Scott Burns

Q. I have worked for the federal government for six years and participate in the Thrift Savings Plan. 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 alternatives for the retirement plans:

• Roll the Schwab 401(k) plan into the Thrift Savings Plan 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.
• Keep the TSP and Schwab separate, and have Schwab administer the plans it has. They charge 0.75-1.0 percent of assets, and have various plans (Private Client, Windhaven, managed portfolio, etc.) I dont 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?
• 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 dont think I do a very good job. I get too impulsive. Any suggestions would be welcome. Do I really need to pay a fee-based Registered Investment Advisor 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 their increased fees in terms of return? T.M. Fort Harrison, Montana

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 1.50 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 arent. Indeed you can be proud that some portion of your management fees may allow them to send their children to Harvard. The reason costs arent 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. You do this by investing in one of the L funds.

You can do something very similar with a Vanguard Life Strategy fund. They also use 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 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.

Filed Under: Income Investing, Investing

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

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