This week, I analyzed my wife’s old 401(k) and learned that she had around $7,000 spread across nine funds at T. Rowe Price. Fortunately for her, and most other 401(k) participants, she’s not charged for having so many funds; it’s just a bit of a mess whenever you open up her statements because you have nine balances, nine bar graphs on performance, and nine discussions of the fund’s prospectus.
The only tangible negative about having those nine funds is that it becomes very difficult to figure out what your composite expense ratio is. An expense ratio is how much you’re paying a mutual fund to manage your money. A composite expense ratio is the average expense ratio across all your funds after you take your balances into consideration. It’s what your expense ratio would be if you were to treat all the funds in your 401(k) as one fund.
Anyway, her composite expense ratio wasn’t too bad, a 0.6946%, but we consolidated it all into two funds – a S&P 500 index fund and a PIMCO bond fund. This cut her expense ratio in half and gave her the kind of diversity she probably was looking for in the first place. It’s not as diverse as it was before but this is easier to manage from an information perspective.
This also fits better with her overall diversity plans because integrating an old 401(k) with 2 funds is easier than integrating 9.
Comments
4 responses to “Review Your 401(k) Fund Fees”
> It?s not as diverse
Why? What can be more diverse than an index fund?
Lev
as a fellow TRP investor, i recently did some consolidating of my own, consolidating 2 TRP small cap IRA funds into a Vanguard small cap index fund. I also took a portion of my TRP bond index fund and put it into a Vanguard TIPS fund.
I also decided to move 2 401k funds into index funds as well.
My ultimate goal is to have all my money in index funds. Not all quite done it yet.
An index isn’t automatically diverse, it’s more diverse than a handful of funds but not necessarily diverse. The Dow has more blue chips, the Nasdaq has more tech, etc.
The writer of this article has made a huge mistake. Just because you have 500 stocks in the S&P 500 does not mean you have diversity. Those 500 stocks are all from one asset class ~ large cap. By adding in the proper mix of other asset classes you can actually increase your return while reducing your risk.
Although I agree that you want to be aware of fees, and minimize them as much as possible, I would not invest in only 2 funds because it was cheaper or easier. That is foolish. You will give up much more in return and have a great deal more volatility in your portfolio because you will lack many other asset categories. Asset classes such as small cap, small cap value, international (both large and small), emerging markets, and many others are an important part of the diversity equation.
Being lazy is a great way to lose money and add a great deal of risk to your portfolio!