If You Care About Costs . . .

This is the first in a series of posts about the problem of excess fees charged to defined contribution retirement plans, a subject I’ve been researching with Quinn Curtis.  Our findings about the pervasiveness of excess fees spurred me to reassess my own retirement investments.  I was embarrassed to find that, among other things, my old Stanford University 401k was invested in “CREF Stock Account,” which uses a combination of “active management, enhanced indexing and pure indexing” and charges 49 basis points (.49%) as its “Estimated Expense Charge.”  Now 49 basis points is not an outrageously high fee, but it is substantially higher than the fees charged by a low-cost index. 

So I called TIAA-CREF and asked for help in rolling over my Stanford account to a Fidelity IRA.  The TIAA CREF rollover specialist asked why I wanted a rollover, we had the follow brief exchange:

IAN: Because the fees on my CREF account are too high.

TIAA-CREF advisor: Well, if you care about costs, you don’t want to rollover to Fidelity.

Frankly, I was shocked by this representation.  I think of TIAA-CREF as a reputable organization that has provided valuable services to legions of the professoriate.  But the implicature that Fidelity funds charge higher fees than TIAA-CREF is misleading.  I asked the adviser how much he thought Fidelity indexes charge and he said he didn’t know but was willing to look it up for me.  After a pause he reported accurately that Fidelity offers index ETFs with “net expense ratios” of just 7 basis points – one seventh the cost of my current Stanford investment. 

I want to be clear that I don’t think that the adviser intentionally tried to mislead me when he suggested that Fidelity has higher expenses, but even negligently misleading participants about the relative costs of different investments is legally troubling.

After the adviser discovered that Fidelity in fact offers much lower costs index ETFs, he next offered that it wasn’t really a fair apples-to-apples comparison because the CREF fund was actively managed.  To which I replied that, for my Stanford plan, TIAA-CREF doesn’t offer any index options.  Failure to offer an option is a good justification for charging higher fees. 

Leave A Comment

Comments are moderated and generally will be posted if they are on-topic and not abusive.



View All Comments »
  1. Barkley says:

    This article misses so many other considerations that I cannot even begin to go through them all. But I will say that the author has a high probability, being a typical average DIY investor, of choosing the wrong allocation, buying/selling at the wrong times, and allowing his emotions to get the better of him. So it wouldn’t matter what you think you are paying in fees when you own decision making is the real factor here. Hire a professional Ian.

    Thumb up 1 Thumb down 2
  2. Dan says:

    Yeah Ian hire a professional….just make sure he or she has fiduciary responsibility! You can tell with every post who is in the business as they defend all the things that were reported in this piece by knowledgeable people as bad approaches to accumulating wealth!

    Thumb up 1 Thumb down 0
  3. Gary says:

    I have dealth with many “wealth managers” and ” financial advisors” at two separate reputable banks with large wealth management departments. I started with $400,000 in 1995 and today I still have $400,000 in my account. Howver they have collected over $80,000 in fees during that time period. Because I know nothing about investing I always took their advice. I was too stupid to know that I was being bamboozled. Over the years the account went up, but then lost all its gains; up and down, up and down. So that today I am left with what I started with, but the advisors are considerably wealthier. I did a little math. If I had just bought CDs in 1995 and renewed them at the prevailing rate every 5 years not only would I have $1,000,000, but I would have saved at least $80,000 in fees. All without ANY risk of the market. I have to wonder if financial adiosors and wealth managers know so much why do they need a job as a financial advisor?

    Thumb up 4 Thumb down 2
  4. Kurt Beindorff says:

    My Fidelity 401(k) account charges a INV. OPTION/SOURCE FEE (it was $65) – I don’t know how often or exactly what this is for. It is against the company stock that I own – purchased through the 401(k). I do not buy/sell that stock except for the “buy” when every two weeks when I get paid. What is it for?

    Thumb up 0 Thumb down 0
  5. ray says:

    The expense ratio is justified for TIAA CREF because they are an annuity company first and mutual fund company second. They are a non-profit.

    Thumb up 0 Thumb down 0
  6. SrNight says:

    “Enough knowledge to be dangerous” would be a great headline for to. Your failure is one of the key tenants of economics or any other science, you’re comparing a plan to an IRA. That’s never fair, you can buy anything you like versus restrictions. Assuming these restrictions are the fault of the plan sponsor is illogical, all plans from all providers have deep flaws primarily constrained by ERISA regulations that limit the amount of reasonable due dilligance that can be done, limiting the offerings.

    Call the poor rep back and see what you can and can’t buy in their IRA. Your TiAA Stock fund has much lower expense ratios than what I get in my Fidelity plan, and I don’t think thats evidence relevant to this conversation.

    Thumb up 2 Thumb down 0