficient number of index funds to establish a properly diversified portfolio by the way.

Last edited by Wraisil; 05-17-2013 at 02:21 PM.
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Old 05-17-2013, 02:59 PM   #19
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Addendum to cliff notes:
Managed funds are generally not worth the fees in comparison to low-fee index funds *IF* all other things are equal.

Not many tax advantaged accounts which offer employer matching, however, offer low-fee index funds as an option available to establish a properly diversified portfolio.

When tax advantages and employer matching are added into the equation, the higher fee funds generally provide a total individual contributions-to-retirement funds ratio more favorable than using non-tax advantaged accounts without employer matching invested in low-fee index funds. A recent study showed that less than 40% of all 401k programs offer a sufficient number of index funds to establish a properly diversified portfolio by the way.
Agreed. The documentary argues that the lack of low-fee funds available in 401Ks is a function of a currupt industry where higher-fee, managed funds essentially are giving kickbacks to brokers to push those funds. Which are then paid for by fees to the investors.

Last edited by oie77; 05-17-2013 at 03:03 PM.
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Old 05-17-2013, 03:07 PM   #20
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Super informative - great reply!

Not sure I understand this. Wraisil just agreed with it and explained it.
Anybody who has their 401k eaten up by a fee structure of > 1% are morons. Even if you believe that actively managed funds are more efficient than passive funds, the funds the brokerage stick you in are too large. That just presents another obstacle for the fund manager to try and beat the market less fees and expenses.

For a 401k, just getting the match from your employer is good enough. Stick it in a low expense ratio fund and watch it grow.
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