The Epic Battle Against The Ball Gag 401k

One of the first things that I do when I start a new job, like any rationally-minded person is check out the company’s package.  My past job had a 401k plan that looked reasonable enough.  They matched up to a certain percent (I believe it was 4%) after you had spent a year there and that was 100% vested.  So, really not a bad deal, everyone should be participating, especially seeing how it was a financial advice company.

On my first day, I’m scanning all my paper work, and attempting to figure out all the medical insurance garbage, fsa, and all the rest of it.  But then, like a glimmering beacon in the night, I see it.  The 401k plan documentation!

I open straight to the prospectus of the available funds and zeroed in on that magical number, Expense Ratio, to find my index fund of choice.  Alas, all of these funds have a greater than 1.5% ER!! (1.5% for an S&P 500 index fund, are you kidding??)  Then I read further, there’s a 1% charge on top of that applied by the management firm to simply hold the money.  And there’s a $75 trading fee.  There were even funds with front-end loads.  BLASPHEMY!!!!

What is a boy to do?

The very first thing was to start grumbling in the meeting.  Mumbling under my breath about how much we are getting ripped off.  I mean what exactly am I supposed to do? I need to contribute the max, but they are going to charge me 2.5% plus transaction costs.  It’s kind of like the financial version of that scene from Pulp Fiction, I call feel the ball gag being forced into my mouth while they are just ripping dollars out of my pockets.

I’m going to fight this, and I’m going to win.

Down with the Ball Gag 401k!!!

Here’s my plan of attack:

1. Find out who’s responsible for the selection of this plan.  If it’s someone in HR, it’s possible that they were just sold some snake oil, and it will be easy to change.
2. Discuss with this person, what exactly is going on, and how we are ALL getting ripped off by it.
3. Show them some alternative plans that might be a better option. Hello, Vanguard/Fidelity.
4. Help them with the paperwork, so that the transition should be as easy as possible.

How does this go?

Well, I go and talk to my boss, who’s the COO:

MrWOW – “Hey, do you know who’s selected the 401k plan?  Just curious”
Boss – “Yeah I think it was the president of the company.  I think it was his frat brother or something that set it up”
MW – “Oh, ok just wondering.  Thanks” – Damn it!  There goes the easy way!!
Boss – “Why are you asking?”
MW – “Well, now that you ask, this plan is ridiculously expensive, have you seen the ratios on the funds? I was just wondering if we could change it.”

Hmmm, so I’m going to have to rethink my strategy here a little bit. What now?

I started mentioning to some other people about the 401k.  I found one partner in crime that had a pretty direct connection to the top, and apparently had already been mentioning that it needs to be changed, but one voice does not make a movement.

Next, I went into the HR office for my 1 month review.  I started talking to them about this issue, and asking how it was chosen.  Again, the response was:

“Well, it’s his friend.”

To which I replied:

“Yeah, but his friend is ripping us ALL off.”

I guess I talked to enough people that word started to spread, it made it to the head office.  I got a meeting invite to talk about how things are going with the head of the company.

Mind you, this is a financial services marketing company.  I took the job because I was really interested in furthering my knowledge of the industry. Plus, I’m just generally interested in this stuff (*AHEM* see here).

I had done my research*, I had some knowledge.  I think Warren G put it best:

We regulate the stealing of this property,
And we damn good too.
Can’t be any geek of the street.
Gotta be handy with the steel, if you know what I mean.
Earn your keep.
REGULATORS!!! Mount up

On that fateful day, I walked into the big corner office and sat across the vast mahogany desk from the CEO of the company.  We exchanged pleasantries and discussed how I was assimilating to the company.  What my goals were at the company and where I saw my department going, how I planned to manage my team, etc, etc.

Then, I brought it up.

I’m just curious, where did our 401k plan come from?

I got this long story about how his friend helped them out long ago, and he was a good guy.  And he’s a close family friend. That went in one ear and out the other.

So, I asked about the fund allocation, and if there was a way for us to get some low cost index funds in there.  Because there was an S&P 500 fund, but it had an ER of over 1.5% plus the management fees.  His response was:

Well, we’re a smaller plan and therefore we have to pay more in fees.

I kind of scoffed and replied:

I run a plan for just my wife, and our fees are WAAAAY lower than this, and I’m hoping this company of 75 people has more money in the plan than she does, other wise there’s a different problem.

To which I get the response:

Well, you know he’s a good guy, and I have all my money with him.  We might give up a little of the upside, but he avoids the downside pretty well.  He’s beaten the market for years.

To which I replied:

Are you sure about that?  Even Warren Buffett says don’t invest in active funds, I think I’ll take his advice over your frat brother.  Here’s the fact of the matter.  We’re both trying to by coffee.  I buy my $3 Starbucks coffee, you are buying $200 coffee from your store down the street.  You can argue that your coffee is better, and maybe it is, there’s no real way to tell.  But, really, I don’t care, I just want the option to buy $3 coffee. Quite frankly, if you want to keep your money with him and pay these high fees, that’s your prerogative.  As for my money, I don’t like getting ripped off.

So uhhh… the conversation just kind of ended there.  We exchanged pleasantries, I mentioned that I would send him the article about Buffett’s directives in his will and any other articles I come across that mention 401k’s etc.  Just so happens that I found an article on OUR site about 5 signs of a bad 401k plan, of which 4 were checked off by our plan (ahhh delicious irony) .  I made sure to forward that over as well, but never heard anything more about it.

Oddly, about a month later, the HR director comes over to me asks to talk to me in her office.  Hmmm… well it turns out, we’re getting a new 401k plan.  When the CEO asked his buddy, he volunteered to magically cut his fees in half!  Now, I’m not that smart, but if you’re willing to cut your fees in half with no negotiation, that means there’s quite a bit of fluff in there.

So, we ended up getting a plan with some low(er) cost funds, there was VTSAX, but somehow it had a 0.5% ER (more mark ups!! GRRRR).  But hey, it’s better than it was.  I even started talking to everyone getting them investing in the 401k, because shockingly few actually did.

You’re welcome good people of my previous company!!

I’ve since left the company and moved on to other things.  As I walked out the door, I was on the phone with the management company moving my money into the i401k I manage at Fidelity, just checked…. FSTVX – 0.05% ER.   I guess the moral of the story is to do your research, and ask the right questions… It can save you a lot of money in the long run!!!!

* A Little Background: MrsWoW started a company a little over 2 years ago at this point.  It’s going great!  It’s fantastic, she loves her job, loves her work, all the good stuff.  I’m hoping she’ll post about all she’s learned running a small business here shortly.

While she is doing all the stuff that she loves, I’ve been in the background setting up the finances, filing the tax paperwork, churning managing all the corporate credit cards, building documentation software and (most importantly for this story) setting up an i401k.*