Friday, April 22, 2016

401K Fees

I don't often comment on other people's blogs, but this issue got me worked up enough that I "contributed to the discussion," FWIW: Profits in Finance.

This was the part I reacted to:

Expense ratios on actively managed mutual funds have remained stubbornly high. Even though more people switch into index funds every year, their overall market share is still low—about $2 trillion out of a total of $18 trillion in U.S. mutual funds and ETFs. Actively managed stock mutual funds still have a weighted-average expense ratio of 86 basis points.

Why do people pay 86 basis points for a product that is likely to trail the market, when they could pay 5 basis points for one that will track the market (with a $10,000 minimum investment)? It’s probably because they think the more expensive fund is better.

And here is the comment I left, in case it disappears from the other site:

I think both you and Noah are missing the reason, a bit. Most people that I know who have investments in high-fee funds, actually have no choice. The people I know in this situation are participating in these funds through their 401K plan, and their 401K plan offers only high-fee funds. Myself, I’ve worked at more than half-a-dozen companies over the last 25 years, both large companies and small companies, and in only ONE of those situations was there even a single low-fee fund available.

With 401K plans, employees have no choice to go outside the funds offered by their plan. If their plan offers only high-fee funds, their only alternative is to forego the 401K plan entirely, which is a far worse choice then enduring the high fee.

Surprisingly to me, I don't see this issue getting much attention.

I'm not sure why that is.

But I suppose we each have our own hobby-horse to ride...

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