I put my money where my mouth is.
In November, I explained how you may be losing out on hundreds of thousands of dollars over your lifetime due to fees paid to your 401(k) administrator.
Over the Christmas break, I finally had the time to dive in to my account, get all the paperwork together and make some changes.
In the November article, I talked about setting up a self-directed 401(k).
[ad#Google Adsense 336×280-IA]This is a brokerage account within your 401(k).
Rather than letting your human resources department pick which mutual funds are best suited for your needs, you can pick any mutual fund or stocks – and even trade options (which I don’t recommend in a retirement account as they are risky, unless you’re selling covered calls).
The benefit of a self-directed 401(k) is you can buy a group of stocks for very low commissions, and then in most cases you won’t be charged any fees after that.
Let’s say you had $100,000 in the account and bought 10 stocks for $10,000 each.
Your commissions could be as low as $7.95 per trade or $79.50 for the entire transaction. That comes out to 0.08% of your portfolio. After that, you pay nothing. You can reinvest your dividends for free. If you held your stocks for 20 or 30 years, you still pay nothing.
Compare that to a typical 401(k). You would pay an average of 1.5% in fees per year. The average investor pays over $155,000 over their lifetime in fees. A high net worth individual will pay over a quarter of a million dollars. So a self-directed 401(k) can save you a ton of money over the years.
Talk to the company that handles your 401(k) and ask if they have the self-directed option.
If a self-directed 401(k) isn’t available, consider no-load index funds. Many of these funds, such as the Vanguard Mid Cap Index Fund (VMCIX), have a paltry expense ratio of just 0.08%. Investing in an index fund like the Vanguard Mid Cap Index can save you thousands of dollars over the years.
Plus, it has been proven over and over again that passive index funds outperform actively managed mutual funds. In a typical year the majority of actively managed funds underperform their benchmarks. So you can pay higher fees and probably not even outperform the market. Or you can opt for the lowest cost option and make more money than if you invested in an actively managed mutual fund.
I’m already invested in index funds and just opened my self-directed 401(k). I work too hard to pay $155,000 or more to the mutual fund industry.
I’d rather see that money go toward my kids’ college education, my retirement and my investments so they can generate even more funds.
Whatever you are doing to save for retirement, make sure it’s a low-cost option. Otherwise, other people will be enjoying your retirement funds instead of you.
— Marc Lichtenfeld
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Source: Wealthy Retirement