Q. I have a retirement fund with Edward Jones. No matter how many times I have asked my financial overseer to invest some of it in other funds, such as Fidelity Blue Chip Fund, he will not. He keeps it in American Funds, exclusively.
This doesn't make me very happy with him. ?After reading your columns on expenses—which tell me that I'm buying him a new car every year— should I just take the money and invest in the mutual funds I like and manage my own money? —?D.S., ?Kaufman, TX
A. As a practical matter, I think you are doing about as well as you can do with a traditional broker. You can’t expect your broker to work for free. Brokers choose from a universe of mutual funds that provide a commission. That’s how they get paid. He could have sold you investments that have higher commissions and/or higher annual costs. But the American Funds group qualifies as a low-cost provider. So your broker is probably a very conscientious person who deals with a lot of pressure for “production.”
Let’s consider the alternatives. Your broker might have sold you a wrap account arrangement that could have had a total cost of about 2 percent a year. He could also have sold you the closed-end fund of the month, pocketing a higher commission and subjecting you to higher annual expenses until he found a “better” fund that would provide him with another high commission. It happens.
Your broker could also have suggested that picking stocks was a good idea and that he would find bargain stocks and bonds through the supernatural brainpower of his firm’s research department. There, the sky is the limit and the broker can easily take home lots of your principal as commission income.
Instead, your broker chose to offer you American Funds, received a commission, and now the annual cost of managing your money is probably somewhere between 0.70 percent and 0.80 percent. To put that in perspective, Fidelity Blue Chip Growth fund is commission-free, but has an annual expense ratio of 0.80 percent. Similarly, if you moved your money to a low-cost target date fund provider like T. Rowe Price, you would also be looking at annual expenses in the same range.
Can you manage your investments for less? You bet. But you will have to do it yourself. It won’t be that hard to do. But lots of people are either unwilling, or afraid, to do it.
If you took the do-it-yourself path, you could reduce your annual expenses to as little as 0.05 percent, but you’d probably average about 0.15 percent if you sought broad diversification. The difference could be as much as 0.75 percent a year in your pocket or as little as 0.45 percent. If you decide to do it yourself, I suggest that you consult the Couch Potato investing archive on my website.
Here’s the link: http://assetbuilder.com/category/scott_burns/couch_potato_investing
Q. My wife and I are both 59 years of age. We have $2.1 million in 401(k) and 457(b) accounts. We also have $200,000 in Roth IRA accounts ($100,000 each). My wife is still working. She makes a very good salary. I am temporarily out of work, but very confident that I will be working within a couple months. I will be making in the range of $80,000.
We have been contributing to Roth IRA accounts for many years. I am not very clear on rules of withdrawal with Roth IRAs. Should we still continue to contribute to our Roth IRAs? —B.M., by email
A. How and where you save depends on what is available to you, your tax bracket and your age. With a substantial amount in qualified plans (that $2.1 million) and being in range of retirement, focusing on building your Roth assets would be a good thing, provided only that it is a low-cost plan and you are allowed to contribute. Withdrawals from Roth IRAs have no limitation after being held for at least five years. Unlike traditional IRA accounts, there is no required minimum distribution and you can withdraw any amount you choose, entirely tax-free, anytime after age 59 1/2.