I fucking hate excess fees in my investment/retirement accounts. I’ve gotten into some heated discussions with friends who are in the personal finance industry, with vested interest in selling you their front-end loaded high fee funds, and have heard them go so far to say indexing is a bubble. It was all I could do not to laugh in their face.
Now I’ll be the first to say indexing isn’t perfect, but it’s efficient, lean, and pretty damn close to perfect. If those like Warren Buffet and John Bogle say they’d recommend their wives index, or they’d rather buy the haystack than try and find the needle, that’s pretty good recommendation. For those that aren’t into this stuff, an index mutual fund basically tries to replicate a broader market index, like the S&P 500 (or Standard and Poor’s 500 large stocks that trade on the NY Stock Exchange or Nasdaq). They don’t try to outthink the market and instead recognizes the efficiency of the market. It doesn’t try to pick the right handful of stocks out of the haystack, or weight towards one segment (health care, mining, technology, etc.), it simply picks the large basket of 500 or 5000 stocks in the same ratio as the market index, be it in U.S. or international funds, and stays constant. There’s limited wasted movement from trading (incurring fees and unnecessary capital gains taxes).
Anyways, I hate fees. And most 401k’s have too many. My new one isn’t that great. I found a couple of funds that are under 0.3% , but most, even an S&P 500 index are well over 0.5% (and to compare, the Vanguard 500 Admiral share index fund of the same is 10% of that, or 0.05%). And they trick the average investor by making their own fund families from a combination of the various higher cost funds (conservative, moderately aggressive, aggressive, etc.) for simplicity, but even higher fees. Ridiculous I say. Even reGronkulous.
So I slightly digress. My 30 days post-employment finally ended and I was eligible to roll over my 401k into my IRA(s) I already had set up at Vanguard. It took 10 minutes and two calls and I went from old to the new. And free money, as I’ll illustrate. The paperwork I got from my 401k company indicated they automatically cut a paper check for a rollover, and send it to you. My call to Vanguard was to get the address to send them to. Polite and professional as always. The second call was to the 401k company, requesting a DIRECT ROLLOVER. The check was made out to “Vanguard FBO My Name” (For the Benefit Of). They will send a hard copy check (to me – my last rollover went to the financial firm directly, so this type of thing sometimes varies), and I will forward it on to Vanguard directly. In a couple of days, I’ll actually get two checks, one from my traditional 401k (pre-tax) and one from my Roth-401k (for deposit into a Roth IRA).
I accomplished two things by rolling this over to a self-directed IRA. One, consolidated an old account into one spot. If you have changed jobs, maybe you have old account or three hanging out there somewhere. Tracking that shit gets annoying. Second, reducing fees. Not only do you have the regular fee that running a mutual fund charges, but you also have the more tricky, hidden fees the 401k administrator charges. It is getting better, but they still hide them pretty good.
So let’s say, for the sake of argument, I just rolled over $100,000 (within spitting distance of that). Assume I have 25 years before I would touch my 401k or any IRA. Now I did my best to pick the funds that were the cheapest in my Asset Allocation zone. That is, stocks/bonds (i.e. risk) tolerance. A topic for another day perhaps. So anyway, I think I did a pretty good job within the limits of my last 401k, getting my weighted average for fees as low as 0.32%. My weighted average in my IRA is 0.08% mainly due to the ability to select super low fee index funds. The difference therefore between the two was a microscopic 0.24%. But it makes a difference over the long term. If one makes a 7.00% return, and one makes a 7.24% return (the difference between expenses), it makes a difference of approximately $35,500 over that time. Certainly not pocket change.
So when you change jobs, and can find similar returns with less expenses, don’t be afraid to switch. The 401k does have some advantages over the IRA in that you can take a loan against it (usually not a great idea), and sometimes is more protected in the event of a lawsuit (depends on the state, but is one reason why I recommend umbrella insurance). Additionally, if you leave your employer during or after age 55, you can begin withdrawals – but not a big deal since if plan on an early retirement, you can use another provision (72t that has various rules and obligations) to get access to either 401k or IRA funds so the advantage isn’t that great.
By all means talk to a financial planner, but be aware that like my friend, they have a vested interest in their company, often to the detriment of the client, even if they have drank the Kool-Aid and don’t believe they do. Look very closely at what they are guiding you towards, and what the expenses are. That is all. Consolidate. Watch the tiny fractions of a percent. Ten minutes can make thousands of dollars in difference. Save. Live beneath your means. Keys to wealth, simplification, and happiness. Set it and forget it, and move on to the more fun things in life.