Q: I have worked for the federal government for six years and participate in the Thrift Savings Plan (TSP). I also have a self-directed Roth IRA and 401(k) with Schwab. Getting near retirement, I am not really happy with the burden of self-directed accounts, and my trading costs are high because I tend to over-manage the portfolio. I also have a Vanguard taxable account. I am considering these options for the retirement plans: Roll the Schwab 401(k) plan into the Thrift Savings Plan, which as you point out in columns is very low cost. Fund choices are limited to bond, Treasury, large cap, small cap and international, but that should be enough. Or keep the TSP and Schwab separate, and have Schwab administer the plans it has. It charges 0.75 to 1 percent of assets and has various plans (Private Client, Windhaven, managed portfolio, etc.). I don’t like to lose that much in costs (it would be about $7,000 a year in fees) compared to the TSP, but do you think Schwab could outperform TSP consistently? Or I could transfer retirement plans to Vanguard and invest in a LifeStrategy Fund. I have heard that it is pretty hard for actively managed plans to beat the indexes, and the LifeStrategy Fund is built with index funds and regularly rebalances. I am trying to simplify my retirement fund management. I don’t think I do a very good job; I get too impulsive. Do I really need to pay a fee-based registered investment adviser to do a basic asset allocation and rebalance? I am wondering whether the simplest option would be to put all funds in TSP and go with the lowest cost. I could do my own rebalancing. Or do you think Schwab might earn its increased fees in terms of return?
A: Whether you go to Schwab, Fidelity, Vanguard or another asset manager/fund company, the basic issue is whether management can recover the costs it imposes on your money. Those costs vary from reasonable to ludicrous, but most are in the range of 0.75 percent or 1.5 percent, plus higher trading costs.
Here, decades of research are not encouraging. The research indicates that the additional costs will not be recovered. When you bet on managers, you are basically hoping that your manager will be one of the 30 percent (often less) who beat their target index.
This is not because portfolio managers are nitwits. They aren’t. Indeed, you can be proud that some portion of your management fees may allow them to send their children to Harvard. The reason costs aren’t recovered is that even very intelligent people can’t predict the future.
In fact, you can have a low-cost, managed solution at the TSP, Schwab and Vanguard. You can do this very easily in the TSP, while enjoying its ultra-low costs of 0.027 percent, by investing in one of what are called the “L” funds.
You can do something very similar with a Vanguard LifeStrategy Fund. Vanguard also uses low-cost index funds to build the portfolios. The Moderate Growth Fund (ticker: VSMGX) invests in the U.S. Total Market Index, the very broad Total International Stock Index, and a domestic total bond index with about 60 percent equities, 40 percent fixed income, at a cost of only 0.16 percent.
It is more expensive to do this at Schwab with its MarketTrack and Target funds, but you can virtually duplicate your TSP or Vanguard fund choice at Schwab by buying its low-cost, individual exchange-traded funds in the same proportions as the pre-built portfolios offered by the TSP and Vanguard.
Indeed, if you want to follow what I call my “Couch Potato” portfolio path, you can do it easily and at very low cost. The annual cost would be 0.07 percent at Schwab and 0.10 percent at Vanguard.
Rather than consolidate the Schwab 401(k) plan into the TSP, why not keep it until you retire? Then you could move the TSP holdings into a familiar Schwab rollover account. You’ll have all your assets under one roof, free checking and online account information that shows your total holdings. That’s a lot better than having what some call “scattered asset syndrome.”
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