Monday, April 20, 2009

Retirement investing: A cautionary tale

I have discussed rolling over your IRA, for example, when you have left a place of employment. In fact, I have rolled over my 403(b) into a traditional IRA. Hindsight being what it is, I wish I would have done things differently.

When I was looking to rollover my 403(b), I had to wait over six years for the amount of money I put in and the value of the account to equalize. This was made more difficult by the fact I make my contributions from 1999-2001 and then left for a new employer. The tech stock crash of 2000-2001 left me with almost 50% of the value of my pretax contributions gone. It was not a pretty sight and I ignored the account for the better part of five years.

However, I received a call from a new financial advisor in late 2006 to ask me to come in and evaluate my accounts. I had not talked with anyone for a while since my previous advisor had left the credit union of which I am a member. So I came in with my statements and we discussed my options. He recommended rolling over my 403(b) into an IRA account. Since the value was near my contribution values, I was interested in doing something different. The financial advisor suggested a growth investment portfolio with TransAmerica, and said he was invested with them as well. I thought that was a good recommendation.

He explained that the account was a front-load fee and was actively managed with shares of stocks and other mutual funds changing as the managers saw more opportunities for growth. My advisor told me that even though a 5% fee would take money from my initial investment, I would likely make it up the money in a year or two.

What does this all mean? Well, a front-load fund basically means that the mutual fund firm takes my money, removes 5% from the money and then invests the remainder for me as I specified. In the case of the fund I invested in, no fees would be charged to take out the money when I would want it in the future. I basically paid a fee up front for the company to take my money and invest it. I made this decision based on two flawed ideas:
1. My financial advisor liked the fund enough to invest in it himself so it has to be good.
2. As long as my money continued to grow, I did not think much about the 5% front-load fee.

Why are these ideas flawed? I never asked if the financial advisor received any benefit from me investing with the company. The second, why give up more of my precious money than I had to? I started out with a small amount of money, $5,400, to invest. Removing 5% then putting it in a market starting in 2007 was not an ideal move. I lost money to start with and my last statement had me with a value of just over $3,100. And that was after nearly gaining back my 5% fee off the top. If I was going to lose over 40% of my portfolio, I would rather have lost less of my money to fees.

If I had to do this over again, I would invest only in no-load funds (those with no fees), most likely index funds like those of Vanguard, Fidelity and T. Rowe Price. Yes, the value would still be down but I would still have more than if I invested in loaded funds. Now I know to check not only what fees are charged for investing, but the maintenance and management fees which can easily add up to 2% or more of the value of the fund. For the future, I plan on keeping more of my money for my investments and both asking more questions and reading the fine print more closely.

To educate yourself about investing, visit the following resources:
CNN Money 101
Balance Track overview
Fidelity basics

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