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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.
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Always enjoy your thoughtful articles. None of your wife’s funds looked particularly expensive to me. Looked up PRJIX on Morningstar and it was in the cheapest quintile for its category (Midcap Growth). Morningstar gives it a 4 star Silver rating. Recent relative performance has been poor, but five year performance has been good. Is your goal to maintain your wife’s allocation and reduce cost?
John Redfield, thanks for the kind words. My goal is to attain market returns at the lowest possible cost. While international diversification has some value, I don’t think investing in small-cap, mid-cap, or smid-cap at a 0.6% expense ratio has any.
A great read Michael! Also, I’m very happy you have accumulated enough knowledge to level up and unlock this achievement.
That’s why we play the game, to gain experience and unlock achievements, right? At least that’s why my kid plays his games.
I love a well prepared filet mignon. I’m going to have to start attending these seminars again. The last few I’ve been to only had fish or chicken as options.
Brad, gaining experience is definitely a goal in life. Thanks for your comments.
Michael:
The fact your wife decided after 20 years you might know what you are talking about picking mutual funds is important reassurance for us HumbleDollar readers. Give her my thanks.
My T Rowe Price New Asia story (which I now notice is not same TRP fund your wife has):
In 1993 when Japan was thought to be taking over the business world, I invested $2500 in PRASX, and made monthly purchases over four years totaling $15,000. I viewed the purchases as high-risk money that I might lose entirely, so decided not to risk any more. Reinvested dividends and capital gains. In 2014 started taking cap gains distributions in cash. Those withdrawn distributions totaled $29,000. At its peak, a year ago, my PRASX was worth $107,000. Today about $60,000. I learned a lot from this, but am not dissatisfied with the investment.
I enjoy your articles. Thanks for sharing.
Tooney, I’ll pass along your thanks. And thanks for your comments.
Some (many?) Fidelity plans allow access to BrokerageLink, another account within the 401(k) where your investment choices are greatly expanded, including cheap Fidelity funds with no transaction fees.
Randy Dobkin, thanks for the information. I’ll definitely look into that.
Every time I read that you got a free meal, I LOL. Nicely done, Michael. Gotta keep the wife happy. I hope you both enjoy your new low cost funds!
Ben Rodriguez, thanks for reading. For some reason, free steak always tastes that much better.
Michael, I applaud your thoughtfulness in choosing 401(k) funds. However, I see that you are now talking about the “next step” which is to roll over her 401(K) to what I assume is a traditional IRA. For many people, this order is backwards, as many times funds cannot be directly moved from a 401(k) trustee to an IRA trustee this way. The entire account balance must first be liquidated, a check mailed either to the account holder (to do a 60-day rollover) or to the new IRA trustee (direct transfer). This can be a frustrating process, and can take anywhere from several days to several *weeks* to complete. I’m sure you’ve done your homework, and have determined that in your wife’s case that direct transfer of funds to an IRA is allowed. For most people though, to avoid additional frustration, I would advise checking this very carefully, before spending the time on picking funds that may or may not be transferable to another account, should a rollover be in their near future.
In my wife’s case, we’ve decided to keep her money in her Federal TSP account, for several reasons: 1)Low fees, with adequate (for us) fund choices; 2) Special state tax treatment for withdrawals; and 3) The G-fund is like a magical pink unicorn, in that it gives us access to a money-market like account that is currently paying over 3 per cent.
My point being, as I’m sure you are aware, is that the decision to roll over or not is not *always* strictly about fund choices, but a whole range of other considerations should be reviewed as well. I look forward to your adventures with Roth conversions, and how you’ll manage to wade through the various hoops and hurdles of that process!
wtfwjtd, That’s all part of the next step. Though I’m thinking we may roll it over to a Fidelity IRA, which should help alleviate any issue about fund compatibility. Also, Fidelity charges her 401k some minor monthly expenses which would also be eliminated in a Fidelity IRA. I’ll keep you updated.
Michael, as an old 401k manager I focused on this part of your piece, “401(k) was limited to just 31 investment choices,” In fact, 31 choices is way too many for the typical 401k participant to understand and effectively utilize.
For most average employees picking investments is no more than throwing darts at a list. Too many choices leads to confusion and inaction. I reviewed many accounts where employees thought they were diversified by investing in three different large cap index funds.
IMO sophisticated investing does not belong in a 401k plan, better to keep to basics.
R Quinn, I agree. My 401k has only four choices, an extremely low cost: S&P 500 fund, total market fund, internation fund, and balanced fund. If my wife’s Fidelity 401k plan had similar options, then there would be no issue. Instead, it was mostly limited to 31 more expensive funds.
From the column ” … limited to just 31 investment choices, a dozen of which are target-date funds.”
So that means there are about 19 investment choices outside of the target date funds. And that’s a very reasonable number of options to build a diversified portfolio from. As an aside, in my opinion many target date funds are just perfect for most participants.
Guest, Not when, except for the S&P 500 fund, they all have high expense ratios. If Fidelity gave me four extremely low-cost options, then that would be all I would need – otherwise I was hopeful that I would have access to all of Fidelity’s offerings so I could pick out the exact one that best suited my wife’s needs. Thanks for your comments.
i think 19 is too many for most 401k investors. Those who want to expand their investing should do so outside their retirement funds. Several index funds, a couple of bond funds and fixed income should be sufficient + target date.
Arguing about the best funds (and fund companies) can be a neverending disagreement between reasonable people. Having said that, I will likely never sell my DODGX and will, likely, never encourage anyone to.
Guest, The 0.52% haircut DODGX imposes on investors is a little stiff for me. Especially when there is a 0.01% option.
Thanks mj. And for me it’s all about the after-fee performance vs the fund’s benchmark. DODGX is head and shoulders above in that department.
Guest, according to DODGX website: DODGX 10 yr return = 14.25%, S&P 500 10 yr return = 14.64%.
My wife also had the Vanguard Primecap Core active fund in an IRA over the past 15 years. The 14.75% annual return over 10 years is nothing to sneeze at: $10,000 becomes $40,000 with this. Your point is made, though, in that with the nearly 0% annual fee of the S&P 500 fund, the two funds more or less tie, perhaps making us and our wives happy either way (a good active fund or a low fee index fund).
BMORE, If the Vanguard Primecap Core keeps your wife happy . . . then it is a very good investment.