Too Broke To Pay Attention

Thoughts on personal finance and how to avoid having it take over your life

How I cost myself a bunch of money for my eventual retirement

28 Aug 2019

Straight from the department of “I should know better than this”. I’ve had an old 401(k) from a previous employer that I rolled over into a Rollover IRA. The main reason for rolling over the 401(k) instead of just keeping it in the existing plan was that I wasn’t too happy with some of the investment choices available in the plan. After the transfer into the Rollover IRA I tweaked the investment choices to where I wanted them to be and left it alone, as you’re supposed to do.

One of my basic choices was to keep some of the money in a Fidelity target date fund. Safe choice and all that, grows OK but given that I’m not one of the “must beat the market with risky investments” types, that was fine. Until I noticed that the target date fund seemed to have slightly lower returns than the one in my current employer’s Vanguard portfolio, which I thought odd. Yes, I expect slight differences, but these were a little out of kilter.

The answer is of course that Fidelity has two types of target date funds, the regular “Fidelity Freedom” funds, and the index variety of the same funds. The old 401(k) only had the regular fund in it, so I when I rolled over the 401(k), that portion of my savings was of course rolled over into the same, non-index version of the fund.

The two funds in question were FFHTX and FIHFX. If you look at the fund summaries, you’ll notice that the regular fund (FFHTX) has an expense ratio is six times that of the index fund (0.73% vs 0.12%). As we know, the expenses we pay for our investments make a massive difference to the outcome. If we compare just the seven year return of the two funds, FIHFX yielded an average annual return of 7.45% whereas FFHFX only yielded 7.27%. While that looks like a pretty small difference, the cumulative nature of the returns means that it’ll actually grow into a noticable difference over time.

So don’t be me and check the expense ratios on your funds! This little hiccup cost me at least two to three years of the higher returns I would have had if I had switched to the index fund sooner.

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