Even Vanguards 401k fees are too high… WHAT?

Yes it’s true. Vanguard’s 401k fees are supposedly too high, though it’s hard to believe.

The low cost leader is facing a lawsuit from the Anthem Inc. 401k plan. That 401k plan has more than 5 billion in assets!

The lawsuit claims the plan sponsors and fiduciaries breached their fiduciary responsibilities by allowing excessive 401k fees for investment management. But are Vanguard’s 401k fees too high?


About Anthem and Vanguard’s 401k arrangement

Anthem’s 401k plan has mainly Vanguard funds. Everyone knows Vanguard is a low cost leader in investment management.

If you’re a participant in the Anthem 401k, you can invest in 11 Vanguard funds. Those include both Admiral and Institutional share classes.

You can also invest in Anthem stock, two other non-vanguard funds, and the Vanguard target date fund options (which are quite good even though I’m not a fan of target date funds).


Why are Vanguard’s 401k fees too high?

The main discrepancy comes from the amount of participant funds invested in the Vanguard funds, and the actual fee they could have obtained if they’d invested that amount directly with Vanguard and not through a 401k plan.

Confusing I know, I’ll try to break it down. Let’s say they had 1 billion in the Vanguard S&P 500 index fund. They were paying X amount for that fund in that 401k plan.

If they’d gotten a pool of investors together and gone straight to Vanguard, they could have ended up paying Y amount. Y would be less than X.

So maybe they were paying .10% and they could have paid .08%. That’s what this boils down to.


Small hinges swing gigantic doors

People don’t realize that a .02% difference on the fund fee would equate to $200,000 in excessive fees on that size of 401k plan – AND THAT’S JUST 2 BASIS POINTS! 2 basis points (a basis point is 1/100th of 1%) is a large amount of money when we’re dealing with large amounts of money.

The 401k lawsuit goes on to allege they were charged excessively for their record keeping fees as well. I know from experience even for SMALL 401k plans the record keeping fee is maybe 75$ a year per participant.

Vanguard was charging from 80$ to 94$ per participant. So they were making extra money on excessive record keeping fees.

Apparently they DID lower their record keeping fees at some point. Even at 42$ per participant, their fee was too high for a plan this large.

Seems to me that whoever was running the Anthem plan wasn’t on the ball. They didn’t fulfill their fiduciary responsibility, and didn’t have the participants best interests at heart.


Yes even a Vanguard 401k plan is vulnerable

The moral of the story is sharks are circling your 401k plan and rightfully so! They’re looking for reasons to sue your employer – or you as a plan sponsor.

You must be continually and religiously vigilant when it comes to your fiduciary responsibilities and protecting your plan participant interests. If you breach your fiduciary duties, no matter what 401k fees your paying or what 401k plan provider you’re using, you can expect to get sued just as easily as Vanguard is getting sued!