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SJan 18, 2013

Where Should You Keep Your Retirement Money?

Scott Burns

How would you like to get the cost of managing your money— particularly your retirement assets— down to less than one-tenth of one percent?

It can be done. But it won’t happen unless you are careful about where you keep your money. Keep it in your old 401(k) account and it will continue costing what it cost when you were working. That could be well over 1 percent a year, unless you work at an organization that has gone into indexing— like IBM, ExxonMobil, Texas Instruments or the federal government’s Thrift Savings Plan. If you move your accounts to your local bank or credit union it is likely some expensive products will be suggested by their advisors (actually sales agents). Attend a “free” dinner and you’ll get clobbered with offers of products that can set you back 3 percent a year.

It doesn’t have to be that way.

If you transfer your accounts to one of the major financial platforms, you can get the cost of investing under 0.20 percent. With a bit of attention you can get it to less than 0.10 percent. I learned this while surveying the costs of basic index fund investing at these firms: E*TRADE, Fidelity, Merrill Lynch/Bank of America, Scottrade, Schwab, TD Ameritrade and Vanguard. In addition to commission costs, I also examined account fees and the number and type of no-commission Exchange Traded Funds available. Finally, I considered the number of offices the firm had.

So follow me down the decision trail.

Brokerage Costs.

If you made your decision based on low brokerage costs, you’d open a Merrill Edge account (their account for independent/online investors). Their commission cost, at $6.95 a trade, is the lowest in the group. By comparison, Fidelity is $7.95 and Schwab is $8.95. TD Ameritrade and E*TRADE are $9.99. Commission costs are muddied by sign-up and account size offers of free or reduced commissions.

Personally, I’d eliminate the Merrill/Bank of America choice because the combination of a part-of-the-problem broker with a too-big-to-fail bank is repulsive. And even if your self-preservation/ethical sense isn’t engaged, the reality is that commissions are no longer very important for a low-cost index investor.

Surprised by the irrelevance of commissions? I was too. But if you do 10 transactions a year in a $9.99 a trade account rather than a $6.95 a trade account, the difference is $30.40 a year. On a $100,000 account that’s all of 0.03 percent a year.

The ETF Factor.

The big divider is the number of no-commission Exchange Traded Funds— and their annual cost. Merrill and Scottrade don’t offer ETFs without commission. TD Ameritrade offers 100, E*Trade offers 90, Vanguard offers 49, Fidelity offers 30 and Schwab offers 14. The ETFs offered by E*Trade, however, are relatively expensive. Their least expensive no-commission ETF has an annual expense ratio of 0.28 percent. Seventy of their no-commission ETFs have expenses from 0.50 percent to as high as 0.88 percent.  Many are also obscure.

We can create a basic Couch Potato portfolio— a 50/50 mixture of the U.S. stock market and Inflation-Protected Treasury Securities for 0.055 percent a year at Schwab, 0.075 percent at Vanguard, 0.085 percent at Fidelity and 0.13 percent at TD Ameritrade. The cost difference between the most and least expensive is 0.075 percent. This simple two-fund portfolio returned about 11.6 percent last year. Not bad for simple and cheap.

What about other asset classes? The cost of adding international equities ETF is lowest at Schwab. So is the cost of adding a REIT index. Get more complicated and you’ll pay a commission to access the broader universe of exchange-traded funds. This would level the playing field some.

And what about other factors?

There are many— but Fidelity, Schwab and TDAmeritrade are head to head in banking, online bill-pay and no-fee ATM access. If you want to consolidate all your financial stuff in one place, you can do it at these firms.

The size of a firms’ office network may not matter to some readers, if only because there are areas where none of the firms has an office presence.  But Schwab has an edge when it comes to the raw count. Schwab has 300 offices and is rapidly growing more. Fidelity has 170 offices. TD Ameritrade has 126. Vanguard has only 3 offices.             

Filed Under: Retirement, 401(K)