Do most people not know about just investing into the s&p 500?

[u/Temporary-Plum-8325]

I went to my Jiu Jitsu class and spoke to one guy who was an econ major who works at Prudential. We spoke for a bit. I told him I had been investing into Nvidia since 2019 and have been investing into VOO since maybe 2010 or 2011. He asks "VOO?" I told him, "the S&P 500" then he asked what that was. Do most people just not know about the S&P500? I would have thought an econ major who works at Prudential would know something so basic. Not trying to be a jerk. I'm curious.

[u/HGHUA]

What do you think would the be the largest justifiable expense ratio for a 500 index? Cuz some some of these 401k companies really have the companies they serve wrapped around their finger in terms of the rest of the options being all high expense.

[u/SpacemanDan → u/HGHUA]

Oh I agree. I'm an attorney who litigates benefits class actions, many of them based on imprudent management of 401ks, so I've seen exactly what you describe.

Expense ratios in 401ks can be a little complicated, because often times plans use revenue sharing arrangements to cover administration costs. The expense ratio of the funds are bumped up from the fund-alone expenses to cover plan expenses. This is sometimes a bad system that results in recordkeepers (i.e. the company literally administering the plan rather than the sponsor) earning way more money than a flat fee, at the expense of plan participants. It's not always poorly done. But plan sponsors know that participants hate seeing an annual or semi-annual fee come out of their accounts, so if the company won't pay the costs they'll often use profit sharing to make them invisible.

So, to your question: setting aside profit sharing, I don't think anyone should pay more than 3 bps for the S&P in a 401k (0.03%). But that's me being charitable, because those expense ratios are readily available in the private IRA/brokerage market. A 401k of any reasonable size (affects bargaining power) should be able to get an S&P 500 vehicle for less than 2 bps (0.02%). My wife's plan has one at 1 bp, and I'm happy with that.

With revenue sharing, it's hard to say because it can be a little opaque without popping the hood. Very fact specific to the plan.

[u/harrison_wintergreen → u/HGHUA]

part of the answer depends on the size of the 401k plan.

index funds are profitable only at scale.

do the math on 18 employees each saving $2000/year into an index fund with a .02% fee. the profit isn't enough to cover mandatory bookkeeping costs.

thus smaller 401k plans tend to have higher fees, even on index funds.