Friday, March 9, 2018

Be careful of your IRA balance

I have two retirement accounts.  One of them came from the firm I worked at for 30 years, and the other from a firm I worked at for 9 months. One account has a nice balance, and the other would barely cover the cost of a nice cruise for two people. This entry is not about my accounts, but the fees that one pays to maintain an account.

My main retirement account is in a 401k associated with the firm I worked at for 30 years. When one takes into account a generous profit sharing plan that expired 20 years into my stay there AND generous contributions to the 401k into which profit sharing monies were then placed, I am earning more then enough to cover the expenses charged to my funds by their administrators. The bank I worked for has done a tolerable job of keeping management fees down.

Contrast the first account with a Rollover IRA associated with the second firm.  I had not reached the $5000 level where this firm would be required to allow me to keep my funds in their 401k.  (I didn't like their fund structures, as they had a set of target date funds which one could invest in, and they had moderately high management fees.)  A few months after I left the firm, this money was rolled over to an IRA, a savings account which pays almost nothing. When I checked my paperwork on this account, I received $9.50 in interest, and was charged $25 in fees for the year.  You can bet that I won't keep my money there much longer!

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This got me thinking about an ex girlfriend of roughly 20 years ago. She was a nice and generous lady, and didn't deserve me as a boyfriend. But what I remembered today was that the fees being charged to her retirement account were destroying the value of that account.  She was being eaten alive by fees, and there was little that she could do about it at the time.

After we broke up, she quit the small nursery school she then worked for and began work at a NYS prison for female inmates. Her responsibilities: Teach inmates with infant children the skills needed to care for children, so that they could find work taking care of others' children in a daycare setting.  Only one problem - NYS would never license these women to work in a daycare center. Instead, this training was really geared to help these women bond with their children and reduce the odds of them going back to prison. By now, my ex girlfriend has accumulated 20 years of experience and has earned a full NYS pension.

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Today, the internet provides everyone with a wealth of information. Yet, few people really understand how to manage their wealth - however much or little it may be.  If my ex girlfriend knew half of what I know about retirement planning (which isn't that much), she'd have chosen the lowest cost funds for her IRA (probably Vanguard) and follow John Bogle's advice and invested in only two funds - An S&P 500 fund and a US Government Bond fund.

I've claimed for years that the big brokerage houses charge fees that will eat the average person alive.  There is no reason for exorbitant fees for minimal returns. Yet, the average person believes that a managed fund will beat the market, and that the big name firms are looking out for the interests of the customer.  If you believe that, I will be more than willing to sell you a bridge in Brooklyn.  But I digress.

Years ago, I was having a conversation on the commuter train into NYC. I was having a conversation with the woman next to me, explaining how fund fees were eating up the modest gains of the average investor, and that managed funds had an 80% chance of trailing index funds. Someone overhearing our conversation got very upset at me, and almost caused a scene.  You can guess that she worked at one of those firms and was deeply ashamed that her income was made off the backs of ignorant investors.

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I can still remember seeing ads for the old investment banking firms. And they used phrases such as: "When E.F.Hutton speaks, everybody listens."  We know what happened to most of these firms, and we know how their excesses helped cause major problems in our economy. And even worse, we now have a government that aids and abets these firms by not requiring them to act as fiduciaries. No wonder why Millennials have little trust in the system.

So look carefully at your account balances, and be ready to move your assets if the trustees of your retirement accounts are making more money from your money than you are.


  1. I don't have any issues with your approach to investing. It seems to be working well. I am another victim of the hidden costs of the major houses. For most of my life I followed the bull of Merrill Lynch. They had me in funds that made them the most money. I thought I could do better on my own and went for some target date funds for my IRA only to learn years later that the company managing the account through work was charging a fee and that there was another fee on the target date fund and that this fund invested in other funds that also carried expense fees. You really have to work hard to get your money to work for you rather than your investment house.

    1. Pat -

      If I had to move my money out of my former employer's 401k, I'd move it all into a Vanguard IRA, as they don't gouge you with fees. Too bad that you didn't have the advantages I did. I read a book called "The Zurich Axioms" years ago, and that was a good treatise on "investing" (read: gambling). Later on, I read Bogle's book - Enough - and benefited from that book on investing.

      Lili deals with a decent firm, but she doesn't know when to let her investments be. She can't time the market, but her thinking is in the model that she can do so. Contrast this with my strategy. I felt that that there was way too much risk in my portfolio, and rebalanced it to something appropriate for my age. One can easily do this with 2-4 funds, keeping the ratio at (110 - your age = Bonds, 110 - Bonds = Stocks) Within the stocks, balance large cap = 1/3, small/med cap = 1/3, international = 1/3. If you don't like risk, simply drop the international part of the stock portfolio, and split stocks 50/50.

      With the above formula (of which I credit John Bogle for the core that I worked from), one should have little need to look at the stock market on an every day basis. But you will have to choose the funds with the lowest fees - and that's Vanguard, 99% of the time.