Crappy 401k Plans

I initially set out to thank the author of an article at US News for writing about crappy 401k plans.  Unfortunately I was sidetracked by my rage at crappy 401k plans and I couldn’t keep my mouth shut.  So I did what any self respecting blabbermouth would do.  I got up on my soapbox and accidentally wrote this blog post in the comments box on that US News article.


Dear Emily,


Thanks for writing about crappy 401k plans.  I have had good ones and bad ones.  Oddly enough, the small engineering company I worked for had a relatively good plan with low cost investments at Fidelity.  At my last job (before I retired), I suffered bloated fees in the 401k plan offered by the State of North Carolina.  Prudential was the plan sponsor, and I’m sure they make a pretty penny by running NC’s 401k and 457 plans.  I’m an index fund investor by nature, so lucky for me the NC plan had a few index fund options.

However the fees were outrageous!  0.20% expense ratio for a large cap S&P 500 index and 0.30% for a broad International index fund.  For comparison, any retail investor can get Vanguard equivalents at 0.05% for the large cap S&P 500 fund or ETF and 0.10% for the international fund or ETF.  That is an extra 0.15% to 0.20% in fees that I was forced to pay at the crappy state 401k and 457 plans.

By the time I left the employ of the Great State of NC, I had over $100,000 in the 401k and 457 plans.  Since I paid an extra 0.15% to 0.20% in expenses on my investment choices, I figure I easily lost over $200 per year in investment management fees because the Vanguard funds or similar options weren’t available.

You expect crappy investment options from really small employers that simply don’t have the buying power or financial management sophistication to get a great 401k with awesome investment options.  The State of NC isn’t a small employer.  I was unable to find the total amount of assets of all participants in the 401k and 457 plans, but it is probably in the tens of billions of dollars.  Why the employees of NC don’t have access to institutional level funds from Vanguard or elsewhere that charge fees way under 0.10%, I can’t tell you.  I have my suspicions *cough politics and payola cough*.

[end rant]

Do yourself a favor and pay attention to your 401k.  Look at your investment options.  Check to see whether there are better, lower cost options available to you in your 401k.

Good 401k Options

In brief, I look at the following items when evaluating costs of funds I might invest in:

  • Expense Ratio
  • Turnover Rate
  • Fees for buying or selling a fund
  • Fees for selling within a certain period of time

You can usually find this information by going to your 401k provider’s website and clicking on each fund option.  Really nifty 401k providers summarize this information in tabular format so you can see it quickly for all funds and eliminate the crappiest ones from further consideration.

Expense ratios might be abbreviated as “ER” in your plan’s literature.  Good expense ratios are all relative.  For a large cap US stock fund (may also be called an S&P 500 fund), a good ER might be 0.10%.  For an international fund or a small cap fund, 0.10% to 0.20% isn’t too bad.

Expense ratio is the measurement of what your fund charges in management and administrative expenses.  You don’t see these expenses explicitly.  Rather, the fund’s investment returns are reduced ever so slightly (or not so slightly for crappy expensive funds).  As a result, the expense ratio is critically important in determining the likely investment results of any given investment.  More expenses = less return for you.

A good turnover rate is around 5-10%.  Turnover rate relates to how often the fund manager is trading stocks in your fund.  Helpful hint #1: you don’t want a day trader managing the investments in your fund.  A 10% turnover rate means one tenth of the investments in the fund are traded each year.  Or to flip it around, the fund manager holds investments for 10 years on average.  That’s my kind of manager!  Helpful hint #2: high turnover rates means lots of trading.  Trading incurs costs that are largely secret to you or at least nearly impossible to determine (even if you are a pro investor).  Costs = bad.


That is all for now.  I hope to dive to much greater depths in the future to discuss 401k’s, fund selection, investment expenses and everything else related to making sure you keep as much of your hard earned cash in your own pockets (or investment accounts, as the case may be).


  • Yesterdaysprincess

    Paying .20 and .30 for index funds in a 401K seems quite good to me! Through John Hancock, the index funds we were offered at work ranged from .69-.74 and those were considerably lower than the majority of funds in the plan. On top of the fees, we were charged “general administration charges” quarterly which took another 1% out of our balance. Later when, the total balance for the the employees reached a higher threshold, this wraparound fee was lowered to about .5%. Even with a new 401k provider that the company switched to, the index funds we are in range from .40-.69. These 401k plans are through my husband’s employer. I am self-employed and have a solo 401k with Vanguard. I am invested in small-cap, mid-cap, large-cap, and International index funds and the expense ratios are .20, .20, .20, and .19, respectively. The expense ratios you list in your article are based on admiral shares and ETFs which Vanguard does not allow in their 401ks for businesses.

  • I know I’m late to this post, but I found it quite eye-opening. I’m early on the path to FI and a bit late (at age 44!) I’ve mostly been tweaking the funds in my Vanguard accounts to ensure maximum efficiency, so I can focus on just shoveling money into them.

    I did switch my funds in my 401k (through Fidelity) and increased my contributions so I am maxing it out, but have since left it alone. After reading the advice here, I decided to revisit my 401k and learned that, while I was contributing to a Vanguard fund as well as one Fidelity fund, these were not very efficient.

    The Vanguard fund was a Mid-Cap Growth fund with a 0.43% exp ratio. It’s turn over rate is a whopping 93%! The Fidelity fund was the Contrafund with a 0.43% exp ration and a 37% turn over.

    I went through all the options available to me and ended up swapping these funds for the Vanguard Target Retirement 2035 fund (exp rat: 0.07%; turn over: 1.52%) and the Fidelity U.S. Equity Index (exp rat: 0.04%; turn over: 9%). Hopefully, this will save me more money in the long term and grow nicely so I can concentrate on my Vanguard accounts.

    Thanks, RoG!

  • I think comparing funds primarily by their ER or turnover can be misleading. ER is baked into the NAV of the fund. Compare funds based on their NAV over various stretches of time (i.e. past 6mo, 12mo, 3yr, 5yr, 10yr, etc.) to see what the actual winner is.

    I’m in a situation with my Prudential 401(k) where I could override the recommended funds and select a couple of Vanguard alternatives that they offer, but the actual differences in NAV are pretty much a wash to the point where I don’t feel its worth the time to manually select an investment and manually rebalance.

    • You’ll always be chasing winners and ignoring the huge drag of high expenses if you ignore the ERs. Also keep in mind you don’t see the losers as 401k sponsors ditch the losers and eventually the loser funds close or merge into other funds. Survivorship bias at its finest.

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