I teach a personal financial acumen class a couple of times each year. It is split into 3 parts: credit scoring, budgeting, and retirement. I really enjoy presenting in front of groups, no matter what the topic, and it is always a very interactive session when I talk about personal finance (unlike most training classes where participation is either nil or forced).
I usually get approached after the class by a few people with more complicated questions around either credit repair or retirement accounts. I had a class earlier this week and one person asked about rolling over a 401k from an old company to either her new plan or a Rollover IRA. Knowing about hers new company plan, the costs did not make sense, so I quickly directed her to a Rollover IRA. I have had this question many times, and always offer to review the fees and investment options in the current plan and give my opinion (for free of course). I have rounded some of the numbers to make it easier to follow.
401k Fees Can Add Up
In this particular scenario, her old company was charging about $15 a year for a $20,000 balance (under a .10% fee). That is not bad, but it gets worse, much worse. The highest rates on two of the mutual funds she was invested in were 1.95% and 1.96%. The lowest two rates were .59% (a bond fund) and .92%. Overall, her weighted average for mutual fund expenses was 1.14% (not including the $20 fee). I have seen worse, but the numbers still beg to do a rollover and lower the fees.
The scary thing is that by reducing down from 1.14% to an average of .34%, the savings (invested over 30 years @8%) would actually be almost the same as the current balance in the account at $19,825! Yes, I realize the .34% could be much lower, however I wanted to leave some room for choices more than absolute lowest cost index funds from Vanguard. In that scenario, getting to an expense level of .14% would end up with $24,356.
My reasoning for using the 30 years is that this person is under 30 and is not currently looking to retire early (that may change if she keeps talking to me enough). My goal wasn’t to gain a financial independence convert, but to give someone the tools to take charge of their retirement investing by increasing their financial acumen. Hopefully, the simple spreadsheet I gave her with the current expenses, possible annual savings, and 30 year difference calculation was an eye opening experience.
Where To Move the Money
After a brief review of several brokerage options, it appears that she doesn’t have a large enough transfer balance to get more than some free trades (it takes $25,000 to get any cash offers from what I can tell). The current offer of some free trades at least means she can buy several index funds which saves a few bucks. This list is not intended to be an all-inclusive brokerage list:
- Scottrade– too low to get a cash bonus, $7 a trade
- E-Trade– or this amount she would receive free trades for 60 days (value depends on number of trades made)
- Fidelity– her balance isn’t large enough to get any free trades or cash. $7.95 per trade, some free ETFs
- TD Ameritrade– for this amount she would receive free trades for 60 days (value depends on number of trades made), some free ETFs
I personally use Scottrade, so I tend to tell people how easy it is to use and that it is pretty low cost. It doesn’t matter which one she chooses, she just needs to get it out of that company plan! Over time I have seen that small companies can’t afford to cover all of the fees and offer the best options. The same has applied to the companies I have worked for in the last 15 years.
I also told her I would send some low cost index fund options with a similar asset weighting to her 401k portfolio. I used a Vanguard model to come up with a suggested allocation for her (and made slight adjustments). I am thinking 50% in large cap US stock funds, 10% in mid/small cap stock funds, 20% in international stock funds, and 20% in bonds. I will also let her know about some other online tools to determine what her risk tolerance is to see if she might want to re-weight her portfolio to be more in line with her newly enlightened investment views.
My suggestion to her is just that and she needs to make sure she understands all of her options. She might come up with a totally different portfolio breakdown and that is fine with me. If she can eliminate most of those those expenses, her return will be better over time.
Wrapping It All Up
It feels good to pass on some financial knowledge to those that are thirsty for it. I would like to think the financial acumen increases for everyone that attends my class and even more for those that ask for follow-up help. Hopefully, I was providing guidance and not creating a clone with my same investment preferences.
I make sure to tell everyone that my advice is meant to be a springboard for them and not a definitive blueprint. Some might want to start managing their own money and some might find a good fee only financial adviser. Not everyone wants to do it themselves and I have to remember that. My class is not ever going to be full of aspiring early retirees and I am okay with that. As long as everyone picks up a few tips I feel like I succeeded.
How do you determine your portfolio weights? What brokerages do you use? What do you do when people ask for your financial advice?