Wednesday, May 10, 2017

Is This The Latest Trend In 401(k)s?

I received an email from my employer's HR department a while ago that notified me of some coming changes to our 401(k) offerings. They are removing some of the higher cost funds and replacing them with similar lower cost funds. This is a great news because most people don't even realize how much funds are charging them.

The flip side of this is that now participants of the plan will be assessed a quarterly fee to make up for some of the losses. As the memo from my company put it:

Effective June 1, 2017, we have chosen to adopt a lowest cost investment approach within our retirement plan; see the attached notice.  With these changes, the Plan will now receive less fee revenue from certain investments that have been used to offset administrative costs associated with the Plan. As a result, you will see a change in the way investment and administrative fees are managed. You will also have greater visibility to the administrative fees since they are no longer embedded in the higher share class investments – creating more transparency and reducing overall expenses.

The Plan will shift the administrative expenses previously covered by higher cost share funds to a per-participant fee each quarter. This fee, which is currently estimated at $7.50 per quarter, will begin in January 2018 and may vary in future years after annual costs associated with the Plan are determined.

Initially, I was a bit peeved. This seems like they are just passing the costs on to me and the other participants. But really, they are not - we were already paying these fees but they were just hidden in the expense ratios of the funds. (See my previous posts about selecting funds with low expense ratios in your 401(k).)

Overall, this is a big win for investors. My plan replaced 9 funds with lower cost alternatives. Here are the changes:

Old fund Old Expense Ratio New fund New Expense Ratio
PGFIX 0.85% AFGFX 0.61%
REREX 0.85% RERGX 0.50%
DISSX 0.50% VSCIX 0.07%
JDVVX 0.77% JDVWX 0.70%
LLDYX 0.40% LDLVX 0.33%
HIEMX 1.33% VREMX 1.20%
BPRIX 0.35% BPLBX 0.30%
DEVIX 0.99% DVZRX 0.77%
PNCYX 0.62% JHBSX 0.45%

With the exception of the one change to a Vanguard fund (VSCIX), most changes resulted in about a 0.2% reduction in expenses. Some were almost not worth the change, in my opinion (i.e., just a 0.07% reduction from JDVVX to JDVWX), but I still have to appreciate the sentiment.

The new fee participants are being charged is $7.50 per quarter, or $30 per year. So if you have invested more than $15,000 and changed to some of these new plans, you'll likely come out ahead (because 0.20% of $15,000 is $30.) Depending on which funds you are in, you may come out ahead with even less invested. For example, if you switched from DISSC to VSIC, you'd start coming out ahead at just $6,976 invested due to the 0.43% reduction in fees.

But Wait, That's Not All!

The other positive thing about his change is that a percentage fee is being replaced (at least in part) by a flat fee. This means that your fee is still $30 a year, no matter if you have $10,000 or $75,000 invested. With the old fee structure, higher balances would pay more.

Let's Hope This Is A Trend

I am hoping that people are becoming more aware of the hidden and not-so-hidden costs of mutual funds. I'd love to see more companies make changes like this. I'm worried that my perspective my be a little skewed though. I work in the financial services industry, so my fellow employees could be more educated about these issues, which might force HR to be more aggressive at lowering 401(k) expenses than HR departments at companies in other industries.

Has your company done something similar?


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