When I got my first 401k at work, it quickly realized that I had no idea what I was doing. There were more than a dozen fund options to choose from and I didn't know what it was going to cost me to participate because there were so many hidden fees.
It made me want to give up right away … and I did. I thought, “This is too difficult and I can't afford to invest for my retirement anyway.”
Years past and I missed out on some major growth for my retirement. It looks like my situation isn't so different than most Americans given nearly half of them have less than $10,000 stashed away for retirement.
To help us solve this retirement conundrum, I invited the founder of blooom, Chris Costello, to tell us more about how their popular service is helping Americans save more money, time and heartache with the 401k process.
Andy: Why are so many Americans behind on saving for retirement?
Chris Costello: That is a question I've obviously thought about for many, many years. I've been in this business now for about 22 years and I think there's a lot of misconception or maybe some improper bias, if you will, around this issue.
I think maybe some people think that, gosh, dang it, people just need to start saving. They need to make this a priority.
And I think too much blame is laid at the feet of the individual retirement savers in this country – the employees in this country. The reason why I say that is because I feel like, we feel like this at blooom, that in a lot of ways, the deck has been stacked against people.
What I mean by that is there have been many, many people who have tried. They've made a valiant effort to dig in and really try and understand their finances or their 401(k) or mortgage loan or something.
And this entire industry has done such a darn good job of making this stuff complicated. They use jargon, and it is an incredibly opaque situation when it comes to fees. A lot of people, like I say, have tried to dig in and understand this, and they just throw their hands up, and they're like, “This makes no sense.”
And I'll give you a good example. I'll give you a great example. Prior to blooom, I was an individual wealth advisor managing money for very, very wealthy people. And oftentimes, when these folks would come in for their annual review, and they'll say they were still working, so they had money in a 401(k) through their employer. So I might be managing a million or $2 million for them that they've got outside of their retirement accounts. But they're still working, so they still have this 401(k) through their employer.
Well, when they'd come into my conference room and we do their annual review, oftentimes, I'd spin the computer around and I'd have them log in to their 401(k) account so I could take a look at their 401(k) allocation, how they had it set up, and if needed, make some tweaks to it.
So again, I'm a guy with 22 years of experience, been managing money and doing this stuff for a long, long time. They'd spin the computer back around to me, and I'd look at it. And the money could be, wherever, Fidelity or J.P. Morgan or Schwab or whomever, Vanguard, doesn't matter.
And I'd look at their 401(k) account, their allocation. I'd be like, “Okay, we need to make a few tweaks here,” and then I'm telling you, man, I mean, I'd look at this thing, and I'd be like, I can't even figure out how I'm supposed to make changes here or rebalance the account.
I'm like, I'm a CFP with two decades of experience, and I'm having trouble figuring out what I need to do to move the money around in this account.
So that's just one example. It's an anecdotal example of how I think in many, many cases, this stuff is just hard for people.
The second thing that I think is working against a lot of people is oftentimes, people have found a way to… I mean, there's a bazillion of those online retirement savings calculators. There's literally a million of those things online. And I think sometimes people go to those calculators and they'll put in their age, and maybe they'll answer how much they have saved for retirement, or they'll put in how much they're currently saving each paycheck into these sites, or maybe they even met with a financial advisor and they told them how much they had saved for retirement and how much they're saving.
And these calculators, or the financial advisor, said, “Oh, my God. You're never going to retire. You're so far behind. I mean, it's going to take a miracle for you to retire before 80.” And so you know what most people do when they hear that? Fine, screw it. I give up. I'm out. I'm not even going to try.
So it's like, if I'm already not going to retire, well, then shoot, why am I doing anything at all?
And I think the combination of the complexity and the fact this industry has told so many people for so many years that they're so far behind, that many people in this country have just given up.
And it's hard to win them back. One of the things we've done at blooom is, we have tried to make dealing with your 401(k) – engaging with your 401(k) – the most simple experience you've ever had in financial services, number one.
And number two, we try to make things positive. Hey, you've got a 401(k). That's awesome. You're saving anything, that's awesome. Good for you. You've started. You've done something.
And we make it a positive first step instead of pounding into people's heads how far behind they are.
So that's the long-winded answer to your question, but I think that's why a lot of people are behind.
What can people expect if they're working with blooom?
blooom is obviously an online service. It is a robo-advisor. That term has gained a lot of attention over the last probably five years. blooom is the only robo-advisor that will actually manage the money for you within your 401(k).
There are a lot of other robo-advisors that exist today, but the only way you could be one of their clients is if you leave your employer, and you have to move your money out of your 401(k) into an IRA, and then companies like Betterment or Wealthfront or some of the others could then manage it. Or if you have other money outside of your 401(k), they can help you with that.
But blooom today is the only robo-advisor in the United States that will specifically manage the money inside of your 401(k).
And so it's all done online. You go to blooom. It takes about 3-4 minutes basically to link up your 401(k).
When you link it up, blooom goes into your account, analyzes your entire allocation based on your age that you've told us, and based on when you'd like to retire. We'll let you know if you've got roughly an appropriate allocation given your age and timeframe to retirement.
If it's a plan that we recognize, we'll be able to tell you precisely what you're paying in fees and what we could save you in these hidden fees by reallocating it using some of the other lower cost funds, namely the index funds that might be available within your plan.
So, that whole analysis takes about three or four minutes. And it is 100% totally free, no strings attached, nothing.
I always tell everybody, everybody with a 401(k) should take 3-4 minutes, go to the blooom, get the free analysis, period. Literally, there's no catch.
And then after you've been shown how blooom thinks we could improve your 401(k) or lower the hidden costs or lower the fees that you're paying, then you can decide at that point after three or four minutes if you want to actually sign up and become a client of blooom.
And becoming a client of blooom means that you give us permission to go into your account and make the changes for you. The cost is $10 per month, period. There's nothing else. There's nothing else we charge. It's pay as you go. You could cancel it at any time.
And for that $10 a month, you basically are hiring an advisor, in this case, a digital advisor, to watch out, look over, monitor, and tweak your 401(k) as market conditions may change and as you get older.
Because as you get older, your allocation needs to change as you get closer and closer to retirement, and blooom will do that for you. And so again, that's $10 a month. But that's a decision that everyone can make after they've received their free analysis on the current state of their 401(k).
You don't have to move your accounts to have blooom analyze them?
That's exactly right. Actually, you can't move your account because while you're still employed at your employer with your 401(k), you can't move it. You don't have the choice to move it.
And so, there is no moving of money. Your money stays inside of your current 401(k), and we manage it where it's at.
And I'll make this point, too. It doesn't matter where you work. Doesn't matter where you live. It doesn't matter who your 401(k) provider is, and it definitely doesn't matter the size of your account.
Anybody with a 401(k) can get a free analysis at blooom, and then decide on their own if they want to become a client.
What's the difference between working with a robo-advisor at blooom versus a financial advisor?
First of all, if your listeners currently have a financial advisor that they know, love, and trust, blooom's not trying to supplant that relationship at all. Good for you. Good for you that you found someone.
But the fact of the matter is that most people in this country don't get access to a financial advisor.
I'll tell you. I'll share a little personal story with you. So, before blooom, about 14 years ago, myself and my business partner, we left some of the big Wall Street brokers firms to start our own independent fee-only investment advisory firm. We started that back in 2004, and that firm still exists today. And that firm focuses on helping people, generally speaking, that have at least a half a million dollars.
As I got further into my career, I really wasn't taking on any new clients unless they had at least a million dollars of investible assets. And that's not uncommon in financial services. I mean, most financial advisors want there to be some ability to make some income off of a client. And generally, that means having a bigger account.
Here's the sad irony though. This firm that I started with my business partner back in 2004, my own mom and dad technically didn't have enough money even to qualify to be a client of that firm, okay. My mom and dad. Now, obviously, they were clients of mine because they're my parents.
But had I not been in the business, there was not going to be any financial advisor that was going to spend any time with my mom and dad given the size, how little that they had in their accounts.
And so that is one of the big reasons why we started blooom is – we didn't really build blooom for people that have million dollar accounts. And I don't mean to discriminate against those people, but they're okay. There are financial advisors lined up around the block to compete and help those people.
It's people that have $8,000, or people that are just starting off in their 401(k), or people that have $32,000 in their 401(k), or people that have $48,000 in their 401(k). Those types of accounts, which there are tens of millions of people in this country, I'd argue probably the majority of the Americans have those kinds of balances. They're kind of caught in this no man's land.
They might go to an advisor, and the advisor starts asking them questions about how much they've got saved, and the advisor finds out there's just not much there. And there's really not much they can do for them.
And the other thing, too, is that even if you're working with a financial advisor, kind of like the story I told you before, if I'm working with a client in a face to face capacity, it's really hard for me to help them with their 401(k).
Again, like I told you, maybe I'd have them log in once a year when they came in for their annual review, and I'd take a peek at it. Sometimes, I just have the client email me a copy of their 401(k) statement, and I'd look at it, and then I email them back my recommendations.
But then it was up to the client themselves to go log into the 401(k) and make all those changes. And sometimes, they would, and sometimes, they wouldn't.
At blooom, we're actually doing it for you. We're actually logging into the account for you and making the changes for you.
So there's a big difference between people that are trying to handle it themselves, or maybe they have an advisor, but the advisor always has kind of an arm's length relationship with your 401(k), if that makes sense.
What type of fees are you guys helping people become aware of?
This is a topic we could devote an entire show to. So, first of all, there are a lot of studies that have been shown. I think that probably most of your listeners are going to know that they're paying some fees inside their 401(k).
I think there's 10% or 20% of the people that they've surveyed at times before that actually think their 401(k) is totally free, like the employer's paying everything. And that's just not the case.
There might be some administrative plan fees, 401(k) fees that definitely your employer could be paying. But the actual investments themselves that you have to pick inside your 401(k), all of those carry expenses. All of those carry expenses, and they're kind of hidden. You have to get the prospectus and turn to page 32 and find in the small print what the hidden fees are in those things.
And here's the crazy thing: the disparity in fees from plan to plan, from custodian to custodian, is insane.
For example, you may have, let's say you work for a big corporation. Your employer may have contracted with Vanguard to provide the 401(k) for all the employees at your company, okay? In that case, you're probably in pretty darn good shape in terms of the fees. Vanguard's obviously very well known for having extremely low fee funds.
Your next-door neighbor, or maybe your spouse if you're married, could work at a different company. And they contracted with a totally different record keeper.
I won't name any names today, but there are a lot of insurance companies out there that provide 401(k)s that could be charging, I'm not kidding you, 10 times what you're paying for a 401(k) plan in these hidden fees. I'm not exaggerating.
You could have a Vanguard plan, and all-in you're at 0.15%, a fraction of 1% a year in these hidden expenses. Your spouse or your next door neighbor who's at a different 401(k) plan could be paying 1.5% a year, literally.
And if you start to do the math on a difference of 1% a year over 20 or 30 years in a working career, it totals up to a six-figure amount. And that's your money, man. That is your money that's getting siphoned off of the account through these hidden fees, most of the time, unknowingly.
The best analogy we've come up with for these fees are to think of them like termites in your house. Nobody can see termites, okay? But if left unchecked for long enough, they will wreak havoc on the house and bring the whole thing down.
Same thing in your 401(k). If these high fees go unchecked long enough, it will rob a significant amount of savings from your 401(k) plan.
So, one of the big things that blooom does is we go into the plan and take a look at what you're paying currently in fees. It might be the first time ever that you've seen actually what you're paying in these fees. And then we look around in the plan, and we can find other, oftentimes, lower cost funds.
The good thing is more and more plans these days are starting to use index funds inside of their 401(k). And these index funds are generally the options that are a fraction of the cost of some of the other higher fee actively managed funds.
And so, I think on average, I'd have to go look at the stats again across the board, across all 20 some odd thousand clients that we've got currently, the average fee savings before blooom versus after signing up for blooom is something close to 40%.
Now, again, that's an average. Sometimes, people are already in great low-cost funds and we can't make any improvement to them on the fees. Maybe we can help them with the allocation or the discipline or the rebalancing.
Other times though, we are making significant changes inside of plans, and it can be higher than a 40% savings.
The point of all this is, again I come back to, just take three or four minutes, go to blooom, and get the free analysis. See if you've got any issues with your allocation or maybe hidden fees that you're unaware of.