There are several reasons one might have multiple 401k, 403b or 457b retirement plan choices. It’s more common than people realize. Are you proactively prioritizing your retirement plan options or are you simply defaulting to the simplest solution? The impact – especially over the long run – can be massive.
The most common multi-retirement plan example is when both spouses work for different employers who both offer these types of plans. Maybe Spouse #1 has access to a 401k and Spouse #2 has access to another 401k. Also somewhat common – especially for the physician – is that one spouse works for multiple employers.. both of which offer retirement plans.
Or maybe you work full time for a private practice that offers a 401k, but also work part time for the academic hospital that has a 403b plan. Or maybe you work solely as an attending for an academic or not-for-profit hospital and they offer you all three plans – the 401k, 403b or 457b.
How do you know where to start?
Start by thinking of your accounts like buckets – you have to figure out which bucket to fill up first, which bucket to fill second… and then you may even have a third and fourth priority bucket – depending on your situation.
For the sake of simplicity, we will focus only on 403b’s and 401k’s for this article, but keep in mind there are many other choices… IRA’s, 457’s, TSP’s, SEP IRA’s, Simple IRA’s, defined benefit plans, etc. But like I said, let’s start with the basics.
Maybe your goal is to save $30K/yr into retirement plans and you have three choices…
1) Your 401k (retirement plan #1)
2) Your 403b (retirement plan #2)
3) Your spouse’s 401k (retirement plan #3)
Most people tend to split their dollars up arbitrarily between two or three of their plans to get them to the total:
Often, this isn’t the best route. Odds are one retirement plan is better than the other – and in many cases one is considerably better. For example, instead of the above common solution, let’s say you proactively determine that it would be best to contribute $7K to retirement plan #1, $5K to retirement plan #2 and $18K to retirement plan #3.
Let’s say we got to this point because matching contributions would be maxed out by contributing $7K to plan #1 and $5K to plan #2. But then how do they decide where to put the other $18k they still have to save? Start by looking more closely at your plans.
Fees & Expenses
When you begin to peel back the layers, you see that plans #1 and #3 have significantly lower fees on their fund choices than plan #2. When you look even closer, you see retirement plan #3 is slightly better than retirement plan #1 because the employer offering it is a massive institution that has qualified HR staff, tons of existing retirement plan assets and a good pricing scale.
On the other end of the spectrum, retirement plan #2 has very high fees (that are hidden, of course) likely because it’s a small business. The owner wasn’t willing to pay to manage the plan, therefore, all of the fees get wrapped into the participant accounts (surprisingly, this is the most common setup with smaller businesses). As a result of these findings, any contributions above the amount required to maximize the match are contributed first to retirement plan #3, then #1, and then #2 (if you ever get to that point).
Now, you might be thinking that it’s not a big deal… the hassle of analyzing the plans is not worth your time. Or maybe it’s not worth the fee of paying someone to help you do it. But I would beg to differ. To give you an idea of the potential impact, let’s say the fees on funds used in retirement plans #1 and #3 average 0.25% versus retirement plan #2 fees average 2.25% (these are figures we see regularly).
Let’s say before you analyzed your plans, you were putting $10k/yr into retirement plan #2. After a close look, you decide to move that $10K/yr contribution away from retirement plan #2 and into retirement plans #1 & #3. If you consider the $10K/yr contribution only – made for 30 years – and assume the underlying investment has a gross return of 8%… the NET return would be 7.75% for options #1 and #3 and 5.75% with option #2. At the end of 30 years, this fee variance equates to $365,886!
In summary, here is how you might begin prioritizing your different retirement plan options…
First… always contribute, at minimum, the necessary amount to a retirement plan to maximize employer matching contributions.
Second… rank your plan options by all-in fees lowest to highest, and prioritize the lowest fee choices first (hint: you can find most the hidden fees on 401k’s by asking HR or the retirement plan provider for a “fee disclosure”)
If you haven’t done this exercise, I encourage you to go through it ASAP. We see people unknowingly throwing away growth opportunities all the time through the use of funds with high fees. Certain types of financial planners can help you sort through all of this and provide objective recommendations.
I would steer clear of retirement plan advisors – they are typically compensated more for higher expense options and can have conflicting interests with the plan they manage. Also, product-selling advisors or investment advisors may not be your best bet, either, because they have zero incentive to provide advice on this – that’s now that they’re paid for. The best kind of planner to consult would be the fee-only financial planner – it’s their job to provide financial advice (like this) that is in your best interest.
How have you prioritized your retirement plan options? Have you enlisted professional help – if so what did they suggest?