Help me improve the portfolio of my small company's 401(k)

November 26, 2014 2:08 PM

I'd like for my company to offer smarter options like Vanguard Funds, but Vanguard doesn't seem to be one of the easy options.

I'm a participant in the 401(k) program, and the bosses are taking input from employees about what funds should be included in the portfolio. I've taken a keen interest in this, and after studying up on the internet, I am well sold on the concepts of index funds, low expense ratios, and retirement target date funds. The company employs Morgan Stanley for investment services, so I called them to ask if we could add Vanguard mutual funds to the portfolio. They said they couldn't, since the program relies on 12b-1 fees that Vanguard doesn't do.

I'm seeing a couple options here:

1) Find some mutual funds that do have 12b-1 fees, but otherwise have relatively low expense ratios (and are index-based and include retirement target-date options). Right now the program mainly contains funds from American Funds that have expense ratios around 0.6-0.9%, which seems like a world of difference from Vanguard's expense ratios. Maybe I can't do as good as Vanguard, but maybe I can at least do better than what we have. If this isn't asking for the impossible, then I don't know how to go about searching for funds within these parameters.

2) Advocate that the company should dump Morgan Stanley and go directly through Vanguard. As a plan participant, that sounds great to me, but my understanding is that Morgan Stanley is providing services in the plan administration that Vanguard doesn't offer. I'm also wondering if there would be transaction costs to moving all the existing money under a scenario like this.

I probably don't have a clear understanding of everything going on here, so I'm very open to advice.

posted by polecat to Work & Money (7 answers total)

Vanguard does offer small business and mid/large business 401(k) administrator services. They are somewhat unique, though, that they only offer those services on a per-employee fee basis rather than embedding the fees in the expense ratio of funds provided. This makes lots of sense for financially savvy people, especially those with lots of assets (lots of assets == lots of expense ratio). It doesn't make sense to people who are not financially savvy (why pay a fee for a 401(k) when Morgan Stanley will do it for free?) and those without lots of assets (where the per-employee fee is more than the expense ratio on their assets).

I've had some luck pointing out to my employer that based on their plan's total holdings (which must be disclosed to you at least once a year), the expense ratio on the holdings is much greater than the per-employee fee that Vanguard offers. This means that the difference between the total plan expenses on an expense ratio basis and the total plan expenses on a per-employee fee is additional employee income that could be offered to employees. However, this assumes that your employer actually cares about these things and that the employees at your work have a sufficiently large asset base to make per-employee fees less than the expense ratio.
posted by saeculorum at 2:31 PM on November 26, 2014

Hrm...I think Morgan Stanley is a small fish in the 401k pond. There may be reasons your employer uses them (like, your boss likes the personal attention of an old school stock broker) but there is no way MS has administrative abilities that Vanguard lacks. That's laughable. More likely Morgan Stanley is facilitating a fee structure for outside managers (like American Funds) that doesn't apply to Vanguard (which uses in house funds).

However, there are MANY other firms out there that can administer your plan and offer low-cost fund options. Aside from Vanguard, big 401k platforms include Fidelity, Aon Hewitt, Charles Schwab, Great-West, Prudential, Principal. Even payroll service providers like ADP and Paychex have 401k platforms, and perhaps are more small business oriented than the bigger names.

I don't really know what's involved in switching 401k providers. But I know it's a very competitive market and that should mean providers will trip over themselves trying to get your business.
posted by mullacc at 4:48 PM on November 26, 2014 [1 favorite]

I'm really not sure how this works from the HR/corporate end, but I work for a small company (50 employees) and we use Fidelity, who offer the Spartan Index Funds which have pretty low fees. I think they are only a hair over the Vanguard ones.
posted by selfnoise at 5:42 PM on November 26, 2014

We have access to Fidelity Target Date funds through our employer, which is quite large but had $0 in the plan to start due to a change in ownership. But Fidelity is the one administering the plan as well. They pay for the plan by using special versions of the funds with higher expense ratios, but still way better than the ripoff 0.6% you're paying now.
posted by wnissen at 8:31 PM on November 26, 2014

The standard advice on /r/personalfinance is that Vanguard, Fidelity, and Charles Schwab are equally good companies for retirement accounts, with broad index funds and low expense ratios. So if Vanguard is not an option, look into the other two.
posted by Harvey Kilobit at 10:01 PM on November 26, 2014

Rather simplistically (and quite cynically): Offering a 401k costs money. There is a bunch of paperwork to be done and maintained and forms need tombs filed with the government. And you need to deal with mistakes made by employees. Vanguard wishes to bill employers a fair price for this service. Basically everyone else will do it for less by offering crappy fund choices where they profit from the funds in some way and by getting access to employees to hock poor financial advice *. From my experience, most small businesses have poor participation in their 401k. Vanguard will bill per employee. Not per employee that uses it. You are asking your employer to pay more for benefits. Best of luck with your efforts.

* while it's possible such a presentation and the follow-up one on one "consultations" could be full of good advice, I would bet a lunch that the advice is flawed in at least some basic way. You want financial advice from people willing to act with a fiduciary responsibility to you.
posted by fief at 10:09 PM on November 26, 2014

Response by poster: Thanks, everyone! These responses are helpful to my understanding of the situation.
posted by polecat at 10:07 AM on November 28, 2014