September 22, 2016
You may have heard or read recently about some high profile retirement plan sponsors being sued by plan participants for high fees in the plan. Financial service firms-yep, folks who run mutual funds-have been hit with lawsuits, as have the plans run by MIT, NYU and Yale.
All of this just highlights the importance of making sure you are making the most of your 401(k). I’m not talking about hiring a lawyer! Rather, there are some simple steps you can take today that are going to help you reduce your cost of retirement investing.
Roll Over Old Retirement Accounts Once you leave a job you are allowed to leave your retirement account in the plan (assuming your account is worth at least $5,000) or you can roll it over into an IRA account at a discount broker. You might also check with your new employer; some allow you to roll over an old 401(k) into their plan.
Does this take a little bit of time and paper work? Sure. But it can be more than worth your time if you have money sitting in funds that charge annual expenses of 0.25% or more. That’s because there are plenty of low-cost index mutual funds and exchange traded funds (ETFs) that charge as little as 0.10-0.25% in annual expenses. And that can mean big savings.
Let’s assume you currently have $50,000 invested in a stock fund in an old plan that charges 1% a year. And let’s assume the portfolio earns a gross return (before expenses) of 6% annualized. Over 20 years if you leave the money in the old fund it will grow to more than $132,000 after accounting for the 1% expense fee. If you move the $50,000 to a brokerage and invest in a stock index fund or ETF that charges 0.10% you will have more than $157,000. See what I mean?
Focus on the Cheapest Options in Your Current 401(k) While you are limited to the funds offered within your plan’s lineup, it’s in your power to choose the lowest cost options. If you have other investment accounts outside of this current 401(k), consider piling all your money into the lowest cost option or your 401(k). Don’t worry if you’re not properly diversified in this specific 401(k).
All that matters is that all your retirement savings-across all your different accounts-are well diversified. Once you shift all your savings into the one or two cheapest funds in your current plan, adjust your allocations in your other accounts so your overall allocation makes sense.
The same goes for married couples: don’t worry about every individual account being well diversified. All that matters is that your entire nest egg has the right overall allocation. You both should look for the cheapest options in your current 401(k) and then adjust other accounts accordingly.