Maximizing Your Savings & Investments: The Power of 1% Over Time

Maximizing Your Savings & Investments: The Power of 1% Over Time

In this issue:

• Latest in Retirement Savings & Personal Finance
• One Percent Difference: Fees and Growth
• Fee Calculator
• Market Overview

Latest in Retirement Savings & Personal Finance

Here is some of the latest news:

Vanguard Lowers Fees Again!

Based on Vanguard, starting on February 1, 2025, it has reduced reduced fees on 168 share classes across 87 funds. Here are the major funds with reduced fees:

Largest Vanguard share classes with reduced fees*

We applaud Vanguard’s relentless efforts to reduce fees, which directly translate into benefits for its investors’ bottom line. We have long complained of the high expense ratios of money market funds and are pleased to see the expense ratio of the Vanguard Treasury Money Market Fund (VUSXX) is now approaching levels similar to those of other fixed-income funds!

Auto-Portability Explained: Preventing 401(k) Leakage When You Switch Jobs

Many people forget about their old 401(k) accounts when they change jobs. Auto-portability is designed to prevent this 401(k) “leakage” for accounts with small balances (below $7,000). Here’s how it works:

• If Your New Employer’s 401(k) Plan Participates in the Portability Services Network (PSN, more on this later): Your previous 401(k) account with a balance under $7,000 can be automatically transferred into your new employer’s plan. This process is designed to be seamless, eliminating the need for your account to first move into a Safe Harbor IRA. 
• If Your New Employer’s 401(k) Plan Does Not Participate in the PSN or If You Are Unemployed: Automatic Rollover to Safe Harbor IRA: your former employer may automatically roll over your 401(k) balance (under $7,000) into a Safe Harbor IRA. More on Safe Harbor IRA later.
• Later on, If Your Current Employer’s 401(k) Plan is in PSN: An auto-portability provider regularly checks if you have a Safe Harbor IRA and have become a participant in a new employer’s retirement plan. Once a match is found, you will not notified about the impending transfer of your IRA balance to the new employer’s account. You are given a specified period to opt out if you choose.

Implementing the above measures helps prevent lingering or forgotten 401(k) accounts. Believe or not, we often received requests to help find 401(k) accounts as old as 30 years!

Note that for accounts with a balance of more than $7,000, if both your old and new 401(k) plans participate in PSN, a rollover will still be more efficient. However, you will need to initiate the rollover process yourself. Of course, you can also choose not to roll over or to roll over to an IRA, just like before.

List of Major Members in Portability Services Network (PSN)

if your 401(k) plan is in the following members, that means your 401(k) accounts are in auto-portability:

• Alight Solutions
• Empower
• Fidelity Investments
• Principal Financial Group
• The Vanguard Group
• TIAA
• Retirement Clearinghouse (RCH)

These organizations collectively represent approximately 82 million workers across more than 185,000 employer-sponsored retirement plans.

What’s a Safe Harbor IRA

Safe Harbor IRAs mentioned above help to manage the retirement savings of former employees with small account balances. These are just like traditional IRAs. Initially, funds in a Safe Harbor IRA are typically invested in a default option designed to preserve capital, such as a money market fund or stable value fund. After claiming your account, you may have the opportunity to choose from a range of investment options, depending on the IRA provider’s offerings.

Unfortunately, fees associated with these accounts are usually high. For example, The Bancorp Bank charges the following fees for a safe harbor IRA:

• Account Setup Fee: $35 (assessed when the first deposit is made).
• Annual Maintenance Fee: $35 (charged on the anniversary of the account opening date).
• Account Closing Fee: $25.
• Additional Fees: Electronic funds transfer (ACH) to another financial institution: $5 per transaction; Treasurer’s check to another financial institution: $12 per check; Expedited delivery (overnight): $50 per delivery. etc.

Our recommendation: Once you are notified that you have a Safe Harbor IRA, roll it over to your IRA with major brokerages like Fidelity or Schwab, or to your new 401(k) plan account as soon as possible. There is really no point in getting charged such large fees for a small amount!

Maximizing Your Savings & Investments: The Power of 1% Over Time

Every percentage point matters in long-term investing. Even among S&P 500 index funds in 401(k) plans, fees vary, impacting your final savings. Here’s a look at expense ratios for some popular options:

• Fidelity 500 Index Fund (FXAIX): 0.015%
• Schwab S7P 500 Index Fund (SWPPX): 0.02%
• TIAA S&P 500 Index Fund (TRSPX): 0.30%
• T. Rowe Price Equity Index 500 Fund (PREIX): 0.19%
• JPMorgan U.S. Equity Index Fund (Class I): 0.20%
• Wells Fargo Index Fund (WFSPX): 0.20%

Paying 0.10% vs. 0.30% on a $500,000 portfolio over 30 years could mean tens of thousands lost to fees—money that could have been growing. By the way, they are risk free or truly a free lunch!

If mutual fund fees seem high, variable annuities take it to another level. Many variable annuities inside retirement plans come with layered fees, including mortality and expense (M&E) charges, administrative fees, and high fund expense ratios. The average total cost of a variable annuity can range from 2% to 3% annually, making them one of the most expensive investment vehicles available. Compared to an S&P 500 index fund with an expense ratio of 0.10% to 0.30%, paying over 2% annually in fees can cut a retirement portfolio’s value nearly in half over 30 years.

The Power of 1% in Returns

What if, instead of losing 1% to fees, you gained an extra 1% in returns? This seemingly small difference has a massive impact over long investment horizons:

• $100,000 at 5% for 30 years → $432K
• $100,000 at 6% for 30 years → $574K (+$142K)
• $100,000 at 7% for 30 years → $761K (+$329K)

Key Takeaway

High fees = less growth. Choose lower-cost index funds if possible. Of course, fees shouldn’t be the only criterion but it needs to be one of the top considerations. 
1% difference in returns = huge impact. A smarter strategy today means more wealth later for you.

Tools & Tips: Investment or Fee Calculators

You can simply use various calculators on our website to calculate returns that takes the fees or annual returns into account:

• Investment Fee Impact Calculator: It accepts both the annualized return and annual fee percentage and calculates the overall gains and the impact of the fees.
• Investment Calculator: It accepts both annualized returns and regular savings amounts, then calculates the overall gains and total accumulated amounts based on the number of years entered. This is similar to Dollar Cost Average calculator but more simplified. 
• Dollar Cost Average (DCA) Calculator: This calculator allows you to see the impact of dollar-cost averaging (DCA) on a particular investment, whether it’s a stock, ETF, mutual fund, or even a portfolio.

In the following, we can see how a 2% annual return difference makes using the Investment Calculator. 

vs. 8% annualized return

The difference in the final amount is nearly 40%!

Market Overview

A few developments last week in financial and economic fronts:

• U.S. inflation for December 2024 largely matched expectations, with the annualized CPI at 2.9%. Inflation has remained persistently above the Federal Reserve’s 2% target.
• As a result, the Federal Reserve held interest rates steady as expected. The slowdown in disinflationary momentum suggests that monetary policy may remain restrictive for a longer period.
• The S&P 500 hit a record high midweek before retreating slightly on Friday after the CPI report. 
• Over the weekend, the U.S. enacted tariffs on Canada, Mexico, and China, stirring volatility in the financial markets.

The following table shows the major asset price returns, as of last Friday: 

Struggling to Select Investments for Your 401(k), IRA, or Brokerage Accounts?