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.