You may have heard or read about some high-profile brokerage firms and employers, such as Edward Jones, Brown University, Delta Airlines, MIT, NYU and Yale, being sued by plan participants and employees for high fees in their 401(k) plans.
Employees and plan participants are fighting back against high, exorbitant 401(k) fees, and recent lawsuits decisions have proven that the courts are beginning to side with them.
But you don’t need to run out and hire a lawyer to do this! Rather, there are some simple steps you can take today that are going to help you reduce the cost of your retirement investment accounts and save you a lot of money in the long run.
Once you leave a job you are (sometimes) allowed to leave your retirement account in the plan or you can roll it over into an IRA account at an online discount broker (like Betterment, Vanguard, Fidelity etc). You can also check with your new or current employer. Some may allow you to roll over an old 401(k) into your new 401(k) plan with them.
Does this take a little bit of time, effort and paper work? Yes, but it can be more than worth your time if you have money just sitting in funds that charge annual expenses of 0.25% or more. There are plenty of low-cost index funds and exchange traded funds (ETFs) that charge as little as 0.10-0.25% in annual expenses. And that can mean huge savings (and returns) for you.
Let’s assume you have $50,000 invested in an old plan that charges and ER (expense ratio) of 1% (the average mutual fund ER is 1.25%). Then, let’s assume your portfolio earns a gross return (before all 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% ER). But, if you rollover your $50,000 to a brokerage firm like Vangaurd and invest in a low-cost index fund (like VTSAX) or ETF that charges only 0.05% to 0.10% you will have more than $157,000 after 20 years. That’s $25,000 more! See what I mean? That is surely worth your time and effort to rollover any and all old retirement portfolios!
While you can be limited to the funds offered within your plan, 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 diversified in your current 401(k). All that matters is that all your retirement savings and investments are well diversified.
Once you shift your money into the one or two cheapest funds in your current plan, you can then adjust your allocations in your other accounts so that your overall allocation is well-diversified. Don’t worry about every individual account being well diversified. All that matters is that your entire nest egg has the right allocation overall.
Both spouses should look for the cheapest options in their current 401(k) plans and then adjust all other accounts accordingly.
The when, why and how to max out all your retirement accounts. 401k or Roth…