There are alternatives to high fee managers
Q. We are rolling over my wife's $160,000 lump sum retirement into a managed account with our bank. She's 55. Wells Fargo charges 1.5 percent a year and a 1.5 percent load for the Wells Fargo fund we are going into. We're not too experienced with investing and aren't sure where to put the rollover. We will need about $950 a month from that money. Are the costs in line with other banks? Is this something I could do? Any suggestions? -- S.D., by e-mail
A. You need to rethink this before the account is rolled and suffers commission expenses from transactions. First, you should check that you understand correctly exactly what you are going to be charged. If you are choosing one of its adviser-managed programs, the 1.5 percent annual management fee will be in addition to the expense ratios of the underlying mutual funds. If it uses Wells Fargo funds, you'll find that this could add another 1.2 percent a year or so to the total expense.
That would be a total cost burden of 2.7 percent a year -- a heavy cost to bear when safe 10-year Treasury obligations are yielding only 3.65 percent. Add that to the withdrawal rate you are seeking, 7.1 percent, and your investments would have to provide a gross return of about 9.8 percent a year to break even. That isn't very likely, so you'll probably run out of money at a very inconvenient time, like age 75.
You can increase your odds of success by doing two things. First, find a far less expensive way to invest the money. Dodge and Cox Balanced fund (ticker: DODBX), a star long-term performer, was recently reopened for new investment. Its expense ratio is only 0.52 percent. That's less than half of the expense of the comparable Wells Fargo fund, and you won't have the 1.5 percent management fee, either.
Another long-term star performer to consider is Fidelity Puritan (ticker: FPURX), with an expense ratio of 0.60 percent. Fidelity has the additional advantage of brick-and-mortar offices and people trained to help you complete the rollover. Still another is Vanguard Wellington (ticker: VWELX), with an expense ratio of 0.30 percent.
Note that each of these paths will save you at least 2 percent a year in expenses -- expenses that are subtracted from the return on your money.
The second step is to reduce your spending to a level that the portfolio can survive. It is unlikely to survive a 7 percent withdrawal rate, regardless of who manages it, particularly if future withdrawals are adjusted upward to preserve your purchasing power. You can read about withdrawal rates and portfolio survival on my Web site (www.scottburns.com).
Q. I'm a 41-year-old woman with a baby and a husband who makes a modest salary (less than $60,000). I've decided not to return to work full time and must now decide what to do with my 401(k) savings. It's a small amount -- about $6,000. Given the shaky market conditions, what are my best options? I already have an IRA with Fidelity, which contains rollover 401(k) money. -- D.F., by e-mail
A. Your best option is to roll the 401(k) account into your existing rollover account at Fidelity. This will save you from what some call "scattered asset syndrome," where your money is lodged in a half-dozen or more accounts, all sending you confusing monthly statements. By consolidating into one account, you'll have one account statement and Fidelity statements are very lucid. You will know, at a glance, how your savings are doing.
I'm sure you are tempted to cash out the account. But don't. Based on your husband's income, it would probably take him at least a year -- probably two years -- of contributions to achieve the same value. Measured in years of new contributions, it's not a minor matter. So let it grow.
© 2008, Universal Press Syndicate