Your 401(k) Provider Probably Sucks
Recently I wrote about how I lowered my 401(k) contribution from 6% to 4% because the expense ratios were high and the choices I had weren’t very good.
The pivotal moment came when we had our annual meeting with Principal, our 401(k) provider. I had the menu of choices in front of me and I wanted to ask a simple question:
“Why are the funds so expensive (.65 and up expense ratios) when in your own literature it says these funds function almost entirely like index funds?”
Most of our options were “80% index funds with the other 20% being treated like a managed fund, which is how they justified the high expense ratio: These funds are actively managed.
Followed by, “Why can’t we have more straight index funds so the expense ratios are less? I’m a big fan of index funds.”
The old guy stepped out from behind the shadows and looked at me like I was an idiot, “Why would we want to do that when we have proven, consistently, that we can beat the averages? Why on earth wouldn’t you want to beat the averages? Our customers come back to us because we deliver results. . .” Blah blah blah he went on and on.
Basically, I got yelled at because I brought some common sense into his pitch. I thought about (briefly) bringing up the whole point that the numbers show you HAVE NOT beaten the averages and how actively managed mutual funds DO NOT BEAT THE AVERAGES but the yelling tempered that urge.
This is how investment companies work: they intimidate people by talking above them (or trying to) and when a sneaky little person tries to say “Wait a minute guys, this makes no sense,” they get shot out of the air.
I was shocked that I would get berated in public like this by some old dude who doesn’t even know me, but that’s the way it works.
The next day I lowered my contribution to 4%, which is what my employer matches. That extra money is going into my ING account and then later into my Roth IRA. Where I’ll be paying a LOT less in expenses.
Will our company stand up to them to get some more options thrown in? Not likely. Our CEO, when asked if we could establish a profit-sharing system in the company, responded with “Well that’s impossible because we’re a private company. It doesn’t exist. Next question.”
Umm, actually it does, but what he meant is it won’t exist for us. Ever.
Why? Cause he says so.