HOUSTON — Recently we savored old school fried chicken at Houston’s The Barbeque Inn. Since we checked off Gus’s in Memphis, we only need to hit Willie Mae’s Scotch House in New Orleans for the yard bird trifecta. Right now our Houston-born granddaughter has a cute baby doll and a pink dump truck but one day, if Houstonians show good sense, folks will call her Madam Mayor. Her mother finds politics distasteful but the sky is the limit for Suzanna James.
After tracking a toddler for five days I am reminded why young people have babies. Our son-in-law had flown the coop on a Harlingen dove shoot/South Padre Island fishing junket. While in the bullpen from babysitting duty, I found a recently delivered Houston Chronicle. Blair catches her news on her iPad but Michael belongs to a dwindling number of Americans with a newspaper subscription. Blair cut him back to twice a week delivery, but fortunately for me the Chronicle runs Scott Burns’ column on Wednesday.
I went back to yesteryear. In the days before PDF files, scanners and online archives I kept a stash of Burns’ columns clipped and stashed in a binder. My old friend Joe would save Burns’ Northwest Florida Daily News columns with a brusque “Thought you might want this.” Burns and I go back a ways.
Fairly often I see clients with a former employer’s 401(k) or (a), 403(b) or 457 plan. Under most circumstances I recommend rolling it to an IRA because the costs are lower. More than once, someone has told them their retirement plan isn’t costing them any money. Unfortunately plan participants pay through the nose.
A typical small 401(k) plan pays .5 percent to a financial services firm to run the plan. The firm generally chooses a basket of actively managed funds with expense ratios of 1.5 percent or higher. These funds generally have 12B-1 fee (.25 percent) which can be rebated back to the employer. With the best-case scenario, the participant pays 1.75 percent, worst scenario 2.0 percent and rising. Here’s a better option, pay the financial services firm .5 percent and use a basket of low-cost index funds with annual fees around .2 percent. This solution, at a minimum, reduces participants’ cost to around 1 percent.
Burns calls these extra costs “part of the conspiracy of failure.” The higher expenses force 70 percent of actively managed funds to trail their index. Don’t take my word for it, Google search “S&P Indices Versus Actively Funds Scorecard” or “SPIVA.”
Unless you are over 55 and need to take distributions there rarely is reason to keep an existing qualified plan that includes all the afore-mentioned alphanumeric options. Notable exceptions to this rule are the Thrift Savings Plan and the Florida Retirement System’s Investment plan along with some fixed account options available in 403(b)/457 plans.
I’m not lobbying for any 401(k) business nor do I want any. Qualified plan participants should simply have all fees disclosed. Someone needs to clue the HR department; qualified plans have expenses. A fiduciary standard for plan advisors would benefit plan participants too. Higher costs erode lifetime wealth.
Here’s a shout-out for newspapers, too. Often we only read our RSS feeds and Facebook links. A successful democracy depends on an intelligent electorate likewise a successful retirement and informed consumers.
Buz Livingston, CFP has the only investment management and financial planning firm in the entire world headquartered in