YA Wealth Management/IRA Question

[Connoisseur]

Here's something I've been mulling about for a couple of months and I can't seem to make a decision.

Quick background:
I'm a novice at investing. I have a 401k with my previous employer which I haven't touched in a couple of years and want to roll over into an IRA so I can contribute more money into it. I also have a fair bit of cash/stocks on hand which I want to invest in a more responsible way. I'm not an active trader and am neither willing nor able to monitor and readjust my investments on a daily/weekly basis. The most I would think about it is about 3-4 times a year.

I've been approached by a number of wealth investment firms and I'm currently considering either Merrill Lynch or Fidelity. I already have checking and savings accounts in ML and rolling over into an IRA would give me some cross-sold benefits (i.e. better rates on credit card, lower lender origination fees, lower HELOC rates etc. etc.) but their rate is 1.5% for actively managing my cash and they'd invest in fairly expensive Mutual Funds (Blackrock primarily). Fidelity has more options in terms of low load funds but they charge a blanket 1% management rate across the board.

Finally to the question:
Should I just pick one of these companies (and if so any thoughts) to invest my wealth or should I just roll over into an IRA myself and throw money into an index tracking fund to save on costs?

Does anyone have experience with wealth management services?

 

[jlee]

Vanguard index. Do it yourself - 1.5% is absurd.

 

[Gunslinger08]

As an average joe investor with a moderate amount of money, I'd probably just buy a Vanguard Target Retirement Fund with an appropriate year for when you'll be of retirement age. So if you're around 30 years from retirement, look at VTIVX.

Personally, I am not a believer in active management for middle class amounts of money. Seems like it's mostly a coin flip whether or not active management gross returns beat index funds, and then you also have larger expense ratios or management fees. That said, I'm not a finance professional or economist. Who knows if continued growth of the US and world economies is realistic for 30-50 more years? Maybe actively managed investment will start to make more sense in the future.

 

[rcpratt]

Absolute waste of money. Stick it in a handful of index funds.

 

[maddogchen]

DO NOT pay people 1-1.5% of your money to manage your money. Only they will get rich, not you!

It is worth the time to learn about how to manage money yourself! And I definitely suggest you should do the latter which is just roll over into an IRA yourself and throw money into an index tracking fund to save on costs.

 

[Connoisseur]

I can do a tracking/target fund with the IRA but suggestions on the cash? I've heard ETF's are a good way to go but trying to figure out what percentage to put into what types of ETFs. Also, does anyone have experience with robo investors like wealthfront?

 

[DaveSimmons]

I keep my emergency funds and the cash part of my portfolio in an online savings account and my checking account. There isn't any point in using bank CDs or money funds until rates rise much higher.

For investing: index funds (mutual or ETF). A Vanguard Target fund of index funds is a one-stop way for you to be fully diversified. Buy, hold for decades, done. Zero effort and it will beat 80% or more of actively managed funds.

> Also, does anyone have experience with robo investors like wealthfront?

No, but I know they're going to do worse than index funds over time.

 

[kranky]

I know I'm repeating earlier comments but this is important. That 1% or 1.5% doesn't sound like much but remember that is taken yearly from what you started with PLUS your profits PLUS you have the high ERs on funds PLUS any front-end loads. So after 20 years, they have siphoned off somewhere between 20%-40% of your money. You do not need to pay someone.

I do have experience with a wealth management firm. I am the trustee for a trust that belongs to a number of beneficiaries (I am not one of them). The WM firm takes about 1% a year for doing nothing beyond having some low-level staffer make fancy binders with colorful charts, meeting with me and the beneficiaries once a year, and having their computer system spit out monthly statements. They split up the money into lots of different mutual funds to make it appear complicated but it's all unnecessary smoke and mirrors. If it wasn't for the legal liability, I'd do it myself for free.

Read "The Bogleheads Guide to Investing". You don't want to mess with your investments more than a couple times a year? Perfect. It can be that easy.

Asset allocation, periodic rebalancing, low fees via index funds = win. It can be boring, but who cares.

 

[edro]

You want to put your cash into a taxed stock account (ETFs)?

"I've been approached by a number of wealth investment firms" Hmmm... I wonder why they are approaching you? Maybe to take 1% of everything you have, every year.

Both are good companies, but there is no reason to let them do any extra management for you.
If you select one, simply do it yourself by selecting some low fee Mutual Funds from the Domestic, International and Bond sectors.

Roll the 401k over into a Traditional or Roth IRA. If you make more than $70k/yr single or $118k/ joint, Traditional contributions are not tax deductible, so you would want to make your contributions to a Roth IRA.
You can roll your 401k into a Traditional IRA and open a Roth IRA and start contributing to it.
Or you can roll your 401k over into a Roth IRA now, but you will have to pay the taxes on the 401k balance this year.

 

[Xonim]

I know I'm repeating earlier comments but this is important. That 1% or 1.5% doesn't sound like much but remember that is taken yearly from what you started with PLUS your profits PLUS you have the high ERs on funds PLUS any front-end loads. So after 20 years, they have siphoned off somewhere between 20%-40% of your money. You do not need to pay someone.

For an excellent explanation of this effect, watch this. It's exactly what those "wealth management" firms don't want you to know.

 

[squelchy451]

It's all about asset allocation.

https://www.bogleheads.org/wiki/Three-fund_portfolio

I use fidelity and have my funds in three iShares--total US market, total international market, and total US Bonds.

 

[s0me0nesmind1]

first and foremost: Do NOT. I repeat. DO NOT roll your 401k over into an IRA UNLESS the fee's are substantially lower. There is NO POINT whatsoever to rolling over a 401k all to pay more money in fees than you did with the IRA. Personally, my 401k fees are absolute rock bottom. I think my fee is ~$10 every quarter (flat fee) and 0.02%.

Second: As most people here have already suggested, I heavily suggest putting money in simple Index funds (such as Target Retirement accounts).

Third: A lot of financial management companies these days are giving enticing offers for rolling over into their accounts. I've heavily contemplated taking a bonus collection approach - by simply rolling over every single year into a different one, collecting the bonus each time. Definitely doesn't sound bad on paper, assuming you don't lose much on the fee side.

Lastly, if you don't know much about managing your retirement funds in general - I would heavily suggest you do a "set it and forget it" approach with target retirement accounts (preferably under vanguard, they are notorious for the low fees).

Also, for those that are more involved and have more in-depth knowledge on investments - Vanguard is currently going through a very big lawsuit in regards to their fees and supposedly avoiding taxes. Anyone with an account with them may want to read: http://www.joshuakennon.com/vanguard-accused-of-nearly-35-billion-tax-abuse/

 

[Hugo Drax]

Where are the customers yachts?

Avoid.

Just roll it into an IRA and just DCA SPY and reinvest dividends.

 

[edro]

Also, for those that are more involved and have more in-depth knowledge on investments - Vanguard is currently going through a very big lawsuit in regards to their fees and supposedly avoiding taxes. Anyone with an account with them may want to read: http://www.joshuakennon.com/vanguard-accused-of-nearly-35-billion-tax-abuse/

No need to be concerned.
Vanguard is still the best place to be for the average Joe.

 

[DaveSimmons]

Also, for those that are more involved and have more in-depth knowledge on investments - Vanguard is currently going through a very big lawsuit in regards to their fees and supposedly avoiding taxes. Anyone with an account with them may want to read: http://www.joshuakennon.com/vanguard-accused-of-nearly-35-billion-tax-abuse/

I'm not concerned, this might or might not result in a settlement with the IRS but the paper's expert seems to be making some odd assumptions about what expense ratios "must be" for index funds that are fully automated with almost zero overhead. He might know his stuff, but this reads like the starting assumptions he worked from were not correct.

If your cost is 0.001%, then charging 0.01% is a 10x markup not predatory pricing.

first and foremost: Do NOT. I repeat. DO NOT roll your 401k over into an IRA UNLESS the fee's are substantially lower. There is NO POINT whatsoever to rolling over a 401k all to pay more money in fees than you did with the IRA. Personally, my 401k fees are absolute rock bottom. I think my fee is ~$10 every quarter (flat fee) and 0.02%.

Look at the 401k fees, the fund expense ratios AND the fund choices. Many 401ks have garbage actively managed funds, or index funds with high expense ratios.

 

[Connoisseur]

You want to put your cash into a taxed stock account (ETFs)?

"I've been approached by a number of wealth investment firms" Hmmm... I wonder why they are approaching you? Maybe to take 1% of everything you have, every year.

Both are good companies, but there is no reason to let them do any extra management for you.
If you select one, simply do it yourself by selecting some low fee Mutual Funds from the Domestic, International and Bond sectors.

Roll the 401k over into a Traditional or Roth IRA. If you make more than $70k/yr single or $118k/ joint, Traditional contributions are not tax deductible, so you would want to make your contributions to a Roth IRA.
You can roll your 401k into a Traditional IRA and open a Roth IRA and start contributing to it.
Or you can roll your 401k over into a Roth IRA now, but you will have to pay the taxes on the 401k balance this year.

Thanks for the advice. In regards to Roth IRAs, I believe my current income (both single and joint) prevents me from making contributions into a Roth IRA account based on my understanding. It would also preclude me from getting tax deductions from the traditional IRA.

In this case, is there any point in rolling over into an IRA (say vanguard)? My old 401k is in ML and is currently invested in a T. Rowe Price target fund. Am I missing something in regards to tax savings or Rollovers?

 

[Uppsala9496]

It's all about the fees you pay on the 401K.
A few years ago I rolled over a large 401K to vanguard. Pay next to nothing in fees. (I'm paying 0.09%; 0.05%; 0.29% in expense ratios)
Look at the fees you currently pay and compare them to the ones at Vanguard for the mutual funds you like (or similar to the ones you have). Shouldn't take too long.

 

[dullard]

Suppose you had $100k to roll over, suppose you were to get a typical 8% return, and suppose you were to withdraw your money in 30 years (not knowing your age, I just guessed).

1) Hypothetically invest with no fees and your money would be worth $1.094 million in 30 years.

2) Invest in the Vanguard 2045 fund with 0.18% fees, and in 30 years you'd have $1.036 million. You paid Vanguard $57,120 in fees and lost gains for this service. But you keep 94.8% of your money.

3) Invest in Merrill Lynch at 1.5% fee and have them invest in Blackrock funds for another 1% fee and in 30 years, you'd have $519k. You will have paid $574,834 in fees and lost gains. Merrill Lynch and Blackrock combined would have gained more than you and they didn't put a dime of their money at risk. You'd be left with just 47.4% of option #1.


It gets worse and worse the lower the returns. Suppose the stock market just doesn't do much over the next 30 years leaving you with meager 2.5% yearly gains (an extreme case, but still useful to think about). In that case, after 30 years with Merrill Lynch, you'd have exactly the same $100k that you started with. But you'd lose 30 years of inflation. Merrill Lynch and Blackrock on the other hand would have $75,000 in fees from you. If they reinvested those fees in the same funds that they recommend for you, then they'd be up to $111,535.

Think about it for a bit to let it sit in. It is quite possible for you to end up with less money than you started with inflation adjusted, and for the fee takers to have more than you started with. All for "small" 1% fees and 1.5% fees here and there.

 

[DaveSimmons]

There are no new tax savings from rolling over a 401k into a traditional IRA. If done properly there are no tax implications at all. The reasons to do it are to lower fees and fund expense ratios, and/or to get access to better funds.

 

[Connoisseur]

A little more info. My old 401k at merrill Lynch is currently fully invested in the T. Rowe Price capital appreciation fund. It looks like the expense ratio is 0.80%. Based on the advice, I may have two options. I'd like to hear thoughts:
1) Roll over into a Vanguard IRA. Looking at their website It looks like the target 2045 or target 2050 have much lower expense ratios (0.18%). Assuming there aren't any significant fees with the rollover, this seems like a no brainer.
2) Roll over into my current employer's 401k with Fidelity. This simplifies the investment visibility. For some reason, the vanguard target 2045 i'm invested in this account only has an expense ratio of 0.06%. i'm not sure why it's so much lower than vanguard's website.

Any thoughts on which route I should take? Is there any benefit to the IRA rollover (versus rolling over into my current 401k) especially if I don't get the tax benefits of contribution? This is, once again, coming from a very novice investor who'd prefer a "set it and forget it" approach.

 

[s0me0nesmind1]

Thanks for the advice. In regards to Roth IRAs, I believe my current income (both single and joint) prevents me from making contributions into a Roth IRA account based on my understanding. It would also preclude me from getting tax deductions from the traditional IRA.

In this case, is there any point in rolling over into an IRA (say vanguard)? My old 401k is in ML and is currently invested in a T. Rowe Price target fund. Am I missing something in regards to tax savings or Rollovers?

Tax Savings is very possible in rollovers with certain situations.

When you roll over from an IRA -> ROTH IRA (or 401k to ROTH IRA), you have inheritantly volunteered to essentially claim that rollover amount as income for that year. What does this mean? You will be taxed on it as if it was income for that given year.

So how is this useful? If - let's say... A situation occurs. You go through some hard times and don't have a job for a couple years. Or you are married and your wife decides to go back to school for a year. During those types of years, you will obviously have a much lower amount on your income from being unemployed (or your spouse being unemployed). Hence, your overall tax bracket will go down. If your income is going to be < $10k a year, I would HIGHLY advocate rolling over taxable funds to a ROTH account for that reason alone.

The key is to pay the least amount of tax as possible. If you are employed and within the 25% tax brackets and make a contribution to a ROTH IRA account, you just paid 25% on all your contributions. If you have an unemployment period and your income is $0 and you rollover your ROTH IRA, you will pay much less than 25% (depending on how much you rollover based on the tax brackets for that given year).

Just something to think about.

 

[s0me0nesmind1]

A little more info. My old 401k at merrill Lynch is currently fully invested in the T. Rowe Price capital appreciation fund. It looks like the expense ratio is 0.80%. Based on the advice, I may have two options. I'd like to hear thoughts:
1) Roll over into a Vanguard IRA. Looking at their website It looks like the target 2045 or target 2050 have much lower expense ratios (0.18%). Assuming there aren't any significant fees with the rollover, this seems like a no brainer.
2) Roll over into my current employer's 401k with Fidelity. This simplifies the investment visibility. For some reason, the vanguard target 2045 i'm invested in this account only has an expense ratio of 0.06%. i'm not sure why it's so much lower than vanguard's website.

Any thoughts on which route I should take? Is there any benefit to the IRA rollover (versus rolling over into my current 401k) especially if I don't get the tax benefits of contribution? This is, once again, coming from a very novice investor who'd prefer a "set it and forget it" approach.

Your 401k is lower than the IRA because ANYONE can get an IRA. But your employer has done specific negotiations for this lower fee terms.

My advice - as I CLEARLY outlined above - is rolling it over into an IRA is NOT ALWAYS the correct move.

As I estimated, it's pretty clear and cut to see that you should roll over your old employer 401k into your new employer 401k.

401k's also typically have other advantages that IRA's do not (such as loan services through it, and other legal benefits).

 

[dullard]

1) Roll over into a Vanguard IRA. Looking at their website It looks like the target 2045 or target 2050 have much lower expense ratios (0.18%). Assuming there aren't any significant fees with the rollover, this seems like a no brainer.
2) Roll over into my current employer's 401k with Fidelity. This simplifies the investment visibility. For some reason, the vanguard target 2045 i'm invested in this account only has an expense ratio of 0.06%. i'm not sure why it's so much lower than vanguard's website.

Whatever you do, be sure to get confirmation of any rollover fees into or out of the accounts. They are often hidden and hard to find. But you'd hate to find out you lost 5% of your money after the fact.

A typical consumer may have say $50,000 invested in a fund. A typical company may have $50,000,000 invested in that fund across all it's employees. Thus, employers can have cheaper fees for the funds since they have so much more leverage. But do check to see if whoever manages your 401k funds may also have their own fees in addition to the 401k fees.

I personally would go Vanguard so that it is fully under my control. Rolling it into your new employer keeps it at the whim of your new HR department. And who knows how long you'll stay there anyways. So you might again have to find a place to roll it into (and again have to check for fees for rolling it over, with each and every new job).

Either way though, there is probably not much difference as long as you are careful to avoid large rollover fees.

 

[Connoisseur]

Tax Savings is very possible in rollovers with certain situations.

Just something to think about.

Great points. Fortunately, my wife and I are in a good position right now. We're both gainfully employed and have no outstanding debts. Furthermore, she just finished her PhD so I don't think any more schooling is in her near future What IS in the near future (i.e. 6-24 months) is a house purchase and potentially a kid if we're up for it. I think my cash assets should be satisfactory for at least a down payment on the house and we'll figure out the kid when we cross that bridge.

::Fingers Crossed:: we shouldn't resort to pulling money out of our retirement accounts anytime soon.

With that said, I've been pretty terrible at investing the past 10 years so have had cash just sitting there doing next to nothing (actually nothing). Furthermore, my old 401k has been sitting appreciating for 3 years. I'm trying to get my finances in order and put myself in a good position for retirement in about 30 years.

 

[Exterous]

OP - one option could be a fee only adviser that you meet with to setup a plan and then meet occasionally to make sure you are on track and don't need to make any major changes. They are usually only a couple hundred dollars per meeting (so 0.2-0.4% ER on $100k) and have no vested financial interest in you going with certain funds over others.

Sure you can do it yourself for even less but if you are uncomfortable doing this on your own (or at least to start) this would give you a professional to keep you on course. This can be really important in periods of economic downturn. In 2007 far too many people thought they could take the risk of stocks only to flee the market in droves when it went down and then proceeded to miss out in one of the best bull markets in history. Paying that advisor a couple hundred to tell you to stay in the market would have made you a lot of money in the long run

I do have experience with a wealth management firm. I am the trustee for a trust that belongs to a number of beneficiaries (I am not one of them). The WM firm takes about 1% a year for doing nothing beyond having some low-level staffer make fancy binders with colorful charts, meeting with me and the beneficiaries once a year, and having their computer system spit out monthly statements. They split up the money into lots of different mutual funds to make it appear complicated but it's all unnecessary smoke and mirrors. If it wasn't for the legal liability, I'd do it myself for free.

As an aside this is going to vary based on the WM firm. I am also a trustee on a trust that uses a WM firm and they take 0.9% and do far more than have some low level staffer make binders. They offer tax advice, situational modeling, personal (and automated) bill management service and assistance in dealing with various government agencies (ORS, SS etc) - to the point that, if they have to, they'll send someone to go with the person to the SS office to help sort things out. I am a replacement trustee and going over the last 25 years of statements (and comparing them to the appropriate benchmarks that I choose instead of the ones they gave me) showed that they did actually outperform the market along with various portfolios I backtested against (3 fund, 4 fund, coffee house, 60/40, etc)

That said I don't use one for my own money and, unless you have a high net worth and\or a complicated situation, I don't think they would be the best option for a lot of people. Even then it will be a bit of a search to find a good WM firm