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Sticker Shock - Expense Ratios
Old 07-17-2017, 01:31 PM   #1
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Sticker Shock - Expense Ratios

Hello All -

My son recently started new job and finally getting good benefits, including a 401k. We will help him max out contributions to a Roth 401k plan.

We are helping him decide where to best invest. There are a variety of choices.

As an old TSP'er, I'm thinking retirement age type index account, 2050 or so, similar to the L Funds. T.Rowe Price offers a 2050 Target Date fund; the expense ratio would be about 1.26%. Now I'm use to the TSP really low expense ratio. Ouch!!

Two questions:
1) is this about an average expense ratio (know TSP is unusually low)?
2) is there an alternative to going with the company's 401k investment choices to move money into a Roth 401K (i.e., we have always used Vanguard for our IRAs).

Thanks

Kannon
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Old 07-17-2017, 01:58 PM   #2
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... 2) is there an alternative ... ? ...
If the investment options are all ripoffs like the one you cite, contribute to the company plan only to the extent of the company match limit. Do everything else on your own. If there's no match, then don't use the company plan at all.
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Old 07-17-2017, 01:58 PM   #3
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Two questions:
1) is this about an average expense ratio (know TSP is unusually low)?
Expense ratio depends on a lot of things. Target date funds are often set up as a fund of funds which makes the over all expenses high. This is really obvious when they show total fees and not just the target fund itself.
Have you looked at what else is available in the 401k. Maybe a good index fund. From my experience these can even be costly too. It is a way to cover the expenses of having a 401k if the employer can't or won't pay the custodian fees outright.

Quote:
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2) is there an alternative to going with the company's 401k investment choices to move money into a Roth 401K (i.e., we have always used Vanguard for our IRAs).
Look at the plan documents. Most likely not except for certain hardship cased can money be removed. Some 401ks allow for a fee to trade investment thru a brokerages facility. This usually costs, but overall may be less expensive then high fee MF.

First thing is to read the plan. I was in a high cost 401k with no match. After a few years I left the company and rolled it over to IRAS.
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Old 07-17-2017, 02:28 PM   #4
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Is this the fund? TRRMX

http://www.morningstar.com/funds/XNAS/TRRMX/quote.html

Morningstar has it's ER at .76.

There's also a ranking of it to other's in it's peer group.
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Old 07-17-2017, 02:39 PM   #5
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+1 on checking all options and looking for an index fund. My last employer had a lot of choices with Fidelity, all but one with silly expense ratios (1% or more). However, they did offer the Fidelity S&P 500 index fund (FUSVX) at something like .07%
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Old 07-17-2017, 02:50 PM   #6
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Your son is lucky to have you to help with this. Just think how many new hires accept lousy choices because they don't know how to evaluate their options.
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Old 07-17-2017, 02:56 PM   #7
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Target date funds aren't worth the added expense for young people. I've advised my kids to go 100% equities with an index fund. We all know fees are an horrific drain and avoiding them is what it's all about. The target date fund for a young person will drop as fast and as hard as the index fund, so there's no benefit there.

http://www.consumerreports.org/cro/m...ings/index.htm
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Old 07-17-2017, 02:59 PM   #8
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Paperwork says T Rowe Price Retirement 2055 Fund - Class R/Target Date. Did google search and think its symbol is RRTVX

Net Expense Ratio 1.26%. Read prospectus, adds a 0.5% 12b-1 fee.
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Old 07-17-2017, 03:18 PM   #9
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Excellent idea about the target date accounts.
They have a few State Street funds (intermediate bond, large blend, and mid cap) with expense rations around 0.7% that we could make our own target date account and just rebalance yearly or so.
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Old 07-17-2017, 03:19 PM   #10
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That's about what my 401k target date fund expenses were.
If you want bad I looked at DGFs 401k. Everything but the straight government bond and a Large Cap fund were over 1% and most had a sales fee.
She was in one fund that had over 2% fees and paid a 5% sales fee up front!
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Old 07-17-2017, 04:42 PM   #11
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Excellent idea about the target date accounts.
They have a few State Street funds (intermediate bond, large blend, and mid cap) with expense rations around 0.7% that we could make our own target date account and just rebalance yearly or so.
That's still a rip. You need to get out of there. @sengsational's link to consumer reports is excellent. I was pleased to see that their first option: "Take the Money and Run" is exactly what I recommended in post #2.

I also agree with @sengsational on 100% equities. We were almost 100% equities until we ER'd. And that's the reason we could do it. Just make sure that your son will gut it out when the market scares him, as it probably will several times.
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Old 07-17-2017, 04:44 PM   #12
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If the investment options are all ripoffs like the one you cite, contribute to the company plan only to the extent of the company match limit. Do everything else on your own. If there's no match, then don't use the company plan at all.
+1, but hopefully have some lower cost index funds that he can use.... for someone his age a low-cost equity index fund would be sufficient... no need for bonds at his young age.
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Old 07-17-2017, 05:13 PM   #13
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To echo what others are saying. Almost all 401K of medium to large firms offer an S&P 500 index fund with low expense. Having him put 100% into that for the first 3-5 years.

Diversification is important but not until he has a decent size nest egg 50-100K AND is over 30.

Odds are in another 10 years he'll be at another company you can roll over the funds into an IRA, and use the IRA to make up for whatever deficiencies are in the 2nd companies 401K
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Old 07-17-2017, 05:19 PM   #14
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Quote:
Originally Posted by OldShooter View Post
If the investment options are all ripoffs like the one you cite, contribute to the company plan only to the extent of the company match limit. Do everything else on your own. If there's no match, then don't use the company plan at all.
+2

Only reason to use a company plan is for the match (if any) and higher contribution limit (if needed), at least until higher income starts to limit individual plans.

Thankfully, we are now out of all employer plans. I always hated the fees, high ERs, and limited (generally poor) investment choices. Prior to retirement, in DW's 457b, the lesser of all evils was an S&P 500 index fund at 0.21% that we owned for decades. I always thought that was a ripoff since there were so many options in the 0.05% range. But after reading some posts here, maybe it wasn't so bad.
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Old 07-17-2017, 05:34 PM   #15
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Be glad the child is not a teacher. I remember my 403b fund choices - high fees and a sales charge of around 3% even though we filled out the paperwork ourselves and never saw a representative of the fund firm. Thankfully, the state decided to let teachers join in a much lower cost Deffered Income plan that had fees more like Vanguard. But, may people still stayed in those awful funds - below market performance, sales charge and high fees. You got to wonder how our supposedly Omnipotent Teachers Union let that go on and on and on.....
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Old 07-17-2017, 05:47 PM   #16
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... Almost all 401K of medium to large firms offer an S&P 500 index fund with low expense. Having him put 100% into that for the first 3-5 years. ...
If that's all there is, yes. But pricing on the S&P has gotten distorted as people confuse that with what the academics (Sharpe, Fama, French, et al) recommend -- investing in the total market. The distortion is to the point where traders routinely try to front-run additions and deletions to the 500.

So I would prefer to see the OP's son in a total world (ACWI All Cap) or at least a total US market fund. The large cap behemoth that is the S&P will still be a big part of the funds' holdings but it will not be 100%.
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Old 07-17-2017, 07:37 PM   #17
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If that's all there is, yes. But pricing on the S&P has gotten distorted as people confuse that with what the academics (Sharpe, Fama, French, et al) recommend -- investing in the total market. The distortion is to the point where traders routinely try to front-run additions and deletions to the 500.

So I would prefer to see the OP's son in a total world (ACWI All Cap) or at least a total US market fund. The large cap behemoth that is the S&P will still be a big part of the funds' holdings but it will not be 100%.
Unless I am missing something the only way to save significant AMT of money in Roth acct is thru a 401k. He's maxed out in his Roth IRA. I know the fees are high but better to save tax deferred than not. Right??
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Old 07-17-2017, 09:45 PM   #18
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Unless I am missing something the only way to save significant AMT of money in Roth acct is thru a 401k. He's maxed out in his Roth IRA. I know the fees are high but better to save tax deferred than not. Right??
+1

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Old 07-17-2017, 10:40 PM   #19
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Unless I am missing something the only way to save significant AMT of money in Roth acct is thru a 401k. He's maxed out in his Roth IRA. I know the fees are high but better to save tax deferred than not. Right??
IMO nothing wrong with a taxable bucket. At end of life it's Cap Gains instead of Ordinary Income. It also allows a little more flexibility when withdrawal time comes. No RMD
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Old 07-18-2017, 03:16 AM   #20
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You may want to look into if the plan offers a self directed brokerage account option. A previous 403b added .4% onto any vanguard fees. I opened the SDBA with Ameritrade. While there was a annual fee and transaction costs to buy mutual funds, it made sense when the balances got higher. I would just sweep funds over from the 403b once a year or so as balances grew. You really have to read the fine print. The extra .4% on vanguard funds was buried in there.

I agree with others that taxable is good too, if one can be disciplined. A mixture of taxable and deferred has set us up with nice options as we approach ER.
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