401K institutional funds vs. retail mutual funds

[FIRE_hopeful]

I work for a megacorp and am invested in their 401K program. The program has always offered several institutional funds. Recently, the 401K plan gives participants the ability to transfer funds through a moneylink conduit and invest in any of the mutual funds in the Fidelity investments portfolio.

While the 401K institutional funds seem to have good performance numbers and very low ERs, much of the details are shrouded. I like many of Fidelity's funds, and of course, the info on these funds is quite comprehensive. My question is this: Is there something about 401K institutional funds that cause them to be a significantly better deal as compared to retail funds like those of Fidelity's?

[bingybear]

When you say megacorp institutional funds, are you referring to an investment vehicle that they had someone set up for them? Or are you referring to institutional funds that would have data available on a service like morningstar?

Assuming the former, how have these tracked the indexes that they are designed to most closely follow? I've seen companies provide good investments and not so good in 401ks plans. Sometimes it is hard to tell.

[MRG]

I'm with bingybear, are there Fund names associated with these? I found very little information with Google, the closest was a link to that suggests megacorps 401k has Institutional funds from Dodge and Cox, American Century, JP Morgan, Vanguard and other providers. Not sure this is what your asking about?

[target2019]

I think I have similar situation to OP. Let's say there is a developed markets index and the expense ratio is under .1. You see this in the plan summary and probably online in your performance section. You just don't have symbol or ticker, so it difficult to confirm things with 100% certainty.

In my case, when I pull the performance report, it comes from M*.

I think it's a better deal so long as the performance equals a Spartan or Admiral fund index, and the e/r is lower.

Another advantage is that you probably have a stable value fund in the 401(k).

[FIRE_hopeful]

Lack of information disclosed is a challenge when it comes to these 401K funds.

The institutional funds have names like PRIME MONEY MKT, US LARGE CAP EQ INDX, US SM/MID CAP EQ IDX, INTL EQUITY INDEX, and CORE BOND FUND. There are around 30 of them to choose from, both index and actively managed. When you look at the details, the info seems a bit thin. I can see that some of them are made up of a mix of other funds that I recognize from Vanguard, Fidelity, and the like, at specific percentages. Others name the top 10 holdings, again, by percentage. The ones I've investigated don't have fund managers named. They have general performance stats, like ave annual returns over the last 1, 3, and 10 years, and ER. One of the funds I'm currently in has the following statement: "The US Large Cap Equity Index Fund is administered by The Bank of New York Mellon according to directions provided by Shoreline Investment Management Company".

I have heard that large corporations are able to put these 401K institutional funds together by negotiating significantly lower expenses than retail mutual funds. I haven't, however, heard of anyone concluding that, as a general rule, these 401K funds are inherently a great opportunity that should be taken advantage of while the opportunity exists, or alternative, if at the first chance to roll them over (or in my case, go through moneylink) to a retail mutual fund like those from Fidelity.

Another helpful data point would be this: When folks have left a corporation, have they rolled their 401K over someone like Fidelity, Schwab, etc., or left their 401K intact?

[arky]

Quote:

Originally Posted by FIRE_hopeful ...................... Another helpful data point would be this: When folks have left a corporation, have they rolled their 401K over someone like Fidelity, Schwab, etc., or left their 401K intact?

Left mine intact. The ERs were decent for the funds in which I participated and they also had a stable value fund.

[target2019]

The rollover thing has been discussed. There were at least two threads. I started one.

One of the popular themes is that you probably have access to a stable value fund.

I'm staying with my institutional funds a bit longer. Eventually I will transfer somewhere else.

If I use the brokerage features in 401, there are fees I don't wanna pay.

[photoguy]

Quote:

Originally Posted by FIRE_hopeful Is there something about 401K institutional funds that cause them to be a significantly better deal as compared to retail funds like those of Fidelity's?

The appeal of institutional funds are their lower expense ratios. For example, Vanguard's 500 fund varies from 0.17% to 0.02% depending on the amount invested (investor = 0.17, admiral = 0.05, inst = 0.04, inst plus = 0.02).

However, in my various 401k plans at megacorps, I've noticed that in addition to the fund's stated expense ratio, the plan will periodically take fees in the form of fractional shares out of my holdings.

I never bothered to compute the true expense ratio, but it's something else to consider.

[hnzw_rui]

Quote:

Originally Posted by photoguy The appeal of institutional funds are their lower expense ratios. For example, Vanguard's 500 fund varies from 0.17% to 0.02% depending on the amount invested (investor = 0.17, admiral = 0.05, inst = 0.04, inst plus = 0.02). However, in my various 401k plans at megacorps, I've noticed that in addition to the fund's stated expense ratio, the plan will periodically take fees in the form of fractional shares out of my holdings.

True but sometimes those can be pretty reasonable. Our deferred comp plan has a 0.10% administration fee capped at a maximum of $125 per year.

[MRG]

Fire_hopeful,
I did move 1 of my retirement accounts to a rollover IRA, the reason was it was mostly Megacorp equity, 60% of our net worth. I'd of loved to have done a NUA on it, I didn't retire for 5 more years so that wasn't an option.

The lack of transparency would make me consider moving to Fidelity if you're comfortable with the Fidelity funds.

[FIRE_hopeful]

These comments have been quite helpful. Much appreciated.


Sent from my iPad using Early Retirement Forum

[bingybear]

Fire_hopeful,
So some of your funds are able to be tracked as they are really funds of funds (made up of specified % of vanguard and/or fidelity funds).
You might want to check if the company covers the 401k expenses beyond fund expenses when you leave the company. In recent years 401k plans have to provide this information to participants. I have always rolled my 401ks to IRAs as appropriate. However, the 401k may have better protection from creditors.

so... more to think about

[bUU]

As others have said, without a ticker symbol, it is really hard to objectively compare. My instinct from what I've seen and heard is that these employer-branded funds are generally on par with the best institutional funds. At least that's what I'm counting on. My small company is about to be gobbled up by a company with 343,000 employees, 62,000 in the US. Their 401k is exclusive employer-branded funds. They seem okay, just from what I can see at this time, so I'll be sticking with them rather than seeking to use the brokerage option.

[DEC-1982]

Quote:

Originally Posted by FIRE_hopeful Lack of information disclosed is a challenge when it comes to these 401K funds. One of the funds I'm currently in has the following statement: "The US Large Cap Equity Index Fund is administered by The Bank of New York Mellon according to directions provided by Shoreline Investment Management Company".

This fund is a Russell 1000 index fund and is managed by BlackRock. The expense ratio is 0.04%. See attached fund fact sheet.

Generally 401 k expenses are lower than retail fund expenses.

I quote from the May 2015 issue of Kiplinger's

"Think carefully before rolling over a 401 k. If you can stay in your employer's plan, consider taking advantage of the economies of scale and lower cost that institutional accounts provide - unless investment options are poor or more limited than you would like."

[FIRE_hopeful]

Quote:

Originally Posted by bingybear However, the 401k may have better protection from creditors.

Significant benefit!

Quote:

Originally Posted by MRG The lack of transparency would make me consider moving to Fidelity if you're comfortable with the Fidelity funds.

Yes, this is the main issue I have with these institutional funds. I am a firm believer in "You get what you measure." If the fund manager identity is shrouded, seems like the motivation for him/her to perform well would be significantly reduced.

Quote:

Originally Posted by DEC-1982 I quote from the May 2015 issue of Kiplinger's "Think carefully before rolling over a 401 k. If you can stay in your employer's plan, consider taking advantage of the economies of scale and lower cost that institutional accounts provide - unless investment options are poor or more limited than you would like."

That is a pretty good endorsement for staying with the institutional funds!

[FIRE_hopeful]

While I hate to resurrect an old thread, I thought I would report on the actions I took and what I've learned on this topic.

I did finally take an early retirement package 1 year ago, in June of 2016. (More on that in a separate thread. Because the retirement incentive pushed me into a higher marginal tax bracket, I waited until Jan 2017 to roll over my 401K into Fidelity IRAs and executed concurrently a rule 55 distribution on the way out to fund 2017 living expenses. My observations/learnings:

Fidelity won my business for the following reasons:

• $2500 incentive when I moved to Fidelity
• Local office with an assigned Fidelity representative that I got to interview and select is very service oriented and knowledgeable -- love talking face-to-face once in a while, and executing documents on the spot.
• I found that Fidelity ETFs and mutual funds exist that have as low ERs as any, including my DW's Vanguard funds, and lower than my old 401K's institutional funds. (I did NOT find that the particular institutional funds I was offered during my working years enjoyed lower negotiated ERs.)
• I really like the Fidelity analysis tools and training videos. I'm currently working through the technical analysis training.
• My Fidelity representative gives me free trades, so that even beats the $2 trades that I use with my DW's Vanguard funds.

With regards to the added protections afforded to 401Ks over IRAs: In my state (Idaho), as long as funds rolled over to a new IRA account are NOT EVER CO-MINGLED with other funds, the ERISA protection of the 401K migrates to the IRA. I get the sense that said protection migration varies from state to state, although I did not study this limitation.

Thanks to all for helping me navigate the early retirement waters.