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. 

Laurie Mann

I have a Fidelity IRA and a TIAA/CREF account. I know the Fidelity account has been growing much more quickly over the years than the TIAA/CREF account.


Vanguard has even lower costs than Fidelity. Their equivalent index ETF fund "VTI" has an expense ratio of 5 basis points.


Oops, I gave the wrong fund name. "VOO" is the fund that more closely matches the Fidelity fund you chose, and it also has an expense ratio of 5 basis points.


One more comment :)

Frontline had an excellent episode called "The Retirement Gamble" dedicated to the rise in popularity of 401(k) plans over the past few decades and how ordinary people are losing out on lots of potential retirement income due to poor fund choices.

You can watch the episode here: http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

Brendan Morgan

Index funds aren't the only answer in an investment portfolio. While they provide great, low-cost exposure to asset classes such as U.S. Large Cap, they are widely variant and much less useful for asset classes like High Yield Bonds, Emerging Markets, etc. While the TIAA portfolio may not have been the best, you cannot simply walk in like Frontline and base the retirement conversation solely on investment management fees for active vs. passive funds. Not to mention that persuading participants to exit their low-cost 401k plans (which have access to institutional share classes) in favor of IRAs will put them in a position in which they are paying MUCH higher fees - through retail share classes, transaction costs, and trustee fees.

Joe Dokes

What this short article misses completely is the key problems with 401K style retirement systems. While it is clear that traditional defined benefit plan is going the way of the Do Do, the 401K style defined contribution plan has the effect of doing two things, neither of which is good for future retirees.

First virtually all defined benefit pension plans have had the net effect of enriching Wall Street. Fidelitiy charging 1/2% fee per year for eternity to manage your money is in effect free money to Fidelity. What's even more obscene is that Fidelity charges this fee whether they make you money or not. Thus, year after year you lose 1/2% of your accumulated wealth.

Even if you go with a low fee like TIAA-CREF is still getting 7 basis point or .07%, yes much lower, but my question is how does .07% compare to the costs of running a huge investment like California State Teachers Retirement System. Although CAL STRS has real problems I wonder if the total cost of running the retirement is less than .07% per year. My guess is that it is substantially less, which would lead me to the conclusion that even in low fee pension plans an individual is in essence enriching someone else.

Second, 401K style plans shift the risk from the employer to the employee. Clearly there are problems with defined benefit pensions, but shifting 100% of the risk of retirement to employees has been a net loss.

Joe Dokes



The real problem I have with 401k plans are the seemingly inexplicable restrictions (at least I do not understand them). In my 401k (Principal) we have something like 20-30 funds to pick from. In my IRA (E*TRADE) I have something like 1000s. My co-worker who recently changed jobs got to roll over his 401k to an IRA - now he has myriad more options to invest his largest asset in. Because I haven't changed jobs, I'm stuck in the same 401k with the same investment options.

I understand that part of it is that because you are buying on a biweekly basis with the 401k, you need funds with no or extremely low transaction fees. But my IRA has hundreds of no fee, no transaction cost funds available - why is my 401k limited to tens?

The answer is probably because the 401k managers know they have a captive audience. You can put many more pre-tax dollars into a 401k vs an IRA. Most companies offer a 401k match that you would forfeit if you go the IRA route. Finally putting pre-tax money into a 401k is much more convenient than putting it in an IRA (paperwork-wise and the possibility of screwing up your withholding).



"Shifting 100% of the risk of retirement to the employees has been a net loss."

Is the company planning retiring? Why should the employer necessarily be expected to assume the risk of any employee's provision after a work contract has expired? I would prefer to make my own decisions for my future well being, and I'm happy to assume the associated risks that accompany those decisions. No one cares more about my money than I do.

Joe Dokes


You may care more about your money. But in a 401K style plan you and you alone bear all the risk. Thus, you must allocate your money in a variety of different ways to insure adequate growth and adequate protection of your principal. Failure to allocate your savings correctly will result in your retirement nest egg being too small to support you in your retirement. If you are overly aggressive for too long you might find yourself with a huge loss at the very moment you were wishing to retire.

By collecting money in a large investment pool you effectively spread the risk. If you have thousands of employees all at different stages of their career all investing money with a money manager who can, keep costs low, arguably even below the costs of low cost mutual funds, you can earn a higher rate of return AND greater safety.


Joe Dokes



I believe you are confusing the concept around insurance and investing. Large pools work well in insurance where a perdictible percentage will make a claim. In investing, 100% will eventually make a claim. Just because yoh have large pools of people does not eliminate or reduce the risk. What you describe is the basic way a Ponzi scheme works. More people joining cover up early loses but as the new money stops flowing in the last to join experience the loss.

When ALL who enter expect a payout, larger pools do not mitigate risk.


Unfortunately Joe's comments represent the failure of basic economic and financial education in our society. First he confuses company risk and market risk. A company specific pension has far higher risk in the form of long term funding and lack of transparency in investment decisions than individually owned investments in mutual funds. After all, a mutual fund is just a large pool of people choosing to invest with a particular professional manager. Because IRAs (less so 401Ks) are individual accounts the owner always has the right to change investment companies at any time just as the author did. Try that with any company or government sponsored pension or Social Security for that matter. Second he confuses his risk preference with everyone else's. Joe may prefer a lower risk approach (T-bills?) but others can make different choices. Why should one person's preference constrain all others?



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.


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!


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?


Kurt Beindorff

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?


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.


"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.