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  • Writer's pictureRebecca Herbst

Student Stories: Tackling your 401k options

Updated: Feb 5, 2023

Here comes the second student story!

Introducing Hannah…


A kind, intelligent, curious and extremely thoughtful friend of mine. We go wayyyyyy back to college. And so it was super duper fun to catch up with her regarding her personal finances. One of the things I absolutely love and respect about Hannah is her ability to be vulnerable. And in this newsletter, Hannah does just that – she is quite open about her experience with tackling her 401k, the friction she feels but her desire to make improvements. Hannah explains that it’s about not getting things perfect, it’s about getting things going.

Read on for more!


So Hannah, tell us about yourself!


Hello! I live in Steamboat Springs, Colorado and will be relocating later this year to the Bay Area with my guy, Mike. I have worked in marketing for ten years and I am halfway through a Master of Public Administration degree and a certificate of Public Policy from the Sol Price School of Public Policy at USC. In the fall, I started a new job in a role that combines public policy and marketing (which I am loving!). But the job change triggered some action items that I needed to do – I knew I had to figure out my new 401k plan, and also deal with some of my old 401k accounts I’d hadn’t looked at in a while. I would not describe myself as a super financially savvy person, and if I’m being honest, I have always felt intimidated by people who manage their own finances. What I have realized from Yield & Spread is that I am actually doing alright! One step at a time.

You mentioned feeling intimidated. Where do you think that fear is coming from?

I consistently get hung up accessing my accounts and having enough time in one sitting to do what I intended to do. I have this unrealistic fear that I will click the wrong thing and lose all my money, or somehow make a mistake that will lead to some horrible tax penalty! I know it is not very secure, but I have found it really helps me to keep a notebook of my bank passwords so that logging in is one less thing to figure out. I also save my passwords to my personal laptop, and whenever I can, I set up automatic transactions. Any steps I can take to make this process less frictionless is a good step for me. (Rebecca here! This is such a good thing to be aware of! Access to your financial accounts is the very first thing you need to keep your finances in order. Removing upfront friction will pay off significantly as you try and make changes. PS for those that run into this password issue, tech savvy Joe recommends using a password manager).

How did you tackle your 401ks?

I had three different 401ks, two from my previous jobs and a new one as I’d just accepted this new job. At the same time, a previous job’s 401k had transitioned to a new provider, and I hadn’t yet explored what that meant for me. And on top of all of that, each one of these 401ks was through a different provider! It felt like a lot to sift through, but I knew I needed to tackle it sooner or later. I was more or less toying around with the following ideas:

  • Whether or not to consolidate my accounts into my new 401k

  • Which funds I should be invested in, since Total Market Index Funds didn’t seem readily available in any of my 401ks

  • Weighing whether or not Target Date Funds made sense for me (should I rebalance allocations myself or let my provider do the work?)

The first thing I realized is that whether or not I should consolidate my accounts largely relied on my fund options in each 401k. So I made a plan of action:

  • Go into each 401k and identify all low-cost index funds

  • See if i can approximate the total stock and bond market with what is offered

  • Identify the expense ratios of the target date retirement funds available to me then compare against the funds I came up with to approximate the stock market

(Rebecca Here! This is a great plan of action. In this way Hannah can explore the right balance between low-cost, broad-based index funds while also seeing if she can minimize any additional “work” that she has to do. If you’re someone who wants to set it and forget it, target date funds, if they’re low cost, might be the right way to go for your too!)

First things first, I looked back at my previous employers' 401ks. I was reminded that I was already invested in target date funds in both 401ks, both having an expense ratio of 0.08%. This still remained the case even though one of those 401k accounts had been transitioned to a new provider. There were other funds that had lower expense ratios, but I thought those target date fund expense ratios looked pretty good in exchange for the task of rebalancing my allocations. So I was pretty happy with that.

When I looked at my newest 401k option, a target date fund was available, but the expense ratio was more than I hoped for at 0.19%. It was time to see if I could approximate the total stock market. It turns out I could using a large-cap, mid-cap, and small-cap index fund. Then I could blend those with an international stock fund as well as a low risk bond fund. Here’s ultimately what that fund breakdown looked like:

At 0.151%, the weighted expense ratio of this set of funds still wasn’t as low as I hoped it would be, but it was still lower than the target date fund option of 0.19%. So forever long I keep this job, I’ll continue to invest in the above funds. But because the expense ratios of the target date funds are so good in my old 401ks, I’m choosing to leave my investments where they are.

For now, I’m ok with having three separate 401ks. I know that not all of this is set in stone, so on a go-forward basis I can consolidate these in the future when if I move to another job or I can always consolidate them to my IRA.

Looking back, what do you think was your biggest hold up? What would you suggest to others?

Once I understood the logic that I could break down the total US stock market into a large/mid/small cap blend of funds, and that I should also look out first and foremost for expense ratios, it started to come together. And because I started this new role and I hadn't yet contributed that much money to this account, I felt a bit more confident fiddling around with the investments. However, now that I have gone through the process, I feel totally empowered to do this for my larger accounts.

(Rebecca here! Another gentle reminder why you should feel comfortable fiddling around with your investments in your retirement accounts. Remember, when you buy and sell funds in tax-advantaged accounts, you will not face any capital gains taxes! So you don’t have to be scared about making a mistake. Fiddle around all you need to get the right mix of investments! Remember, this is not the case with Regular Brokerage Accounts)

Do not be hard on yourself at any point in the process! I first learned about how I might want to look into expense ratios two years ago from Yield & Spread, and I only just completed these steps. Still worth it! My first focus, before reviewing investments, was to maximize my retirement account contributions.

This experience also inspired me to review the expense ratios in my Roth IRA investments (which I recently changed from USAA to Charles Schwab). They had been taking me for a ride (a previous expense ratio of 0.6%!) I have my new investments all picked out (net expense ratio of 0.04%) and plan to call Charles Schwab for a walkthrough so I understand how to transfer my funds through the online desk.

Any other big life stuff going on that you wanna share with us?

My husband and I are under contract to buy a house! The loan process is ugly, but taking the Yield & Spread class empowered me in such obvious ways. I read the fine print, I asked my loan officer for more details, and I advocate for myself. If nothing else, you should know that you have power! And you are allowed (and expected) to ask a million questions and think critically about things “financial people” tell you. The finance industry does not make money without your money, so make it work for you!

...

A huge thanks to Hannah for sharing her story with the Y&S community!


Boost your Wallet. Wellbeing. World.

Rebecca


 

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Disclaimer: The information contained in the Yield & Spread website, course materials and all other related content is provided for informational and educational purposes only. It is not intended to substitute for obtaining accounting, tax, or financial advice, and may not be suitable for every individual. Yield & Spread is not a registered investment, legal or tax advisor or a broker/dealer.


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