Diversification is good right? Well yes it is, if it truly is diversification. But it doesn’t work if your idea of diversification is that you have your money in a lot of different places.
These days, it’s easy to grow the number of your investment accounts. According to The Balance, a career advice web site, the average person will change jobs twelve times during their career. That means potentially twelve different 401(k) accounts if you’re a good saver. There are also lots of opportunities for savers to open accounts outside their 401(k)s too. Maybe your neighbor sells annuities, or your brother in law is a stock broker. As long as you’re investing, how can it be bad?
Brenda and Gary are good savers, and that makes them vulnerable to AAS (account accumulation syndrome). Their accountant recommended a financial adviser who sold them a variable annuity. They had savings in a mutual fund company, and more savings with an insurance company. Gary had his company 401(k), and Brenda, as a teacher, spread her retirement savings around a few of the dozens of vendors participating in the school district’s 403(b) program.
There are several problems with this approach.
- It’s hard to get a good picture of how your money is invested. From how much you have in stocks versus bonds, to how much is in U.S. versus international investments, it takes digging into each provider’s information to understand your investment portfolio.
- It’s hard to keep track of your investment expenses. Brenda and Gary’s average investment expenses ranged from 0.65 percent at the mutual fund company to over 4.50 percent in the variable annuity.
- It’s hard to keep track of your investment balances. If you’ve gone paperless, you have to keep track of usernames and passwords to all of the accounts. If not, you’ll still get statements from multiple providers, and some will be quarterly, while others are monthly. Of course this can be alleviated by using an account aggregation service, like Mint, but some accounts may not be accessible through these services.
- It’s hard to change your investment strategy. As you get older and closer to the time when you’ll be tapping your savings for living expenses, you’ll want to reduce the risk of your investment strategy. With a large number of accounts it becomes harder to make the transactions necessary to move your investments to better meet your needs.
- It’s hard to manage what happens to the investments if you or your spouse dies. The more retirement accounts (company or individual) you have, the more beneficiary designations there are to manage. The more investment accounts you have, the more accounts that have to be retitled if you decide to create a family trust. At the very least there are more vendors for your family to work with as they settle your estate.
When it comes to your money, keeping things simple is your best approach. Consider choosing a single mutual fund company or discount brokerage firm to hold your savings outside your company sponsored retirement plan. If you change jobs, roll your 401(k) account into either your new employer’s retirement plan or into an individual retirement account at your fund company or brokerage firm.
An added benefit of consolidating your investments in this way is that you will get additional services as your balance grows. Jeff and I have the bulk of our savings with Vanguard. As our investments grew through savings, 401(k) rollovers and market increases we were offered access to a financial planner for free, lower cost share classes, and more free brokerage account trades than I’ll ever use in a year. Other providers offer similar perks.
The longer you wait to simplify, the more difficult it will be. Taxable accounts and annuities in particular are difficult to move. Mutual funds held with the fund company generally have to be sold if you switch companies, which creates a taxable transaction. Income on annuities is taxable upon withdrawal unless the proceeds are rolled into another annuity.
Our lives are complicated enough. There isn’t any need to add complexity with multiple investment accounts. Keeping as many of your accounts as you can in a single location will go a long way toward simplifying your financial life.
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