Ask Liz Weston

Get smart with your money

401(k)

Q&A: Fees can do serious damage to your retirement

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Dear Liz: When I changed jobs, I rolled my 401(k) account into an IRA and took it to a financial planner. He invested it initially and now has a management company watching it. So now I am paying quarterly fees to him, the management company and the IRA custodian. The fees average about $2,000 a year. I am thinking about moving my account to my current 401(k), which has lower fees.

I feel like the planner has me in way too many investments, and my returns aren’t great. My account is up about $40,000 on a $122,000 initial investment. I will be 60 this year and plan on working for another six-plus years.

Answer: If your employer accepts IRA transfers — and many do — then rolling the money into your current 401(k) could be a great way to go.

Many 401(k) plans offer ultra-low-cost investment options that aren’t available to retail investors. Many also offer target date funds that would take care of diversifying your investments while making sure the mix gets more conservative as you get closer to retirement.

Right now you’re paying above-average fees to get below-average performance. If you had put your money into a low-cost option such as the Vanguard Balanced Index Fund five years ago, your account would now be worth nearly $190,000. The expense ratio for the balanced fund can be as low as 0.08%, compared with the 1.23% you’re paying now. (Your actual cost probably is higher; you didn’t include the expense ratios of the underlying investments in your account.)

Fees matter a lot. Higher fees depress returns and can increase your chance of running short of money in retirement.

At the same time, the years just before and after retirement are crucial because you’ll be making a lot of decisions with major consequences (such as when to claim Social Security and how much to withdraw from retirement accounts). Paying 1% in fees could make sense if you were getting comprehensive financial planning advice that addressed your retirement planning needs as well as other aspects of your finances, such as insurance, taxes and estate planning. If all you’re paying for is investment management, though, you can get that for a lot less.

If your employer doesn’t accept transfers or doesn’t have low-cost options, you could consider transferring your IRA to a custodian that offers low-cost computerized investment services. These include Betterment, Wealthfront, Vanguard Personal Advisor Services and Schwab Intelligent Portfolios, among others. The all-in fee for their services, including expense ratios of underlying investments, is typically less than 0.5%.

If you do opt for less expensive investment management, you still should consider hiring a fee-only financial planner before you retire to review your plan. You can find fee-only planners who charge by the hour at Garrett Planning Network.

Tuesday’s need-to-know money news

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Today’s top story: Managing your 401(k) in uncertain times. Also in the news: How the Alternative Minimum Tax works, how owning or selling a home affects your taxes, and the 10 biggest tax havens on earth.

How To Manage Your 401(k) in Uncertain Times
Protecting your retirement.

How Does the Alternative Minimum Tax Work?
What you need to know about the extra tax bite.

How Owning or Selling a Home Affects Your Taxes
Both could save you money.

These are the 10 biggest tax havens on the planet
In case this year’s taxes have you thinking of relocating.

Q&A: How to track down an old retirement account

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Dear Liz: I worked for a company during the late 1990s. When I left, I had a 401(k) worth approximately $10,000. I recently found an old 401(k) statement and called the plan administrator. I was told my company’s accounts had been transferred to another plan administrator in 2008. I called the new administrator and was told they also could not find my 401(k) using my Social Security number. How do I proceed? What are my options?

Answer: Get ready to make a lot more phone calls.

There’s no central repository for missing 401(k) funds — at least not yet. The Pension Benefit Guaranty Corp., which safeguards traditional pensions, has proposed rules that would allow it to hold orphaned 401(k) money from plans that have closed. That wouldn’t start until 2018. Another proposal, by Sen. Elizabeth Warren (D-Mass.) and Sen. Steve Daines (R-Mont.), would direct the IRS to set up an online database so workers could find pension and 401(k) benefits from open or closed plans, but Congress has yet to take action on that.

If your balance was less than $5,000 — which is possible, given the big market drop in 2008-2009 — your employer could have approved a forced IRA transfer and the money could be sitting with a financial services firm that accepts small accounts. If the plan was closed and your employer couldn’t find you, the money could have been transferred to an IRA, a bank account or a state escheat office. You can check state escheat offices at Unclaimed.org, but searching for an IRA or bank account may require help.

If your employer still exists, call to find out if anyone knows what happened to your money. If the company is out of business, you may be able to get free help tracking down your money from the U.S. Department of Labor (at askebsa.dol.gov or (866) 444-3272) or from the Pension Rights Center, a nonprofit pension counseling center (pensionrights.org/find-help). Another place to check is the National Registry of Unclaimed Retirement Benefits, a subsidiary of a private company, called PenChecks, that processes retirement checks, at www.unclaimedretirementbenefits.com.

One more wrinkle: Your employer or a plan administrator could insist you cashed in your account at some point. You may be able to prove otherwise if you’ve kept old tax returns, since those typically would show any distributions.

Your experience shows why it’s important not to lose track of old retirement accounts. Your current employer may allow you to transfer old accounts into its plan, or you can roll the money into an IRA. Either way, it’s much better to keep on top of your retirement money than to try to find it years later.

Wednesday’s need-to-know money news

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Today’s top story: What happens when you can’t repay a payday loan. Also in the news: How to upgrade your old car with new-car tech, why women may face retirement shortfalls despite the closing pay gap, and the biggest complaints about 401(k)s.

When You Can’t Repay a Payday Loan
Preparing for the consequences.

5 Ways to Upgrade Your Old Car With New-Car Tech
You don’t need a new car in order to have the bells and whistles.

Pay Gap Closing but Women May Face Retirement Shortfall
Good news and bad news.

The Biggest Complaints About 401(k)s
Know what you’re dealing with.

Monday’s need-to-know money news

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Zemanta Related Posts ThumbnailToday’s top story: NerdWallet’s best credit card tips for December. Also in the news: How to tell if a Roth 401(k) is for you, why postdating checks is a waste of time, and how many credit cards you should have.

NerdWallet’s Best Credit Card Tips for December 2016
Just in time for holiday spending.

How to Tell If a Roth 401(k) Is for You
Choosing the right retirement savings.

Postdating Checks Is a Waste of Time — Here’s Why
Not worth the risk.

How many credit cards should you have?
What’s the magic number?

Q&A: What to consider when investing in target date retirement funds

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Dear Liz: I have 100% of my 401(k) in a fund called “Target Retirement 2030.” This fund is made of several other funds, so does that qualify as “diversified”?

Answer: It does. Target date funds have become increasingly popular in 401(k) plans because they do the heavy lifting for investors. The funds select asset allocations and grow more conservative in their mix as the retirement date approaches.

Target date funds aren’t perfect, of course. Some are too expensive. The typical target date fund charges about 1%, but Vanguard and Fidelity charge as little as 0.15%.

Another issue is the “glide path” — how quickly the funds get more conservative. There’s no consensus about what the right glide path should be, and investment companies offer a lot of different mixes. Any given glide path may be too steep for some people and too shallow for others, depending on their circumstances. As an investor, you can compensate for that by choosing funds dated later or earlier than your targeted retirement date. If the 2030 fund gets too conservative too fast for your taste, for example, you could choose the 2040 fund instead.

Despite the downsides, you’re likely to be much better off in a target date fund than you are in some of the other options. Too often novice investors take too much or too little risk without realizing it. They may have all of their money in “safe” low-return options, which means they’re losing ground to inflation. Or they may have all their money in stocks, including their own company’s stock, and would be unprepared for a downturn wiping out a good chunk of their portfolio’s value.

Even those who know they should diversify often do it wrong by randomly distributing their contributions across their investment options. If you don’t know what you’re doing, or you simply prefer investing professionals to take charge, target date funds are a good way to go.