PSA: January is a good time to check your investments

OPINION

BY LEN CABRERA

The start of a new year is a good time to review your retirement account(s) to check your investment position, especially if you just created a new account last year. It’s common for investment companies that manage corporate retirement plans to default contributions into government bond funds or money market funds. 

Recently a young adult asked me to look at his Roth IRA account from a local credit union. He was wondering why there were four identical payments during the year, since his money was supposed to be in an S&P 500 index fund. 

It turns out his credit union created a Roth IRA savings account, not an investment account. The young adult said he should have known something was wrong when he created the account; when he asked how the money was being invested, the representative at the credit union said they couldn’t divulge that information. 

Fortunately, he caught the error early, so he didn’t waste too many years of compounding. If this error had continued for 30 years, he would have had a very rude awakening at how poorly prepared he’d be for retirement. The savings account paid 2% in quarterly installments, so the effective rate was (1 + 0.02/4)^4 – 1 = 2.015%, not exactly a good return when inflation is 3.4% (based on 12-month CPI change for December 2023, the latest available from Bureau of Labor Statistics). 

If the institution had invested the money in an S&P 500 index fund, the return for 2023 would have been at least 10 times higher. The Wall Street Journal reports the index was up “about 24% in 2023,” and Seeking Alpha says “just under 25% in 2023.” Actual S&P 500 funds did better because of dividend reinvestment. The total return from 2023 for S&P 500 index funds was 26.29% according to Slickcharts, which mirrors the returns from the index funds offered by Vanguard and Fidelity.

For a $6,000 balance at the start of the year, that’s over $1,400 of lost gains ($1,577.40 vs.  $120.90), even more when you consider future gains on that money if it were invested for the next 30+ years.

Whether the account mix-up was an innocent mistake by the credit union or on purpose to benefit themselves at the expense of a naïve customer is irrelevant to the customer’s financial health. The same could happen to anyone who doesn’t pay attention. 

Just because you have a retirement account (401k, 403b, 459b, IRA, etc.) doesn’t mean you have money properly invested for your future. Make sure you take the time to know where your money is invested. Don’t blindly trust some anonymous account manager. Nobody is going to care about your retirement savings more than you.