The majority of us spend the best years of our lives saving up for when we’re too old to do anything but chat with our kids on the phone once a week and do the hobbies that we never got around to enjoying when we were actually healthy enough to do them properly. These are often referred to as our “golden years” and all that gold is supposed to come to us in the form of a paid off mortgage, a 401k retirement plan, or an IRA. Being ‘Muricans, the majority of our readers will know what a 401k is. Essentially, it goes something like this:
- Your employer pays your salary and you can allocate up to a certain amount of it (before taxes) to a 401k which will then reduce your overall income so you pay less taxes.
- The money that goes into your 401k is then allocated across one or more fund choices that are usually total isht
- When you get old enough to start needing Viagra for horizontal gymnastics, you start spending these 401k funds on your rapidly deteriorating health
People say things like “I’m maxing out my 401k” yet very few people out there know enough (or care enough) about what’s going on with the actual investments being made. When you start to peel back the layers of the onion, there are going to be many reasons to cry. What you’ll likely find are a bunch of high-fee actively managed funds which will underperform the broader market.
Think about this for a second. The people who get to decide how these 401k plans get setup are human resources (HR). In other words, some of the most incompetent people found in any organization, who have your best interests in mind the least, are responsible for setting up these 401k plans. This should set off alarm bells ringing and you should immediately be concerned if you have a 401k. Don’t worry, we’re going to sort you out now and tell you how to make your 401k grow faster.
Founded in 2013, Kansas startup blooom has taken in $13.15 million in funding so far from investors that include insurance giant Allianz to build a tool that helps you make sense of your company-sponsored retirement plan(s). Finance is a largely boring topic which is often pontificated upon by “finance professionals” who try and make the whole thing more complicated than it actually is so that they can bamboozle you. We’ve touched upon some of this nomenclature before looking at things like asset classes, basis points, and asset allocation which largely refers to an age-old theory that says in your early years you should take more risk (invest in stocks) and in your later years take less risk and focus on income (invest in bonds). This is called “asset class allocation” and it’s the simple theory that most robo-advisors like Betterment are based upon. While it’s a relatively important concept, nothing will erode your nest egg like fees will.
How To Make Your 401k Grow Faster by Reducing Fees
The idea behind blooom is that they’ll analyze all that money you have saved up in company retirement plans to see what fees you’re paying. While a traditional robo-advisor will ask you to withdraw your money and hand it over to them, blooom will do the analysis while leaving your money in your company plan. All you have to do is go through a simple online process. When you first start filling out the forms to begin the process, you can see that these people are fun and down to earth – just like you’d expect people from Kansas to be:
The last thing you want is to be fawned all over by some sycophant in a Ferragamo tie who took the New York subway to work and thinks he can tell you how to drive a Bentley and not work. Once you enter some basic information, blooom does what a lot of fintech firms do now which is to authenticate your external account within their tool. That way you can automatically “import” your holdings and they can analyze them:
After you’ve done that, blooom will then suggest an optimal allocation which takes into account the optimal “asset class allocation” that we mentioned earlier while reducing your fees. They’ve analyzed over $1 billion in accounts and saved people like us more than $500 million in lifetime fees. So how did they come up with that “$500 million” number? They used the median pre-blooom expense ratio of .633% and compared that to a post-blooom expense ratio of .249% and then extrapolated that out.
What Fees Does Blooom Charge?
So what are we being charged for this service? Blooom has a flat fee of $10 a month (it’s a monthly fee because all you millennials out there can’t understand how interest rates work). Basically, you are being charged $120 a year for their service. This means that if your 401k balance is $50,000, then they are charging you .24% for their service. If on average they save their clients .38%, you’re getting a net savings of .14%. Go ahead and whip out that computer you carry around in your pocket all day that’s 10,000X more powerful than the computer used to put man on the moon and do the math yourself. “But it’s just .14%” we can hear people say. Well, over time this stuff adds up.
The Impact of Fees on Your 401k Plan
It’s always nice when someone can hand you concrete proof that their product benefits you when it comes to complex topics like investing. While it seems to be a no-brainer to assume that people who don’t understand how interest rates work probably shouldn’t be managing their own money, it also helps to see some actual scientific studies that demonstrate this. Blooom has an interesting 52-page study which analyzed 14 contribution plans with 723,000 participants and $55 billion in assets over a 6-year time frame to determine that yes, someone helping you manage your plan is a good thing. For a 45-year old participant, these savings could translate into 79% more wealth by the age of 65. That’s for someone who is already over the hill, but all you young-uns out there will save even more. Here’s a cool looking chart that helps visualize these better returns over time:
While those percentage signs may be a bit daunting, just think about it like this. The taller the bar, the more money you’ll have to spend on isht like motor homes and walkers.
Forgetting about all the benefits being provided to the average Joe 401k holder, blooom has come up with an extraordinarily lucrative Software-as-a–Service (SaaS) business model. According to the ICI, in 2015 there were 54 million 401k participants. If blooom can capture just 10% of these accounts, that translates into a $648 million yearly run rate. Maybe you should just go work for them and see if they’ll offer you some stock options. Millennials should note that they’ll probably require you to know how interest rates work in order to get a job there but that mountain is probably worth climbing. For all you 401k account holders out there who are reading this, these lovely Kansans will go through your 401k account for free so just do it and see what you’ve been paying in fees. Make the fund managers collecting those fees work for that money as hard as you had to work to earn it. Click here to start.