Personal Finance, Retirement 

Monitor Your 401(k) Fund Fees

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When I was contemplating rolling over my 401(k) from my former employer into a Vanguard IRA, one of the chief concerns I had involved the fund fees I was being charged at my old job. It took some digging but eventually I discovered that I was paying anywhere from 0.6% to 1.3% in expenses (which includes administrative fees) to the fund managers. The only time you would agree to pay higher expenses is if you thought the fund could outperform funds with lower feeds.

My aggregate performance the last year is 11.8% and that’s based on a mixture of 90% funds (which are themselves comprised of mostly stocks and some bonds) and 10% in my own misguided investment efforts (mostly in Fortune Brands, which has recovered nicely as of late). I’m paying three to seven times the fees by staying with my 401(k) compared to the following set of comparable Vanguard funds.

  • Vanguard Target Retirement 2050 (VFIFX) – 0.21% in fees for a 1 Year return of N/A. (It’s too new).
  • Vanguard Target Retirement 2035 (VTTHX) – 0.21% in fees for a 1 Year return of 9.70%
  • Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) – 0.19% – in fees for a 1 Year return of 10.25%
  • Vanguard 500 Index Fund Investor Shares (VFINX) – 0.18% in fees for a 1 Year return of 10.63%

As a frame of reference, the S&P Index performance over 1 Year is 10.79%.

So, in this particular case it’s been “worth it” for me to keep it in my 401(k), mostly since I had no choice, but now that I do I may opt to go the route of a Vanguard fund instead of sticking with my old 401(k). In the long run, funds that have higher fees have a tougher time because you always have to outperform comparable funds with lower fees by that margin in order to “stay in business,” so to speak. I’m going to roll my 401(k) funds over to a Vanguard account.

Why Do Fees Matter? It’s just a percent.
Let’s say you have two funds, Fund Caviar Dreams and Fund Boring Index, and each started with $1,000 and had identical performance numbers year after year of 11%. Now let’s say Fund Caviar Dreams, in order to support the expensive tastes of its fund manager, had fees of 1.5% of its assets where as frugal Fund Boring Index only had fees of 0.5%. After 30 years, Fund Caviar Dreams’ balance would be $4,192.98 less than Fund Boring Index. If you started with $10,000, now you’re talking a difference of $41,929.83 – or approximately half a semester of tuition in thirty years. That’s why fees matter.

{ 9 comments, please add your thoughts now! }

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9 Responses to “Monitor Your 401(k) Fund Fees”

  1. Jeremy says:

    It definitely pays to examine your options when it comes to deciding whether or not to roll over your old retirement plan into your new employer’s plan or into an IRA. Unfortunately due to the tremendous number of plans out there and the investment options available it does take a little time for people to research the available options.

    One thing to note is that many larger plans typically offer institutional variations of typical funds, which could mean lower expenses. Other smaller plans don’t, which could mean even higher expenses than buying the fund outright. For instance, our retirement plan offers about 20 different funds, all institutional, and many of the fees are in the 0.20%-0.40%, even after including all the underlying expenses. These same funds which are available to regular investors can have fees of 1.2-1.4%. Identical funds, but purchasing them via your 401k could provide a good savings.

    Another good thing to consider when deciding what to do with your old retirement plan money is that you typically don’t have to roll all of it over. So, say your new plan has one really good fund option you’d like to capitalize on, you could just elect to move a portion over and then move the remainder to an IRA.

    I did that with my latest rollover, because many of the funds were for the most part average, nothing I couldn’t find anywhere else, but one of the institutional mid-cap funds is just outstanding. One of the top rated by morningstar, low fees, and outstanding returns. I couldn’t find a similar fund in anywhere in the ETF or no-load universe. A few beat it slightly on expenses, but given the 1, 3, and 5 year returns on this fund was beating the other options by double digits, hard to turn that down. So, I just moved a portion of my old 401k into my new one simply for the mid-cap allocation, then rebalanced the rest of my portfolios to reflect the change.

    I apologize for rambling on, but the bottom line is, as the original post stated, it is important to check on your fees when you are ready to roll money. Every plan is very unique, all have different fund options, and you should look at your options to ensure you can save the most money as possible.

  2. jim says:

    I don’t advocate rolling over just half only because it becomes a pain to keep track and simplicity is key whenever you’re talking about finances.

  3. Jeremy says:

    But if you will be contributing money to your new 401k anyway, then there is no additional things to keep track of. It will be two separate accounts either way.

  4. samerwriter says:

    I agree with Jim — Dealing with a former employer’s 401k just makes things messy, and puts you at the mercy of their 401k administrator and their HR department. Both of which generally see you as a pain, since you’re not even an employee anymore.

    The IRA generally gives you a better choice of funds, lower costs, and easier access to your funds. And if something happens to you, it is likely _significantly_ easier for whomever deals with your estate to deal with an IRA at Vanguard than a 401k.

  5. CK says:

    IRA all the way. Flexibility.

  6. Jeremy says:

    I think people are misunderstanding the point I was trying to make. In almost every case it is a bad idea to keep money in an old plan where you are no longer employed. What the original post and what I was referring to was when moving that old money, deciding whether or not to roll it into your NEW plan where you will continue to be contributing anyway or an IRA.

  7. Weekly Roundup – 11/17/06

    Here’s a quick look at some finance-related posts that caught my eye this week:

    Flexo has a funny list of seven ways to save while maintaining your extravagant lifestyle.
    FMF has some thoughts on juggling multiple job offers.
    Jim reminds us to …

  8. lionder says:

    Most recent annual survey from the Profit Sharing 401k Council of America (PSCA) reflects growing participation in automated 401k deferrals. It shows that last year along six million participants were added in around 51 profit sharing plan. Also, the average deferrals were 5.4% for average compensated participants.
    Appears at 401K Tips

  9. crazypumpkin says:

    I’m getting ready to rollover my old retirement plan (state pension system) to a traditional IRA (my only option). I found this really helpful, but I’m still confused and trying to find answers. I’m in my mid 20’s. I want to start this now. How do I pick a place to roll my retirement savings over to?!

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