This investor gets schooled in the ABCs of fund fees

Dear Adviser:

My client has three 401(k)s sitting at previous employers but doesn’t want to roll them over into an IRA. He seems to think having different managers keeps them honest. I’ve talked to him about consolidating, but it comes off like a hard sell. I really just want what’s best for his retirement. How do I communicate that clearly and effectively?

High fees can eat up 30% or more of a retirement plan’s investment gains.

Ask this investor how many primary doctors he has. People have specialists and dentists and eye doctors, sure, but they must communicate.

A single primary doctor solves that problem. Retirement investing is no different. For instance, your client almost certainly is overly concentrated in one investment or another but doesn’t realize it because the different 401(k) plans don’t communicate. His true investment risk-profile is a question mark, honest brokers or not.

Build him a risk-appropriate model portfolio that uses low-cost index funds, then populate that model with his current portfolio balance. Show him the annualized fee cost. He should immediately recognize what serious studies have shown — 401(k) plans are far too costly.

Brightscope, for instance, looked at hundreds of 401(k) plans around the U.S. It found that large plans have fees below 1% while the average for small plans is between 1.5% and 2%. Those are averages; some plans clocked in well-north of 3.5% of investor assets per year. A Yale study makes the case that any fund charging more than 1% is a “rip-off” by definition.

He might not be convinced by your sales chatter, but it’s hard to brush aside numbers. Point out to him that excessively high fees can eat up 30% or more of a retirement plan’s investment gains. That means he takes the risk while fund managers collect the money. It’s an easy call once he realizes the true impact of fund fees.

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