Having come from the government realm where 401ks aren't a thing, I had previously read/heard horror stories about the high fees and limited fund options available in some employers' plans, but had never experienced it myself. Until now.

I received the information for my employer's new 401k, and was blown away at the high expense ratios of nearly all of the couple dozen investment options available within the plan. All my prior investing experience has been with Vanguard, where ERs are a couple hundredths of a percent on a fund. But with this 401k plan, ERs on the various fund options run anywhere from 0.24% to 0.98%.

The sole exceptions to that within this 401k are four Fidelity index funds (with reasonable ERs):
FXAIX S&P 500 Index Fund (0.01%)
FSMDX Mid Cap Index Fund (0.03%)
FSSNX Small Cap Index Fund (0.03%)
FSPSX International Stock Index Fund (0.04%)


So as far as I'm concerned, I'm going to have to piece together my 401k portfolio from among those four options.

Here are my thoughts/questions:

FXIAX will naturally form the majority of my investments within the 401k.

Do I just hit the Easy Button, dump 100% of my 401k contributions into that, and worry about the rest of my overall diversification using my personal brokerage account and Roth IRA?

Or would it be worth trying to build some sort of "lazy portfolio" from among those four funds to get some diversification built into the 401k?

Something like 80% domestic FXAIX and 20% international FSPSX?

Or even try to approximate a Total US Stock Market fund within that percentage of domestic stocks using 83% FXAIX, 8% FSMDX, and 9% FSSNX to mimic the total US stock market as shown here: https://www.bogleheads.org/wik...ock_with_three_funds)

Not sure how to answer your question, but any expense ratio under 1 percent inside a 401k is pretty good. At least that is what I have been told, reading your post I thought you were gonna say 5 percent or higher.

Edit to add, I just reviewed my 401k holdings and all my ER's are exactly what you listed...the highest risk one was .98 percent and the lowest risk was .04. the average was .58-.90.

Of the ones you listed the Fidelity s&p 500 index is far superior. I have had 6 figures invested in that for years.
If you want email me and I’ll send you a report ( updated monthly) on all the Fidelity funds and their returns over the years.

quote:

Originally posted by jeffxjet:
any expense ratio under 1 percent inside a 401k is pretty good

Really? If so, I guess I didn't realize that.

As mentioned, this is my first experience with a 401k and my prior investment experiences is with Vanguard, where ERs on their funds run similar to those Fidelity funds... Stuff like 0.01%, 0.02%, 0.05%, etc.

When you're coming from ~0.01%, it makes 0.98% seem like a ludicrously high expense ratio to me. Practically 100x higher. But maybe that's the norm, and I just hadn't encountered it yet.

Regardless, I'm reluctant to hand nearly 1% of my investment contributions and returns off to someone when there are far cheaper alternatives.

quote:

Or even try to approximate a Total US Stock Market fund within that percentage of domestic stocks using 83% FXAIX, 8% FSMDX, and 9% FSSNX to mimic the total US stock market as shown here: https://www.bogleheads.org/wik...ock_with_three_funds)

I'm 3.5 to 5.5 years from retirement so I have those 3 plus bond fund in my limited option 401k. The mid and small is roughly same as mine but mine combine for 20%. My S&P 500 is much lower due to the bond mutual fund.

quote:

Originally posted by RogueJSK:

quote:

Originally posted by jeffxjet:
any expense ratio under 1 percent inside a 401k is pretty good

Really? If so, I guess I didn't realize that.

As mentioned, my investment experiences is with Vanguard, where ERs on their funds run similar to the Fidelity funds listed in the OP. Stuff like 0.01%, 0.02%, 0.05%, etc.

When you're coming from ~0.01%, it makes 0.98% seems a ludicrously high expense ratio to me. But maybe that's the norm, and I just hadn't encountered it yet.

Regardless, I'm not going to hand 1% of my investment contributions and returns off to someone when there are far cheaper alternatives.

I edited my original post, I just now checked my 401 and my highest is .98 and lowest was .04.

I have been very happy with FXAIX since I retired nine years ago.

I am NOT an expert, so if this sounds wrong, I hope someone will correct me (as this is basically what I do).

I'm mostly in an S&P index fund. For me, that's sufficient equity diversification. Cap size to me isn't really diversification - I'm not sure when the S&P would have a trend different from mid/small cap funds. Foreign is not for me - I don't follow / monitor foreign economies / companies and so it would be like a crap shoot and win/lose would be just sheer luck.

To me, it's just a question of how much to allocate to the S&P index fund or a Treasury bond fund.

I try to look for lower expense ratios but I prioritize return history first. For example, I'd probably tend to put my money in a fund with 15% returns on 0.25 expense vs 5% return on 0.01 expense.

Not sure where you're getting your information. Typical expense ratios for managed mutual funds is around 0.5 to 0.75%. Not really considered high till it reaches 1.5%.

The four funds you listed are index funds. Lower operating expenses since they only follow stock indexes. Not a lot of management expenses.

Vanguard is known for lower fees because their funds are index funds or very close to index funds in style.

Fidelity also follow the broad markets, and their managed funds are nonethless indexy in nature, and less highly-managed.

Ok. So it's just my lack of experience with these types of managed funds that's clouding my perspective on what's considered "expensive" when it comes to expense ratios.

Guess I need to take another look at the other 20ish fund options that I had initially automatically discounted due to their significantly higher ERs than those Fidelity index funds. Though my preference will likely still be with sticking mostly to low cost, passive index funds.

Average expense rations in the industry is about 1.40% though, admittedly, I haven’t researched that fact in a few years.

If decisions were solely based on expense ratios then we would all be shooting Hi Powers.

Personally, within reason, I don’t care what they charge for expense ratios as long as they give me the net results and consistency I’m looking for.

quote:

Average expense rations in the industry is about 1.40% though, admittedly, I haven’t researched that fact in a few years.

That's definitely old data. Ratios have dropped some 60% for the last 25 years or so. Average is around 0.50-0.60% I think.

quote:

Originally posted by RogueJSK:
Ok. So it's just my lack of experience with these types of managed funds that's clouding my perspective on what's considered "expensive" when it comes to expense ratios.

Guess I need to take another look at the other 20ish fund options that I had initially automatically discounted due to their significantly higher ERs than those Fidelity index funds. Though my preference will likely still be with sticking mostly to low cost, passive index funds.

I would consider a different path of thinking, try more research first. As someone alluded to above, pick the best returns first and ER last. Look for something with a long track record over the last 10-15 years. A more risky investment requires more oversight(higher ER) but yields much greater returns. Low returns means low oversight and low ER.

I follow the Dave Ramsey plan, he recommends investing in 4 different types of mutual funds...Growth(risky), Aggressive Growth(Most risky), growth and income(lowered risk), and international(moderate risk). All with a long track record of good returns. I divide my portfolio up 25 percent each. I looked at returns first, and honestly never even looked at the ERs until today. They were all with fidelity, so I knew they were in line with industry norms.

If you are not getting 7 percent, you are not even keeping up with inflation, so you will need some higher risk investments to outpace inflation. Most of my risky investments, during the good years, make 11-20 percent.

quote:

Originally posted by jeffxjet:
Low returns means low oversight and low ER.

Sorry, but you can't make a blanket statement like that.

I've been doing just fine in my other investment accounts using mostly index funds and ETFs that have ultra-low ERs (a few hundredths of a percent).

Most actively managed funds simply cannot beat the S&P 500 or the overall stock market index, especially over a 5, 10, or 20 year span. Even in just 1 year increments, the success rate varies from about 10% to 40% in any single year. So this means that in most cases, investors in actively managed funds are just spending 50x-100x the fees for the same or worse performance as they could be getting from a low cost passive index fund.

quote:

Originally posted by RogueJSK:

quote:

Originally posted by jeffxjet:
Low returns means low oversight and low ER.

Sorry, but you can't make a blanket statement like that.

I've been doing just fine in my other investment accounts using mostly index funds and ETFs that have ultra-low ERs (a few hundredths of a percent).

Most actively managed funds don't beat the S&P 500 or the overall market index. So this means that in most cases you're just spending 50x-100x the fees for the same or worse performance as a low cost index fund.

The blanket statement is an unrefined generalization, mostly true.

the rest is wholly untrue. Index funds follow the market, their goal is to match the market, not beat it that why they are called "index" funds. There are tons of funds that beat the market, and by a lot, and if I have to pay an extra .5 percent to make 20 percent on my money, I will gladly pay it.

Look at it another way: I'm surprised that you're holding up 11%-20% as an example of "good years" for your high fee investments.

Last year, which wasn't even an especially spectacular year, the S&P 500 did 22%. So if your fund(s) got 20% at best, it underperformed the market.

I did ~28% in 2023, with no high fee funds. I believe the highest ER out of the funds in my other accounts is a mere 0.08%.

So no, it's not necessary to spend 0.5%+ on fees to get 20% returns in a good year.

Past performance isn't a future indicator, but there are free tools where you can stress test a portfolio long term. I did it before I chose my financial advisor, and it was pretty eye opening on wild swings from one financial advisor to another. By going back 20 years it'll show how two or three different portfolios would perform in 2008, how they would perform in a multiyear flat market, etc. Here is the portfolio backtester I liked.

quote:

Originally posted by RogueJSK:
Look at it another way: I'm surprised that you're holding up 11%-20% as an example of "good years" for your high fee investments.

Last year, which wasn't even an especially spectacularly year, the S&P 500 did 22%. So if you got 20% at best, you underperformed the market.

I did ~28% in 2023, with no high fee funds. I think my highest ER of the funds in my other accounts is a mere 0.08%.

So no, it's not necessary to spend 0.5%+ on fees to get 20% returns in a good year.

That's because I didn't want to get into specifics, but since you asked.
10yr return on FXAIX(your fund)- 12.8 percent
1yr return on FXAIX-24.6%

10yr fsmdx-9%
1yr fsmdx-12%

10yr fssnx-7%
1yr fssnx-10.2%

10yr fspsx 4.5%
1yr fspsx 11.4

10yr return on my 401 fund(can't find the exact ticker)-13.3%
1 yr return-30.6 percent(yes that's correct).

So yes, when times are lean they are about equal, when times are plenty, they are much more plenty outside of an index fund. Although that FXAIX is a really good fund.So in the bad times I got .5% percent better, in the good times I got 6 percent better. And that 30 percent was on an ER of .3. So it's a tremendous fund for me. I'm not trying to argue, just trying to help you think outside the box a little on ER vs Track record of returns. That 30% is on my best fund, most of them have 10yr records in the 11-15 percent, which I where I got my general numbers.

Edited to add, I got all my numbers from ETrade, just typed in the ticker and looked at performance summary.

Because it’s weighted by market cap, the S&P500 index is not diverse. The top three stocks represent 21% of the value of the S&P500. The top ten: 35% and top 25: 48%.

I’ve owned SPY and MDY, S&P500 and mid-cap exchange traded funds, since just after the tech bubble burst. MDY is more volatile, but has had better returns.

Really, only you can look at your time frame for needing the money and the rest of your financial picture to see if there’s any holes those mutual funds could fill in a diversified portfolio.

The easy advice is maximize the employer’s match.

Rogue, are you old enough to need some bond exposure in the overall portfolio? May want to consider holding bond funds in the 401k and your equities in a Roth and/or brokerage account. This lets all the growth get better tax treatment when you need it. I know there’s a wiki at the bogleheads site on optimal placement of funds for tax efficiency.