401K Fees Decoded

 

401k Fees Decoded

At the end of every month, I sit down and catalogue my spending in an excel spreadsheet. I find it oddly calming (yeah okay, I’m a nerd). While I don’t have a strict budget in the traditional sense, I’ve found that tracking my spending helps me to see where I may be overdoing it. (This past month the gingersnap lattes put me over budget. So, no surprises there.)

I realized something in my latest catalogue though: there are certain expenses I have every month that actually never make it to my spreadsheet. Namely, the fees I pay associated with my 401k account, since they are taken out of the account itself rather than my checking or credit accounts. Without including these fees, I realized I wasn’t really seeing the full picture of my spending. I decided to start the year off by making sure I am accounting for those expenses along with everything else.

As I started to look into it, I found that these fees fall into three main categories: administrative/record keeping fees, internal fund expenses, and management fees.

Administrative/Record Keeping Fees

Least controllable.

The first category is the one that unfortunately we all have the least control over when it comes to our 401k accounts. Our employers choose the record keeper that houses our 401k and they set their own administrative fees which they charge automatically. Beyond petitioning your employer to change record keepers, there’s not a lot you can do about this one. Luckily for me, the record keeper that holds my 401k charges a flat fee that’s pretty easy to swallow: $5/month. Other record keepers may charge fees that are a little less straightforward. These fees should be itemized on your account statement or at least available in a fee disclosure within your account or on request. If you don’t know how much you’re paying, call your record keeper and ask!

Internal Fund Expenses

Slightly controllable.

The second category is one we start to have a little more control over (though less than we would in an IRA or traditional brokerage account, due to the limited fund line ups available in employer-sponsored accounts). Each fund you’re invested in within your 401k also charges a fee, typically as a percentage of the amount invested. I’m also lucky in this category that many of the options available to me within my 401k are low cost, so the weighted expense ratio of all the funds in my portfolio is currently about 0.07%. Market fluctuations make it difficult to get an exact dollar amount on this unless your record keeper provides one, but you can estimate using the following formula: [weighted expense ratio (keep in mind that my 0.07% would translate to 0.0007 for this calculation) / 12 months] * total account value at the end of the month. So for December, my internal fund expenses would have cost me about $1.46. Not too bad!

In comparison, let’s assume my weighted expense ratio was 1% higher, at 1.07%. This would have made my cost for December jump to $3.57. That still seems pretty low, but over a full year, that would have been an increase of over $25, and that amount only grows as the account does! Making sure your internal fund expenses are as low as possible can have a huge impact on your account growth over time. This is one area where it’s definitely worth reaching out to your HR department if your current options aren’t up to snuff. If you need help building a case, reach out to us! We’ve got your back.

Management Fees

Full control.

The last category is the one we finally have full control over. This is the amount we pay for help managing the account. If you’re a blooom client, you already know exactly what you’re paying in this category, because it’s a flat fee that came out of a separate funding source, rather than being buried in the other fees of your 401k account.A blooom client paying annually at a discounted rate of $99 year would pay $8.25/month.

If you’re paying for a traditional management service however, you’re likely in for some math again: these services typically charge by a percentage of the account’s value. So like we saw with internal fund expenses, that expense will only grow over time. Given that, the obvious choice is to go it alone and bring your cost down to $0, right? Well, maybe not.

A study by Financial Engines that looked at defined contribution plan participants from 2006-2012 found that the median return was 3.32% higher for those with professional guidance. According to this study, for a 45-year old, this could translate to 79% more wealth at age 65! This seems to suggest that getting some help with your investments is worth it in the long term, but there’s still no reason to pay more than you should. To save money in this category, look for low cost services that are up front about their fee structure and fit with your goals and risk tolerance.

The Full Picture

So looking at all of these fees together, I paid $14.71 towards servicing my 401k in December. But since the blooom subscription was already accounted for, it’s actually just the additional $6.46 that I’ll need to add to my spreadsheet this time around.  One study estimates that a typical worker — earning the median income and paying the average 401(k) fees over their lifetime — will be assessed a total of $138,336 in fees. And it’s estimated to be worse for high-income workers, thanks to the fee structure of the average 401(k) plan.The fees you uncovered in your own account might be higher or lower, but hopefully just the act of looking them up was empowering and eye-opening. In this case, ignorance is definitely not bliss! After all, it’s only once you know how much you’re paying that you can take steps to lower it.

We leave you with this 401k fee advice:

May you have the strength to accept the things you cannot change (Administrative/Record Keeping Fees)the courage to change the things you can (Internal Fund Expenses/Management Fees), and the wisdom to know the difference (blooom’s here to help).

 

 

 

[source: https://www.usatoday.com/story/money/markets/2018/02/08/ask-a-fool-how-much-does-my-401k-cost/110041408/]
[source: http://corp.financialengines.com/employers/FinancialEngines-2014-Help-Report.pdf]
[source: https://www.americanprogress.org/issues/economy/reports/2014/04/11/87503/fixing-the-drain-on-retirement-savings/]

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Keep Calm and Invest On

Remember when “breaking news” was actually worthy of the term? It’s thrown around so much by networks these days, it feels like everything leading off the news is cause for mass hysteria. Maybe there’s an asteroid heading right for us, or maybe the Sun is supposed to randomly burn out in the next few months.

If that’s the case, your investments aren’t going to do you any good anyway. But in the far-off chance that those things DON’T happen any time soon, it might be good for us to cover something EVERY long-term investor must understand. Just like any set of stairs you encounter, markets go up AND down. It happens ALL the time … so often that at some point investors saving for retirement owe it to themselves to stop paying so much attention to [insert major news network].

We can’t tell you how many times we’ve seen something similar to these following headlines over the years:

“Expert: Crash is Coming, Time to Sell”

“2008 All Over Again?: Analysts Think So”

“Dow Sheds 300: Pros Say Get Out!”

And the very next day…

“Dow Rebounds 350 Points: Bull Market Marches On”

“Analysts: This Year Could Be the Best Year in Decades for Stocks”

“Risk On: Never a Better Time to Buy!”

You get the point. In a world where we now have a 24-hour news cycle, the very existence of any news outlet is highly dependent upon one thing: RATINGS. There is simply nothing better for ratings than fear and panic, which is why those first three headlines will catch more attention than the last three. It’s why negative news will always net more ratings.

Why is this? Well, unfortunately negative events have a greater impact on our psychology than neutral or positive events. This is often referred to as negativity bias and it’s just another annoying and unavoidable part of our human nature. It’s why we tend to pay more attention to a celebrity’s life spiraling out of control than the daily acts of heroism displayed by any of our local fire departments. In the world of finance, it’s why we’re inclined to tune in on the down days and ignore the up days. The media knows this. They thrive on it. It’s also the reason that very simple facts that would likely relieve that fear for the average long-term investor are often left out of the story.

For example, how about the fact that, according to data from the Capital Group, in the last 115 years we’ve seen a decline in stocks of 10% or more on average once every single year? Or the fact that in that same span, we’ve averaged three declines of 5% or more every single year? What about the most comforting fact of all – that there has NEVER been a single time in U.S. history where the stock market has dropped and not recovered. Does that guarantee it will never happen? Absolutely not, but we would have far bigger concerns than our 401k accounts if we saw the first ever permanent crash. When the stock market is falling, viewers are more likely to stay tuned (can you say RATINGS BONANZA?) Do they usually balance it out with historical context and comforting facts? Not so much.

No one knows for sure what the rest of 2018 will bring to investing. Financial news will continue to keep us informed and sometimes on edge, but its role has little to do with the average investor saving for a far-off goal like retirement. Unless you’re a professional trader trying to interpret market data every second of your day, any news related to the day-to-day movements in the stock market should be irrelevant to you. Investing for your retirement is about retirement. If anything, most investors should embrace the volatility, since the market is really just going on sale. It’s not about today, tomorrow, or even five years from now. And if you ARE that close to retirement, you shouldn’t be heavily invested in stocks anyway.

So relax. Be patient. Chill. Sure, it’s a challenge to any investor, but it may also be what ultimately saves you from making enemies with future you.

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Don’t Sit: How to Rollover Your 401k

Congrats! You’ve landed a new job (never a doubt) and didn’t even have to list us as a reference (Oh, the accolades we would’ve thrown your way). While you’re busy getting acclimated to your new work digs, if you have a 401k with your previous employer, don’t forget to bring it with you, along with your trusty stapler. Here are a couple options on how to roll it over:    

Direct rollover to new company plan

If you plan on performing a direct rollover of your old account, first check to make sure your new employer’s retirement plan will accept 401k rollovers. If so, contact the 401k administrator at your new company for a new account address [Example: ABC 401k Plan FBO (for the benefit of) YOUR NAME]. Once you fill out all required paperwork, your 401k funds will either be transferred directly from your old plan to the new plan, or mailed to you as a check made out to the new account address. Just make sure to turn it over to your new company’s 401k administrator.

Rollover to an IRA

You can also roll over your 401k to a traditional IRA, either by transferring the funds to your existing traditional IRA, or by opening a new IRA to receive the funds. No dollar limit is required for either one. You can also roll over – or convert – your non-Roth 401k money to a Roth IRA. The taxable portion of your distribution from the 401k plan will be included in your income at the time of the rollover.

Leave it where it is.

Sometimes the best move you can make with your 401k is to not make any move at all. At least for the time being. For instance, If you’re happy with the investment alternatives your former job offers, or if you need some more time deciding your next move, or if your new company requires a certain amount of time before you can participate in their 401k plan, you may be able to simply leave your 401k where it is.  

Cash out.

Please advise, we only recommend this as a “last resort” option. After you leave your previous employer, you can choose to withdraw your 401k funds in a lump sum after leaving your previous employer. To do this, request that your 401k plan administrator cut you a check. While the check amount will look great in your hands, remember that cashing out could put a dent in your retirement savings, plus you may be faced with significant taxes and penalties in the short term, too.

Of course, not all 401k plans are created equal. So before you make a final decision, we’ll help you choose the best fit for your retirement goals. Hey, it’s what we’re here for, so let’s chat.  

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Women Investors

3 Reasons Why Women are the Better Investors

A Wells Fargo Investment Institute study found that women perform better than men as investors. We can probably blame testosterone, which makes men quicker to make judgments and less likely to examine facts that might prove them wrong.

So what can you do if you don’t happen to be a woman? Try to emulate the traits that give them the advantage:

1. Women are more patient

Since they tend to trade less frequently than men, they often earn higher returns for the risks they do decide to take. Men on the other hand tend to be overconfident about their investment ability. Additionally, their frequent trading carries both direct and indirect costs, which can eat away at returns. (See also: Leaving your 401k the heck alone)

2. Women are more disciplined

Women tend to stick to their investment plan, which can to lead to better results. However, male investors were six times more likely to make major changes in asset allocation, such as switching from 100 percent stocks to 100 percent bonds, or vice versa.

3. Women are more willing to learn

They are more likely to seek education and advice from investment professionals. Also, twice as many women as men said that what they need most from a financial advisor is education about investing principles and concepts.

 

Room for improvement

The one area where women lag behind is investing confidence. While this might help them make prudent decisions, it also dampens their chances at higher returns in some cases. Become a more confident investor with these tips:

Research

Visit investment websites, take an investment class, or meet with an investment professional. Learn what your employer offers. Explore individual retirement accounts, or, if applicable, your partner’s retirement benefits.

Plan

Create a budget for saving and investing. Set goals with a time horizon and risk level you’re comfortable with.

Act

Choose the asset allocation that works best for your personal financial situation. Regularly monitor and rebalance your portfolio as necessary.

 

A great place for financial advice is blooom, where members have free access to registered Financial Advisors. Send them your questions and you’re on your way to becoming the best investor you can be!

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The Stock Market Sell-Off

Every investor needs to know that market sell-offs are both inevitable and, in fact, business as usual.

This is not our first rodeo… more like 350th

Since 1900, the market has averaged three declines of at least 5% per calendar year (source: Capital Research and Management Company). In other words: The market has dropped by at least 5% about 350 times since 1900! The mistake so many investors make is that they see their account value declining, and hear doom and gloom from the media and friends. They then assume they should sell and “wait for things to get better.” This is not an advisable course of action: The market has recovered and reached new all-time highs not 90% of the time… but 100% of the time.

Hindsight is always 20/20

Sometimes, we know why the market is selling off. Other times, it is a complete surprise. History has also shown that the reasons for market sell-offs are rarely what the talking heads were predicting. What we know or fear today will rarely be the actual reason for a future market decline.

What should investors do after a big market sell-off?

Know that the recent market decline has nothing to do with what the market will do today, tomorrow, or next month. Many times after steep sell-offs in the market, it goes on to rebound even higher than where it was before.

Your not-to-do-list

If you are investing for the long term (like inside your 401k for retirement), the best course of action when you feel scared about the markets is do nothing. Do not panic, do not do something radical like selling out of your investments.

Learn to love a good sale

If your budget allows, a market decline is the best time to INCREASE your contributions to your 401k. Think about it: The market has effectively gone on sale. We know as consumers to look for sales and bargains when we are shopping. Americans would be wealthier if they learned to treat market declines as sales and, if possible, bought a bit more.

Avoid FOMO

Considering that today, the Dow Jones is around 25,000, wouldn’t you want to travel back in time to 2008/2009 and buy a ton of stocks? During the financial crisis, the Dow went below 7,000! Sadly, very few investors were buying when it was at those low levels. Many were even doing exactly the opposite–the worst possible thing: They were selling at those insanely low levels. Doing this likely locked in losses that many investors may have never recovered from. Most other long-term investors who stayed put and ignored the panic were rewarded by their portfolio values, if they were well-diversified. They climbed up to new all-time highs within just a few years.

When in doubt, ask blooom

At blooom, we do our best to communicate these kinds of messages. We worry that there is an entire generation of investors (roughly age 32 and younger) that were likely not investing during the last significant market decline. They have thus only seen the market since 2009 on a fairly robust growth trajectory. We remind our clients that markets never go straight up and that periodic declines are not only inevitable, but actually needed from a risk/reward standpoint.

Since blooom specializes in 401k accounts, it is easy for us to help our clients maintain a long term focus, since their investments are generally for long term goals like retirement. We also remind our clients that included in their monthly subscription fee, they always have access to a blooom advisor if they are feeling scared or considering selling out of their investment portfolio.

Help us help you

Blooom will put together a beautiful, well-diversified portfolio for all clients using the lowest cost funds available within their 401k plan. However, if a client does something rash and sells out when the markets declines, all of the work that blooom has done goes right out the window – and might never return. We suspect that a lot of wealth is squandered by individual investors not from poor investment selection, or high fee funds, but squarely due to bad decisions and bad investor behavior in moments of emotional exuberance or fear. Be careful not to chase over-priced “hot” funds in good markets, and be sure not to bail out of so-called poorly performing funds in bad markets. The old “buy high, sell low” problem – don’t fall for it!

 

If you would like more information or perspective on this topic – visit blooom’s FAQs regarding market declines.

 

 

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