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Sure. “I was able to save $15,000 more in 15 minutes for retirement and you can, too.” Ugh, I know… I know. We all hate it when personal finance writers assume that just because they were able to do something then it should be easy for everyone else, too. That said, what I did was incredibly generic and could apply to a lot of people out there with a company-sponsored 401k.
Can you really save $15,000 in 15 minutes?
If you read through this and are able to make the same changes I did to have more money for retirement, then I’ll be happy. If you can’t make those changes, then it probably means you are already ahead of the game. Honestly, when I did the math on this I was just so excited I needed to share with someone. I immediately told my coworkers (who obviously have the same 401k as I do), and now I’m telling you.
Is this a pyramid scheme?
No, but it’d be super cool of you to share this article with two of your friends, and they can share with two of theirs. Get to the third tier, and you’ll be part of my double diamond ambassador club. Oh wait… now I see it see it. Just kidding. (Send it to 3 friends.)
Seriously, though, the short story is that by trading out the 2045 Target Date Mutual Fund in my 401k portfolio I was able to significantly reduce the overall operating expense ratio. Operating expenses are just fees paid for them to manage the fund, sort of like annual dues. The lower the percentage the better in terms of keeping more of your money yours.
Lower expense-related fees over the next 17 years at an average market growth of 7% means I’ll have $15,000 more. It is a powerful combination of not paying the higher fees and allowing those invested savings to grow as well that adds up to $15,000 more for retirement. The 2045 fund was only 25% of my 401k portfolio, too, so your gains might be more impressive if you held a larger share. I’ll go into the details below.
Like most people searching around the internet for personal finance information, I found my way to the JL Collinsnh Stock Series of articles. Seriously the best first stop on a journey to understanding investments, the stock market, and how to handle them when saving for retirement. I honestly will not feel bad if you click that link and leave for a few hours to read that series. It is seriously that good.
Specifically, Part VIII-b: Should you avoid your company’s 401k? is what inspired me to make the change to my investments. In the article he discusses how investment companies have plundered a once great retirement planning tool. The funds offered in your 401k are often saddled with high fees and operating expenses that seem innocuous at first glance. How bad could a 0.50% expense fee be? (Short answer: not great.)
I understand that investment fees and operating expense ratios can be buried deep in the legalese. Doing the math for yourself on compounding gains over a long time horizon can be complicated. I get it. That’s why your homework is to just watch The Retirement Gamble mini-documentary by PBS. In less than an hour you, too, can be horrified at just how much those fees are robbing your retirement.
After watching that video one afternoon I watched it again with my wife that night to share the horror. The next morning I pulled up my 401k portfolio and went through all of the funds I was invested in to make sure I wasn’t being hit with outrageous fees I could avoid. Thankfully, 75% of my portfolio was in index funds which have notably low operating expense ratios.
Wait. What was the other 25% ?
The remaining quarter of my retirement portfolio was in a 2045 Target Date Mutual Fund. It is the fund that I was automatically enrolled in when my company initially set up my 401k. I appreciate the gesture since at least it was invested in something instead of cash. I believe the company does that because the target date funds are the easiest to understand and most generic for most employees.
At first, the target date funds sound great. I make one investment choice, and the provider allocates that to a portfolio appropriate for how long my timeline to retirement might be. They periodically adjust the ratio of stocks to bonds as we approach the target date when I would presumably retire. This, in theory, keeps my investments aligned with the appropriate risk tolerance for that period of my life.
The problem with Target Date Funds
Target date funds are expensive compared to index funds, presumably because they are actively managed in some capacity. The 2045 Fund offered in our 401k carried a 0.538% expense ratio which only seems very low because you haven’t watched that PBS video yet, I presume. Ern at EarlyRetirementNow has a great article breaking down What is Wrong With Target Date Funds that I implore you read when you get the chance.
My other issue with target date funds is that I could functionally build my own using the far cheaper index funds to save money. I looked into our 2045 Fund allocations and realized that, not counting the bonds, it was 80% large cap stocks and 20% small cap stocks. It was slightly more convoluted than that but I just needed the approximate ratio to trade for index funds.
Here it is… what I actually did. Time me 🙂
I logged into my 401k provider website and navigated to the investments page. I chose the option to re-balance my portfolio which allows me to specify what percent of my portfolio I want in which investments. My provider lets me do this a couple times a year, though yours might vary on that. I set the 2045 fund to 0% and increased the Large Cap Index Fund and Small Cap Index Fund up 20% and 5% respectively. [20%-5% maintains the 80:20 split of large to small cap stocks for the 25% I needed to reallocate.]
Click save. Done. Long-term I was able to save $15,000 in 15 minutes of actual processing time. The folks in the back are already yelling that I clearly took more time than that to research the issue, become aware of the situation, and calculate how to reallocate the traded fund. I never said the research time was included in that claim, and you can’t make me include it.
Give me some numbers, you coward
A person after my heart, I see. For the purposes of a simple illustration let’s pretend my 401k balance at the time was $150,000, and I was contributing $15,000 annually (because I like the 15 theme going on here). Below you can see the original portfolio with the 2045 Fund versus the updated portfolio where I reallocated to the index funds. This one change drops the weighted average expense ratio on the portfolio from 0.158% to 0.028%.
That may not seem like much since the starting expense ratio was so low, but it adds up quickly over 15+ years. You might personally gain a lot more ground if you have a higher proportion of target date funds or invest in high-expense mutual funds. Either way, a win is a win, and I’ll take any amount of found money.
|Fund Name||% Invested||3-Yr Return||Exp Ratio|
|LARGE CAP INDEX||35.00%||0.017%|
|SMALL CAP INDEX||15.00%||0.025%|
|Fund Name||% Invested||3-Yr Return||Exp Ratio|
|LARGE CAP INDEX||55.00%||0.017%|
|SMALL CAP INDEX||20.00%||0.025%|
Show me the money
You can see in the chart below that if we control for starting balance, contributions, and time frame and only vary the expenses applied on the portfolios it is a huge difference. The updated portfolio has an expense ratio over 5 times lower which is a lot. Over 15-17 years, you can save $15,000 in 15 minutes of work, as noted by the red text in the table.
For me, the small amount of effort involved in re-balancing my portfolio is worth saving nearly $1,000 a year on average over 15-17 years. We spend so much time trying to cut our day-to-day expenses that long term assets like your retirement account can easily be lost in the shuffle.
Why stop there?
Fees aren’t just potentially robbing your retirement accounts. You should check your taxable investments, IRAs, and college savings fund accounts as well. I wrote a few weeks ago about how a simple change to our son’s 529 college savings will probably net him $10,000 more toward his education. Read that article here: College Savings and Firing Our Financial Advisor
TL;DR – Save $15,000 in 15 minutes
I sold my 2045 Target Date Mutual Fund with a 0.538% expense ratio. I bought a similar proportion of Large Cap Index Fund and Small Cap Index fund carrying a blended 0.019% expense ratio. The expense savings will result in a portfolio approximately $15,000 higher than keeping the 2045 fund over 15-17 years. This trade only affected 25% of my portfolio– imagine the savings if yours involves more.
Nothing on this blog constitutes investment advice or any recommendation that any investment strategy is suitable for any specific person. From reading my Blog I cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Blog are just that – an opinion or information. You should not solely use my blog to make financial decisions and I highly recommended you seek professional advice from someone who is authorized to provide investment advice.
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