I’VE BEEN GIVING salient and sagacious financial advice to HumbleDollar readers for coming up on two years. Before that, I’d shared my wisdom for as long as I can remember with family, friends and—in a few cases—complete strangers. Sometimes, though, you need to listen.
Recently, I attended a presentation given by Carlson Financial, where various personal finance issues were discussed while I ate a complimentary eight-ounce filet mignon. One of the issues raised: When determining the total cost of a financial advisor, in addition to the advisor’s fee, an investor needs to include the expenses of the mutual funds that the advisor recommends.
I thought “how ridiculous.” Most savvy investors know that controlling mutual fund expenses is crucial. Then I suddenly realized that it had been years since I had reviewed the fees charged by the mutual funds in my wife’s 401(k), which still sits with her old employer.
Almost 20 years ago, soon after we were married, I briefly reviewed the mutual funds in my wife’s 401(k), which is administered by Fidelity Investments. When I recommended that she think about moving her money to low-cost index funds, she refused.
She informed me then that she had invested her 401(k) based on her own analysis, and in consultation with partners at the then third-largest accounting firm in the world. She made it quite clear that she had no desire to make any changes.
I decided that the benefits of marital bliss exceeded any savings we might achieve in her 401(k)—and that maybe her mutual fund selections weren’t that bad after all. When I got home from the recent Carlson Financial presentation, however, I decided to take a second look. Here are the funds held in my wife’s 401(k):
An eclectic list, to say the least. With a weighted average expense ratio of 0.27%, I realized that my wife’s 401(k) ship required only a modest course correction. I also resolved, however, that a couple of her costliest funds should go.
I thought about reviewing my findings with my wife immediately, but then remembered her steadfastness when we discussed it some 20 years ago. It reminded me of a story I’d read in Stephen Covey’s The 7 Habits of Highly Effective People.
The author had been frustrated by his wife’s requirement that all their new appliances be made by Frigidaire, as it added cost and complexity to each purchase. Eventually, he talked with his wife to try to understand why. She informed him that Frigidaire had always supplied credit to her father when he owned an appliance store—credit that kept his store afloat during hard times. As a result, when buying Frigidaire, she felt she was being loyal to the company and, by extension, to her father.
I decided to take a similar approach with my wife. I gingerly brought up the subject of mutual funds, hoping to better understand her attachment to her 401(k) selections. She replied matter-of-factly that she hadn’t wanted to discuss the topic with me 20 years ago “because back then I didn’t think you knew what you were talking about.”
We both laughed. She then informed me that she was now open to moving her investments in a lower-expense direction. It was nice to know that our future held lower costs—and that I had learned just enough during the last 20 years to gain her trust.
Using FundVisualizer.com, I compared each of her mutual funds with an alternative low-cost index fund. I decided to focus first on her small position in Vanguard Primecap Core (VPCCX), partly to better understand how Fidelity handled mutual-fund trades within her 401(k) plan.
I was concerned there could be a delay between the sell order and the corresponding purchase of the lower-cost fund. It turns out the sell and buy orders occurred simultaneously. With my wife’s blessing, I planned to sell Primecap and purchase the Fidelity ZERO Large Cap Index Fund (FNILX)—the zero referring to the fund’s 0% expense ratio.
There was just one problem with this master plan. The Fidelity fund wasn’t an option in her 401(k). Even though Fidelity offers access to more than 10,000 mutual funds on the retail side, my wife’s 401(k) was limited to just 31 investment choices, a dozen of which are target-date funds. This made some of my wife’s fund selections much more understandable.
She had one good option, however, that appears available only to 401(k) investors—Spartan 500 Index Pool Class E with a 0.01% expense ratio. We sold Primecap and purchased this fund. A few days later, Dodge & Cox Stock (DODGX) was exchanged for Spartan 500 Index Pool Class E as well.
What to do with her remaining funds? I started with the most cryptic, listed among my wife’s holdings as US Smid Eq Portfolio, which apparently stands for U.S. Small-Mid Cap Equity Portfolio. According to Fidelity, it “is not a mutual fund” but rather “an active, multi-manager fund” that has only been in existence for about a year. I wondered what this exactly meant, and what had my wife previously been invested in.
As the fund’s prospectus was not available online, I called Fidelity. When the representative said the firm could only mail me one, I asked the rep if I was dialing 1992. In a way, I’m thankful for this obstacle as it made the decision to sell that much easier. The entire position was promptly converted to—you guessed it—Spartan 500 Index Pool Class E.
American Funds Europacific Growth R6 (RERGX), T. Rowe Price New Horizons I (PRJIX) and American Funds New Perspective R6 (RNPGX) have all outperformed their respective indexes over the past 10 years, but they have plummeted this year. I decided that, while timing the market might be heretical to some readers, I’m going to give it a try in this case and wait for a market rebound before exchanging these three funds for Vanguard Institutional Total International Stock Market Index Trust. This decision is made easier by the fact that just 10% of my wife’s 401(k) balance is invested in these three funds.
The next step: Roll over her 401(k) to an IRA to allow for future Roth conversions—and, more important, a future article.
Michael Flack blogs at AfterActionReport.info. He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.