56% of workers in the U.S. contribute to a workplace retirement plan. That number has been steadily growing as more companies start making participation the default choice – meaning that you have to opt out if you DON’T want to participate.
In fact, the Secure 2.0 Act, which was passed last year, requires all new workplace retirement plans to be opt-out. This is a great development, especially since almost 98% of employers that offer a 401(k) or 403(b) will match at least part of their employees’ contributions, so by contributing you are basically getting free money.
However, most people just leave their retirement savings in the default option their company picked out for them. But is that really the best choice?
If you want to better understand what it is you are invested in there are two key numbers to look for:
- Long-term returns
- Expense ratio
If you have never taken the time to look up these two numbers for each of your investments – do it now! In the rest of this post I’ll show you how to find them and what they will mean in terms of how much money you will have to retire.
How do you find your investment’s long term returns?
[Note: if you scroll down you will see screenshots of a real world example of how to find this number.]
You should be able to find this number, which will be a percentage, on your retirement plan’s website. When trying to find this number there are a few things to keep in mind:
- It might be called “performance” or “returns” or “trailing returns”
- You want the longest period possible – at least 10 years, but preferably 15 or more years.
- If they only give you the returns since you started contributing and that is less than 10 years, you will need to look elsewhere (see below).
- If they only give you the one-year or year-to-date performance you will need to look elsewhere (see below).
You want to look at the returns for the longest period possible. Why? These are retirement funds, so you are not planning to sell them any time soon. Knowing the year-to-date or one year or even five year returns does not help much since the market fluctuates a lot in the short term. You want to know how your fund does over the long term.
Ideally you can get the returns since the fund was started, which might be called “since inception” or “max”. If the fund itself was created less than 10 years ago then you might want to look at the returns of a similar fund with a longer history instead.
The “secret code” to get all your investment information
Every mutual fund has a 5-letter code – its stock symbol or ticker symbol – that is the key to getting all the information you want about this fund. If your workplace retirement website is not giving you the information you need, or if you just want a “second opinion”, you can use this code to do that. You can also use the name, but there are a lot of funds with very similar names, so using the code will make sure that you are looking at the right thing.
Look at your retirement website or monthly statement to get the code for each fund you are invested in. If it is a mutual fund it will be 5 letters and the last letter will be an X.
Once you have it, you can type this 5-letter code right into Google and you will immediately see information about that fund, and lots of links to find out more. You will see links to finance websites you might have heard of, like Morningstar and Marketwatch, as well as links to brokerage firms like Vanguard and Fidelity.
I personally find Yahoo Finance—yes, Yahoo finance—to be the easiest site to work with so that is where I have gotten the screenshots below.
How do you find your investment’s expense ratio?
[Note: if you scroll down you will see screenshots of a real world example of how to find this number.]
This number is probably available on your retirement plan website, but if you don’t see it, type the “secret code” into Google and it should show up right in the Google search results.
What is an expense ratio? I’m going to quote this directly from Investopedia:
“The expense ratio measures how much of a fund’s assets are used for administrative and other operating expenses. For investors, the expense ratio is deducted from the fund’s gross return and paid to the fund manager.”
In other words, it is money that YOU don’t get to keep.
Does a 1% expense ratio even matter?
“Low cost” funds will have expense ratios that are 0.2% or less. They may even be as low as 0.02%! High cost funds can have expense ratios of 1% or even 1.5%. But does 1% really make a difference?
Yes, it makes a difference! For example, let’s say you are 35, have $60,000 in your retirement fund, and contribute $500 every month.
- At age 65 at 8% you will have $1,308,034.
- At age 65 at 7% (after your 1% in fees) you will have $1,041,061.
That 1% expense ratio took $260,000 from your retirement fund! You could have a heck of a retirement party for a quarter of a million dollars.
Just like the expense ratio, the performance of your fund also matters greatly over the long term. 1% less in the long term performance will have just as profound of an effect as a 1% expense ratio.
A real world example
To give you an example, I typed “TRRDX” into Google, and then clicked on the link for Yahoo Finance. TRRDX is the “secret code” for the T. Rowe Price Retirement 2040 fund. This is a target date fund which means that it is meant for people who are retiring in the year listed, and as you get closer to that date and beyond it, the fund manager will change the ratio of stocks to bonds to make it more conservative. Target date funds are a popular default choice in workplace retirement plans.
PLEASE NOTE: I am not recommending this investment, it is only an example.
Here is the first screen that comes up on the Yahoo Finance page:
The expense ratio (I put a red box around it) is listed as 1.10%. Remember that expense ratios can be as low at 0.1% or even less, so this one is 11 times higher than that.
The words in blue slightly above the red box are tabs with more information on this fund. If you click on the tab labeled “Performance” and scroll down you will see this:
The column labeled “TRRDX” is the returns for this fund, and the one labeled “Category” is the returns for similar funds in this category. The typical returns for a certain category of mutual funds is also referred to as the “benchmark” because it indicates what you can expect for this type of fund.
You will notice that TRRDX had an average return of 6.84% over 10 years, compared to 9.72% for other funds in that category. That is almost 3% less. You can draw your own conclusions from that!
You will also notice that in the short term the returns vary greatly – that is why you want to look at the 10-year (or longer) returns.
Can I change my funds?
Yes, you absolutely can!
Moving money from one fund to another inside of a 401(k) or 403(b) should be able to be done relatively easily via your workplace retirement plan website, and does not count as a “sale” for tax purposes.
Depending on how your workplace has set it up, you may have lots of choices of investment funds or only a few. There is nothing you can do about that. However, even if the choice of funds is not great, if your workplace matches your contributions it still makes sense to stay invested there because that matching money will beat pretty much any investment.
If you have any problems or questions about how to do this, don’t hesitate to contact the people in charge of your workplace retirement plan. That is what they are there for!
But shouldn’t you wait and try to time the market?
An investment saying that I like very much is that time in the market is more important than timing the market. If you have a fund that is low-performing and/or has a high expense ratio, you want to get out of that fund as soon as you can so you have as much time as possible in the better fund.
It is very possible that you will move it and it will immediately go down and you’ll think, “Why did I do that?” But a) the fund you moved your money out of probably also went down and b) you are in this for the long term – for mutual funds that you intend to hold on to for a long time short term ups and downs don’t matter.
Please note that the above applies to mutual funds, which include dozens if not hundreds of companies and tend to move with the overall market. If you are invested in individual stocks which can be affected by many other things (the CEO has an affair and the bad press causes the stock to go down, or whatever), please get advice from a licensed Financial Advisor.
If this all still feels confusing please know that:
- You can do more reading on the subject of investments until you feel confident with your decision. A book I like is “I Will Teach You To Be Rich” by Ramit Sethi, who also happens to have a show on Netflix called “How to Get Rich.”
- You can contact your workplace retirement plan company and find out if they offer investment guidance.
- A licensed Financial Advisor can give you specific financial investment advice and make sure you are invested correctly for your goals. You want to make sure that they are a fiduciary – this means that they are required by law to act in your best interest. A “fee only” advisor will charge a flat fee, instead of a percentage of your fund, which can keep the costs down.
Although I can’t give specific investment advice (I’m not a licensed Financial Advisor), I can help you look at what percentage of your income you are putting towards retirement, walk you through a retirement calculator, help with budgeting (which directly affects how much you can save for retirement), debt reduction, and with the basics of how investing works. I offer a free, 30-minute introductory call, affordable rates, and up-front pricing. I do not sell financial products—you are only paying me for my time. Schedule a call and let’s talk!
A Financial Coach is not a Financial Advisor. If you are looking for someone to manage an investment portfolio, sell you investment products, or recommend specific investment products, please contact a licensed Financial Advisor.
