In October I started a new gig. By changing employers, I was eligible to roll over my Principal 401k balance into my IRA accounts.
How did I get here?
Years ago, I began maximizing my annual 401k contribution. During the four and half years that I was at Startup Inc, I made the maximum contribution each year, front loading my contribution most of the years. That’s five years of maximum contributions, or $94,500. Startup Inc never made any matching contributions. I invested everything in the lowest fee options. At the end, I was 75% in an S&P 500 index and 25% in a small cap, S&P 600 index. Both have expense ratios of .05%. The last five years of compounding have been great.
My major beef with the plan has been the administration fee. Previous employers picked up the administration fee, but not StartupInc. Instead, they passed the fee on to the participants. In the early days when the assets under management (AUM) and participants were both low, the administration fee was high. I can’t recall exactly, but it was somewhere in the range of .75% or more. Now, with more participants and a higher total AUM, the fee is still pretty high, around .7%.
How does this translate to me? In 2018, I paid a total fee of $263. But this year, even with a lower administration fee ratio, I’ve already paid nearly two-and-a-half times that, or $644.75. If I kept my money in the plan, I would break $900 in fees for the year.
To me, that’s expensive.
When I started at Startup Inc, we were encouraged to rollover previous workplace 401k plans. I was told that doing this would lower the administration fee for everyone. If I had followed that terrible advice, I would have paid at least $5,000 more in fees. No thank you. Instead, I rolled over my previous plan into my Fidelity IRA, and subsequently into my Fidelity self-employed 401k. Neither of those have any administration fees and both have low fee investment options.
I was looking forward to ditching those fees by rolling over my 401k.
Justifying the Fees
These fees aren’t entirely useless. They play an important CYA role for both Principal and Startup Inc. Presumably, they use the fees to hire auditors who make sure everyone is crossing their T’s and dotting the I’s. They pay for a financial advisor who reviews the investment options for “low” fees and suitability for plan participants. Without the auditors and advisors, we could have many more Enron’s on our hands, companies that shell company stock onto their employees through 401k plans. I get that auditors and advisors aren’t cheap.
Frankly, I would be happy if the Startup Inc plan ditched the expensive Wells Fargo Advisors and the auditors and instead gave an option like Fidelity’s BrokerageLink. I have a BrokerageLink option at MegaCorp and I love being able to put my investments into diversified ETFs like VTI. I don’t need an advisor watching out for me, and I need bare minimum auditing to prevent my 401k account from being robbed by my employer or the 401k record keeper. In fact, I still have my 401k with MegaCorp because of things like the low fees investment options and the BrokerageLink option.
Please Don’t Leave!
It was three weeks after leaving that Principal–StartupInc’s 401k provider–informed me that I was eligible to rollover my 401k. Seems a little long if you ask me. They informed me that I had four options:
- Do nothing. And keep the high administration fee? No thank you!
- Rollover my 401k into an IRA. Have I considered a Principal IRA? Yes, I did. But there’s a minimum $35 annual fee. Not a terrible option, but not the best, either.
- Take a distribution. And pay both regular income tax and steep early withdrawal penalties. Again, no thanks!
- Roll it over to another employer’s 401k. Not an option as my new employer doesn’t even have a 401k option yet. When they do, I’ll bet it will be subject to similar high fees.
In my book, option #2 was the clear winner. When I called Principal’s customer service, the agent was super professional and courteous. However, I felt like I was still being sold to with questions like:
- Have you considered opening a Principal IRA? Yes, I have but I want to go somewhere else.
- Why are you not choosing to use Principal? Because I have IRA accounts at other providers and want to consolidate instead of having IRAs littered all over the financial landscape.
After confirming my identity, the agent informed me that my 401k plan allowed the rollover to happen using their website. All she needed to do was flip a switch and I would see a new “distribution” option.
Why did I have to call to unlock that option? Please, just flip the switch from the start and let me take care of my rollover without the additional friction of a phone call. Friction intended to retain customers smells a lot like a dark pattern.
With the website option now opened up, I quickly set up the distribution. Because I had both a mix of Roth(post-tax) and traditional(pre-tax) contributions, I had two distributions: the pre-tax heading to a Fidelity rollover IRA and the post-tax to my Vanguard Roth IRA. As a final shiv in the gut, Principal charged me $50 for each transaction, adding yet another reason why switching to Roth contributions this year ended up being a bad idea.
It took 7 days for Principal to write the checks according to my distribution instructions, or almost a complete month after my last day at Startup Inc. The Principal representative suggested that if I was worried about market volatility, I could transfer my holdings into the money market equivalent before the transfer started. I wasn’t really worried about the market tanking in the next 7 days and I kept it invested as is.
Here’s the complete timeline:
- October 1st – Last day at StartupInc
- October 20th – Principal sends me both an email and a piece of mail (postmarked 10/18) with my rollover options
- October 21st – I call Principal customer service and initiate the rollover distribution online
- October 29th (Friday) – Principal’s website finally shows the checks have been sent to Vanguard (Roth) and Fidelity (traditional)
- November 2nd (Tuesday) – Vanguard and Fidelity both deposit the checks
- November 3rd (Wednesday) – I’m back in the market
- November 13th (Saturday) – Principal sends me snail mail that they sent the checks
Total Fee Damage
To pay the administrative fee, Principal deducts shares around the 25th of each month. The deduction doesn’t show on any account statements. I only noticed because I was tracking the account in Quicken and saw the share balance drop every month by a fraction. It’s almost like Principal doesn’t want you to notice.
If I take the final share prices and multiply it by the total shares that Principal took out each month, my total administrative fee burden was $2,793.26. Add in the $100 distribution fee and divide by the 56 months I worked at StartupInc and I paid on average $51.67/month. I pay less than that for my internet each month. That doesn’t seem right.
Don’t get me wrong. In my opinion, Principal is no different from other 401k providers who charge high fees for plans with few participants. I was treated similarly by MassMutual, the 401k provider for DumpsterFire. I’ve heard nightmare stories of providers who charged even higher fees than I paid. My attitude is to contribute the max to get the tax benefits, but at the first chance, flee the fees.
Do you have an old workplace 401k that can be moved? What are the administration fees you’re paying for your plan? What’s holding you back?