Separated at Birth: Fund Share Classes and CIT Funds

bee

Looking over a friends 401K plan recently I tried to decipher what his employer was offering for investment choices. In his case, he was mandatorily enrolled in what appeared to be a T. Rowe Price 2020 Retirement Fund, yet it did not have the investor share class ticker symbol TRRBX. Instead it was a CIT (Collective Investment Trusts) fund option that carried an ER (expense ratio) of 1.18% compared to TRRBX's ER of (0.61 %).

I attempt to monitor my weighted expense ratio of my entire portfolio. Funds in my portfolio that have an ER above this weight average will be scrutinized more closer for lower ER comparative options. In some rare cases, paying a high ER is legitimized by manager out performance.

Article explores these expenses:
https://humbledollar.com/2018/08/separated-at-birth/

msf

Was it a CIT or an a clone offered inside an annuity? That's common at smaller companies. If it was the latter, it should be possible to find info in the plan docs that separate out the underlying clone cost from the annuity wrapper fee. (Not that it matters, because your friend pays the total cost, regardless of who gets the money - the insurance company or the underlying fund manager.)

I believe that 401k plans are allowed to have opt-out provisions, but not mandatory ones. That is, you can't be required to invest in a default fund. Though a plan can specify a default and you wind up invested there if you don't actively opt out.

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The column doesn't do a great job of explaining clones, as it lumps multiple share classes of one fund (VFINX et al.) with a share class (VIIIX) of different fund that is a clone of the Vanguard 500 fund. I added a comment there to that effect.

One place where that distinction matters is in taxable accounts. It's often possible to do a tax-free exchange from one share class to another of the same fund. But AFAIK you can't do that between share classes of clones.

bee

@msf, As best I recall it was John Hancock as the TPA (third party administrator) for the employer's plan. The fund choices seemed to be what you described as clones of other familiar funds with fund identifiers unique to these in house JH funds...all with much higher ERs.

msf

Here's a piece on one of John Hancock's plans. It has a 1.69% plan fee - which might be paid by the employer, the employee, or split. If the employee pays that fee or part of it, it could make the fund expense look higher. The example in the article takes a 0.18% underlying fee expense and adds the 1.69% plan fee to come up with a 1.87% fund fee.
https://www.employeefiduciary.com/blog/john-oliver-should-be-upset-his-hancock-401k-fees-are-too-high

The column is a discussion of the Hancock plan John Oliver presented a couple of years ago (and was linked to by MFO, somewhere). Oliver starts talking about the plan around 12:00 in the video:

bee

@msf...too funny and sad...here's the link for rope...DOL rule is DOA...thanks.
https://en.wikipedia.org/wiki/Rope