GROUPIRA Learning Center

Education, strategies, and tools for our Members to invest better for whatever comes next in life.

5 Financial Mistakes to Avoid in Your New Job

Starting a new job can be exciting and full of opportunities. If you have recently started a new career, congratulations and best of luck. However, before you rush off to lunch or happy hour with your new co-workers, you should first work to avoid these common financial mistakes made by new employees.

  1. Forgetting to rollover your former employer’s workplace retirement plan account. When employees terminate employment, they earn the right to rollover their workplace retirement accounts. In the excitement to start something new, people often forget about retirement accounts with former employers. Why should you care? Employers maintain benefit plans for their current workforce, so many employers will charge additional fees to accounts of former employees for continuing to administer retirement benefits. Such fees are perfectly legal, provided the fee is reasonable and the services necessary. By rolling over your workplace retirement account to an IRA, you can avoid such potential fees, preserve your account’s tax-deferred status, engage investment advisers for personalized advice, and generally access a wider range of investment options.
  2. Failing to select appropriate withholding allowances. If someone unknown wanted to borrow hundreds or thousands of dollars from you at zero percent interest, would you let them? We didn’t think so. Unfortunately, workers do this when they set their tax withholding allowances too low. If you receive a federal tax refund from the IRS, know that the IRS is simply giving you back your own money, without interest. What can you do? Form W-4 tells your new employer how much money to withhold from your pay for federal income taxes. It is best to give the IRS what you expect to owe in taxes, and not a penny more. There are several online calculators that can help you determine an appropriate federal tax withholding amount.
  3. Delaying enrollment in your new employer’s workplace retirement plan. Most employers require employees to complete enrollment forms for workplace retirement plans. Why participate? Contributing to workplace retirement plans is convenient, carries meaningful tax benefits, and makes you eligible for potential employer matching contributions. If your employer offers a match and you do not contribute, you get nothing. Before you read any further, or get another cup of coffee, go directly to your human resources department and request a retirement plan enrollment form. Complete it now. If you have not satisfied your plan’s eligibility requirements, ask your employer to keep your completed enrollment form on file until you do.
  4. Contributing inadequately toward your retirement savings. Participating in a workplace retirement plan is the first step. Contributing adequately, is the single most important thing you can do for yourself. How much should you save? We recommend contributing 15% of compensation, starting from the moment you enter the workforce. As an example, if your employer matches 3%, then you may want to contribute 12% of your pay. If you are mid-career and have not started saving, then you should contribute more. Can’t afford that much? Try contributing as much as possible, and then increase your contribution rate by 1% each year.
  5. Neglecting your retirement account’s asset allocation. Investments with greater growth opportunities generally carry greater risk of loss. The right asset allocation lessens your risk of loss when financial markets decline, but also provide opportunities for gain when financial markets grow. When choosing an asset allocation, consider your investment time horizon, and personal risk tolerance. There are several free online investment risk profile questionnaires that can help.

By avoiding these financial pitfalls, you can begin your new job with confidence and financial peace of mind. If you need help or have additional questions, we invite you to contact us.

Wall Street Does Not Want You to Know This About Mutual Funds

One of the mutual fund industry’s dirty little secrets is that mutual funds with identical names, identical fund managers, and identical investment objectives are not identical. This is a lesson in the murky world of mutual fund share classes.

Mutual funds can be sold in different share classes, where the principal difference among share classes are the fees and expense the fund will charge you. In fact, it is common for a mutual fund to have some share classes that cost 100% or more than other competitively priced share classes. Imagine buying a car at your local auto dealer and the sales agent tells you that two cars of identical make, model, condition, and options were priced at $20,000 and $40,000 respectively. What would be your reaction? Sadly, this is exactly what is happening in the mutual fund business. More on that in a minute, but first a little background on mutual funds.

Mutual funds are collective pools of money, managed by professional investment managers. The investment manager makes all investment decisions. In fact, the only decision investors make is which investment manager they hire or fire. Investors hire managers by purchasing mutual fund shares. Investors fire managers by redeeming their mutual fund shares. When a mutual fund is purchased, the investor’s money is transferred into the mutual fund pool. Once in the pool, investment managers are in control and decide what to buy or sell (stocks, bonds, commodities, etc.). When you fire an investment manager by redeeming your shares, the mutual fund company returns to you the proceeds.

Investment managers do not manage money for charity — they do so for a fee. This fee is known as the mutual fund expense ratio. The expense ratio is expressed as a percentage and reflects the mutual fund’s annual charge to investors. Mutual funds generally calculate their fees daily, so a fund with an expense ratio of 2.00% may charge (2.00% / 365) against an investor’s balance each day.

Now let’s consider the effect of different share classes by looking at a real world example — the PIMCO Total Return Fund. As of this writing, the PIMCO Total Return Fund is among the largest mutual funds in the world. In fact, you may own this mutual fund in your Individual Retirement Account or 401k plan. The PIMCO Total Return Fund is offered in a range of share classes:

  • Share Class A (PTTAX) – Expense Ratio: 0.85%, Minimum Initial Purchase: $1,000
  • Share Class C (PTTCX) – Expense Ratio: 1.60%, Minimum Initial Purchase: $1,000
  • Share Class D (PTTDX) – Expense Ratio: 0.75%, Minimum Initial Purchase: $1,000
  • Share Class P (PTTPX) – Expense Ratio: 0.56%, Minimum Initial Purchase: $1 Million
  • Share Class R (PTRRX) – Expense Ratio: 1.10%, Minimum Initial Purchase: None
  • Share Class Admin (PTRAX) – Expense Ratio: 0.71%, Minimum Initial Purchase: $1 Million
  • Share Class Instl (PTTRX) – Expense Ratio: 0.46%, Minimum Initial Purchase: $1 Million

The mutual fund objectives and the investment manager are identical, but the expenses vary significantly among the share classes. Another significant difference among the share classes is the minimum initial purchase. Mutual fund companies often reward large investors with more favorably priced share classes because they are purchasing in bulk. It is similar to Costco selling bulk products for less than you pay at convenience stores.

What investors do not always know is that a better priced share class may be available. The savings to investors can be significant, especially when considering that mutual funds are often purchased in retirement accounts with a buy-and-hold investment strategy. Investors should do their homework before purchasing mutual funds, lest they risk spending more than necessary. If you would like to learn more or review your specific situation, our IRA Consultants are happy to assist.