Make $500,000 more at $1,700/hr - Know your 401k Plan

How's that headline? No exaggeration, nothing to sell, no advice on investments, no spreadsheets required. With 6 hours per year, if that, you may be able to increase your retirement assets by $500,000. 50 more lavish vacations, 5 less working years, 250 more years of Netflix subscription. 3 more dinners at Nobu. All with basic concepts that should be taught in high school (assuming we would have listened).

Why write this?

I want people to get the most out of their earnings and have more options in life. In my last 10 years, I discovered several peers, subordinates, and superiors that are not familiar with investment expenses. These have a disproportionate impact on investment performance. that In my career I stumbled into a few unique circumstances giving me context most engineers won't see. I adjusted my 401k investments and easily saved 5 figures of account value in only the 7 years since. I kept quiet thinking it was a taboo topic for the workplace, finally realizing this perfectly fits in with my mantra that improved lives impact business performance. Some reasons we often don't know more on this topic:

• Disinterest in finance. I find flossing more fun. Over a year flossing takes longer than putting $500k back in my pocket.
• It may feel awkward to ask the employer. And if we do, we may not understand what we hear, we may be intimidated to question further, or it feels inappropriate.
• Assuming more time spent looking into the 401k plan equates to pennies if anything (very wrong)
• Assuming expense numbers are negligible because they are low single digits (very wrong)
• Investments intended for 30, 40, 50-year horizons seem so distant to not be real today. Like getting back to the gym, I can start tomorrow.
• Assuming the employer understands the 401k plan and therefore optimized the options for plan participants (while not often malicious, also very wrong)
• Their parents were not obsessed with driving the same Japanese car for 30 years to save money, and/or didn't talk about finance. Honda Accords can get too old, just saying.

Assumptions, we all have 'em

The "flashy" numbers above are realistic, the basis of this article is:

• I am starting with context of a typical engineering career, investing early in life, and always getting the company's match. The principles apply to anyone.
• This is based on investments several decades in length.
• 1% of excess 401k administration and mutual fund fees
• (Tangent) If you are not contributing to your 401k, or other retirement vehicle, and have the means to do so, SIGN UP TODAY. I'll start a non-GMO gluten free egg-white only diet and gym routine tomorrow - I'm starting my 401k today. This is timeless 7-figure advice. I expect kickback.

Show me the $ Chris, or go post #growthmindset with 3 likes

Using Bankrate 401k calculator let's demonstrate why I'm comfortable flashing about the $500k and $1.7k/hr figures like a YouTube ad in the middle of the video you're watching to relax: "I WILL TEACH YOU MY PROCESS, MAKE $15 MILLION SELLING BOOKS ON AMAZON IN TWO STEPS".

Here's the starting point. You're 25yo, $75k starting salary, will retire at 65 (after your done reading maybe that can be earlier), average 3% salary growth, average 401k contribution of 15%, with company match of 3%. Your account averages a 5% return (some will say this is too low, over decades this is unarguably a safe baseline, the average stock market return is expected to be lower in 21st century vs. the 20th). We're also ignoring inflation and taxes, which for the point of this article I don't care about. Some of these assumptions are addressed at the end for those interested.

Let's watch the number in the red box (or Space / Ninja / Fishbowl? Cat) as we go.

Space cat's baseline is $2.468 Million.

We very easily could work at an employer where the administration fee is 1% (annual) of our total assets. Add in poorly selected mutual funds (by you or having a limited set the employer offers), and 1% of additional unnecessary fees are a minimum assumption.

To model this we'll take the 1% fee off Space Cat's annual return (5% - 1% = 4% annual return).

As every 6 year old knows $2,468,122 - $1,984,599 = "EIGHTY HUNDRED DADDY" (ahh, you're so smart honeyyyy!). I wish it was eighty hundred, but it's $483,523.

Round up, $500k. BOOM.

1% is a laughable number right?

1. If the framed picture of the 4 Jonas brothers hung in my bedroom (on my wife's side of course) is within 1% of being level, it is perfect to the point of getting lucky on a final nudge. Not really a good example - I would throw that picture out the window without removing the screen before I would hang it.
2. If my weight is 1% higher than normal, I'm within the range of water loss while sleeping.
3. I won't even know if I put 1% too much salt in my egg white only birthday cake batter.
4. I'd save $20 annually with 1% better gas mileage.

The trick is that 1% annual expense takes money today, and it's compounding power forever more. It's odd most people are aware of the interest rate of their home and usually can cite it off the top of their head, investment fees - no. My guess is this is because we see its effect on the monthly payment (proving that the fractions matter). Us humans are good at caring about today, it's how we are built.

Chris, kind of vague on these "fees", what do I do about it anyway?

Great question. By 1% I'm referring to unnecessary additional fees. There will always be a fee. Someone has to administer the account for the company, sign you up, maintain the portal you log into, transfer funds, make the trades, generate reports, comply with SEC regulations, etc... //Tangent alert what really stinks is the cost of administration doesn't actually increase as our account grows. No additional value is provided to us when we're 25 with $2 vs. 65 with $2 million. The ideal plan will have a fee per headcount, not many offer that, because they make far more money basing fees as a percentage of our account value. The same service is provided for $25 on $2,500 in our first year or two as is being provided for $25,000 on an account of $2.5M. Tangent rant over//

However, your 401k provider will charge as high of a fee as they can. Is your employer a subject matter expert in this topic? and the 401k provider options on the market? Do tey have the time to be when they are setting it up? Maybe, more often than you or I would assume, this is not the case. Being an expert in maintaining the company's 401k plan is not the same as being an expert in 401k plans. Plus the details are mind-numbing. But as $500k shows us, #detailsmatter.

Want to learn more about your 401k provider? This website is awesome: Find and calculate your 401k fees

Mutual fund expenses are another source of expense. 401k providers often provide a limited offering of funds participants can choose from (e.g. 12-18). The provider may also put "wrapper" fees on top of those. Those that do are trying to mask their admin fees. Unless you're a specialist wanting to invest in very specific sectors, 99% of us are not, for simplicity any mutual fund with an expense ratio over 0.5% is trash. Personally my coefficient of trash mutual fund (CTMF) is 0.3% to 0.4%. In my personal accounts (non-401k) I shoot for 0.1-0.2 because.... I can, they are readily available.

I've seen mutual funds offered in 401ks with expense ratios as high as 1.4% and unfortunately owned a few for a few years. My dad led me to Vanguard early in life (the champion of low expenses and personal investor advocacy) so I innately adopted their expenses as normal. Thus it took a while before I caught on to high expense ratio 401k funds. In one case, when I asked where these high expense funds came from, the provider and employer pointed at each other, nobody knew. In hindsight I assume when the 401k plan was setup the salesperson, LONG gone, selected the funds and no one knew better. Looking into that led me to notice the prospectus for the mutual funds also said they had "loads"(buy-in or sell-out fees you pay, usually as a percentage of your assets, these tend to be large 4 or 5%! And why not if someone tolerates them). Loads are purely commission with no value provided to you. In our case the provider said they were waved, but it wasn't documented anywhere I had access too. This is the kind of thing you have to watch for and question. It can be serious money out of your pocket, and you get Nothing. Zero. Zilch. for it.

AP / Reuters: Trash mutual funds in downtown New York City trying to transfer money from Space Cat's bank account into theirs

Good thing Space Cat appears to also be a ninja. Let's become ninjas.

Easy first steps to knock off 1%+ in fees

This is where $1,700 per hour comes in. It will take you a few hours to familiarize with your 401k provider and account, maybe do some googling for basic education, and maybe a handful of hours annually to revisit your selections. $500k / 300 hours over your career = $1,666 per hour. I probably spend 4 hours on this a year logging in and poking around. And 20 hours collectively upfront to learn about how a 401k works.

• This may be the only item in your immediate control. Select funds with lower expense ratios. Remember the trash rule (0.5% expense ratio). If there is no way you can stomach learning more, choose the lowest expense total market fund (e.g. S&P500, Dow Jones) for your first decade or two. Or choose a "target retirement date" fund. These funds have diversified investments (stock, real estate, bonds, etc.) and get rebalanced regularly to reduce risk as the target date nears (i.e. as you get older. We don't want to be 100% in stock as we head towards needing to use that money). For example: Vanguard Target Retirement 2060 Fund.
• Read the fee disclosure report for your 401k plan. These have to be provided by law. Hopefully, the provider is upfront with the fees and they are easy to understand. If you can't understand it relatively easily, it's not you, and it could be a larger sign that there are more fees masked as other costs. Some masked fees only your employer will be able to see, you'll have to ask if you want to know. Your company may offer an advisor too who can help make sense of it. If not, it's on you (see the end for ideas on how to get help).
• Will this change where you work? Most often not. But it is definitely something to evaluate for any company you hope to stay with long term (10 years or more).
• If you are at a smaller company, maybe you can influence improvement in the 401k plan or mutual fund options provided. Companies switch providers all the time, especially small businesses. Or maybe the 401k provider offers an account option where you can select your own funds from the market ("self-directed brokerage"). I've seen some funds so bad I ended up requesting this otherwise unknown feature, gratefully the company accommodated the request (smaller company).
• If you're company's 401k plan and/or mutual funds equate to 1% fee or more, consider switching retirement saving strategies. For example put less in the 401k and more in personal retirement accounts (e.g. IRA's, Roths, personal savings). If you don't know what a Roth is, read this (this article does not mention the legal way to contribute to a Roth even if you become inellgible, which can happen sooner than expected when professionals get married). There are tax differences between 401k and personal retirment accounts, that is beyond my scope here, but you can, and should try to have both.
• Overwhelmed? Need it to be easier? Find a service-fee based fiduciary financial advisor. Someone you pay per hour of consulting who by law puts your first. A good advisor will be worth their weight in gold, and thus always look for someone overweight... I'm trying to make it interesting here. If you meet an advisor who tries to get you to invest or sell out of existing investments and into the products they sell, Run. This happened to me through an advisor who came recommended. Their professional advice was I should sell all of my personal Vanguard Roth and move it into the loaded funds they sold (loads = commissions, zero value is provided to you). Why? Because that's how nice cars are created, for them. My reaction was the same as when I pitched to my friends that they they wouldn't need a baby stroller for the first 6 to 12 months (I had premature twins, my wife and I avoided traveling with babies, skewing my expertise). My friends didnt' give 1% to that advice and 6 years later I still get grief.

General financial musings, clean-up

These bullet points are related thoughts I wanted to capture. Some are standalone.

• Reward requires Risk: Some will find my sensibility here nauseating. Some will say it's crazy to dedicate that much to 401k instead of starting a business, and/or focusing on enriching life experiences. YOLO, I do get it. YOLO also applies in old age.
• Sorry, investing is Just. Too. Boring. If you know you loathe this topic more than chocolate cake (obviously the most overrated dessert of all time) and can admit you will take zero action (when was the last time you logged in?) - hire a financial advisor. But even an advisor who charges 1% or more of your assets will lead you to an easier life with more money and more options compared to doing nothing. You buy them a Porsche or two in the process, but you'll also have way more yourself. In Space Cat's example, had he/she waited 5 years to contribute to the 401k, he/she will have $600,000 less at age 65. 10-year delay? $1.1 Million less. This is in the realm of having to work 5, 10, 15 more years! Not traveling in retirement, being limited in how we can help family, limited to only Social Security Income (it's not much now and who knows what it will be in the future). There is no judgment on my part, it's just the stakes. I have a privileged life, I've had lots of help, and hope to be able to offer it later (it's safe, my daughters aren't on the internet yet, nor have the time to read thus far when 8 hours of MINECRAFT are at stake). For those who have the means to invest, the future lifestyle difference is staggering. If seeing an advisor 2 to 4 times a year for an hour makes you do that, do that!
• Compounding interest doesn't make sense. Fact: compounding interest is as real as gravity, both involve non-linear elements. Jumping off a 6-foot ladder produces impact forces in the realm of how much a car weighs. Fact: our brains are not built to contextualize things like this, hence we use calculators a lot. To me compound interest feels like the tooth fairy relative to day-to-day living (I know she's real of course, but I never actually see her). Thus compound interest seems academic and doesn't generate excitement. Only fear of not being able to afford the 2040 Yeezy's has kept me going. Just kidding, they will be $198,000 a pair by the time I retire.
• My assumptions are simplistic but real enough. If you're 25 contributing 15% of your salary may not be feasible, but you'll end up making more later and contributing higher than 15%. Non-engineers will be even further pressed early in their career. Contribute whatever it takes to get the company match. This is free money that will contribute up to 5 or 6 figures over 40 years.
• Your salary increases may be higher in the first part of your career, but will almost certainly tail off the latter half if doing a 9-5 for someone else (it only pays so much). 3% was an average over 40 years, and maybe even a bit high. But it also doesn't include bonuses if you are lucky to benefit from such a program.
• 5%, what a travesty! Many consider 5% a paltry return, someone wealthy will see it as a loss. The wealthy shoot for 15% or more. Accounting for taxes and inflation 5% is a a safe assumption to avoid overestimate for an average investor. By average I mean almost everyone, unless you or your family are really connected or knowledgeable in wealth creation. Otherwise, if someone guarantees you a higher return, ask if the magic carpet ride is complimentary. Countless long-term analyses of market returns show 90% of professional active managers do not beat major stock indices (e.g. S&P500). Active managers trade frequently trying to "beat the market"... and they may for select periods of time, which obviously they will emphasize in their marketing material by limiting the date range and playing with the graph scales. Most often "beat the market" promises are signs of you getting screwed.
• Get good running shoes: if you have a financial advisor selling you into "loaded" funds, and/or they get a commission for selling you into an investment (you will have to ask), you are about to have to work longer so they can retire sooner. Maybe they are a friend, family member, you like them, they mean well. The claims of "beating the market the last 5 years" will never hold up when the details (not provided) are scrutinized and compared to long-term market performance (10+ years). Us Average Joe's are rarely equipped to counter the pitch in the moment, so just avoid these meetings.
• Power Users - Turnover Rate. Also look at mutual fund "turnover rate", what percent of the fund is traded annually, you want this to be in the teens or less. Anything more and your fund has an active management strategy. The frequent trading generates more trade costs and taxes to the fund. These costs are not exposed to the investors, they stay within the fund and lessen its return. It's virtually impossible to uncover these. 60% of the time, I beat the market every time.

• Large Single Stock Investment Risk: many of us like to play around with investing in single stocks. After 15 years of dabbling, I see why it is advised against for the Average Joe. Maybe you bought Amazon, Apple, etc. and did really well in this explosive era of technology. These can create confirmation bias that it always goes this way. Some of my experiences and observations with sudden disruption: buying Citibank in 2008 because NO WAY could it go lower having lost 60% of its value, I bought some shares and lost 80% more value. I almost bought into a biotech firm on the verge of FDA approval for a revolutionary breast cancer detection, suddenly the FDA didn't approve the product, investor lawsuits followed (preferred investors always get first rights to damages, us "common stock" Average Joes get pennies, AND only if you send in the postcard to claim your $0.17 settlement). I bought HIMX because they had the chip technology for Google Glasses, after years of hype they were never released. Who saw the BP oil spill coming? Boeing SuperMAX grounding? Who knew, but introverts of course, how quickly malls would die out (was Macy's always that uncool?). How about COVID19? Have fun and take some risks when you want to, avoid this reckless risk for long-term investments by diversifying. If you have a few market index funds you own a lot more FAANGS than you realize and aren't missing those upsides.
• Sound Investment Strategy - Ignore the Market: You can read about "dollar-cost averaging" here, it makes long-term investing simple. Set up an auto-invest (like 401k) and ignore what the market is doing. (Tangent alert for those that know me) I realized a couple of years ago that this theory is what I do for employee development: prioritize regular check-ins (performance and relationship, separately), keep coaching through seeming plateaus (on their side or mine) - in time mountains can be moved.
• Market Dips / Crashes are Great: with this knowledge downturns in the market are when money is made. Knowing that doesn't change the psychology in the moment. Put more in when things are falling! Don't try to time it, don't worry if you bought high, just keep buying. Yes, I feel those crappy feelings when I buy on a dip and things keep going down. I've also had a few cases where 2 or 3 years later I look and say "Wow, that would buy a few Prada bags for my wife... theoretically". These are not great when nearing retirement, but that's why we rebalance or have an advisor do it as we age.
• ETFs (Exchange Traded Funds). These are becoming a common alternative to mutual funds. An ETF usually involves less administration between the trader and the market. ETFs can have ultra-low expenses (e.g. expense ratio 0.04%, that is crazy!). I chose to move to these where I have the option, only large funds (8 figures +) with big institution names (Vanguard, Fidelity, Blackrock iShares, etc). There are unique risks and some convenience losses to trading (those of us who don't trade frequently won't notice). I'm not going to get into those.
• Personal investment accounts. Use Vanguard, Fidelity, Schwabb or another big name brokerage. They are established, low cost, and offer low-cost investment options. They have gargantuan teams dedicated to security. Vanguard is the gold standard for low-expense personal investing and arguably kicked off the movement back in the 1970s. In the long-run us Average Joe's do not beat the market, and neither do 90% of the "pros". How can we tell who the pros in the 10% are? Wait 20 years and check their record.
• 401k pre-tax vs. Roth IRA post-tax advantages. Secret tip, one of these is correct and is very dependent on opinion (even political leaning). I've went back and forth many times. BTW you can legally do "back door" contributions to a Roth once eligibility phases out. If you think your taxes will be higher when you're older, include a Roth in your retirement strategy if possible. If my employer's 401k fees were egregious, I would do retirement investing in this order: 401k to get the maximum employer match, personal Roth for significant other and self (up to $6k limit 2020, back-door through a standard IRA conversion), anything further I can afford into the 401k. If my 401k fees were bad enough to cancel out the 401k tax advantages (it doesn't take much), I would invest post-tax into a personal account after maxing out my Roth.
• I'm not going to cite sources, I'm not making bold claims. The fastest and easiest book I've found is "Rescue Your Money" by Ric Edelman. 4-hour read, non-technical, straight shooting. The knowledge is backed up by countless other resources and 100 years of market history. By all means, read differing opinions, but be mindful of who writes them. In my experience, it's almost always a financial advisor, or someone else, who sells investments that are loaded or have an active trading strategy.