I listed one good IRA option yesterday for those that are just starting out saving, but now I want to spend some time and explore more options. I don’t want it to seem like I favor Fidelity – people were asking for a good option and I threw one out there. Maybe not the best, but again, sometimes just starting is more important. Besides, you all know that my own retirement money is at Vanguard.
For the purposes of this comparison, I am assuming that we are talking about a person who does not have a lump sum to invest, but can manage to set aside $200 a month towards an IRA. For those that think that’s too little to start, consider this: Just $200 a month, starting from age 25, growing at a tax-deferred 8% annually, will grow to about $1,000,000 by age 70. For simplicity of comparing investment choices, I will also compare each broker’s auto-pilot retirement funds.
Already discussed here yesterday. Their Freedom 2045 fund (FFFFX) has an expense ratio of 0.79%. This is on the high side, and is mostly because the fund consists of several actively-managed funds. Still, Fidelity has tons of selection and solid customer service.
First of all, it has a minimum initial opening balance of $3,000. So in my scenario you can’t even get into the game. If you do manage to save up that much, for IRAs, you have a $10 annual fee for each fund with a balance of less than $5,000. Say you put in $3,000, that’s like an extra 0.33% annual expense ratio. Still, their Target 2045 Retirement fund (VTIVX) has a rock-bottom expense ratio of 0.21% and Vanguard is my broker of choice if you have enough money. No annual maintenance fees.
Not everyone knows this, but anybody who is otherwise eligible can open up an IRA with TIAA-Cref and invest in their mutual funds. You don’t have to be a teacher or work for an educational institution. The usual minimum initial investment for IRAs is $2,000 per fund account. But, you can get around this by setting up an Automatic Investment Plan of $50 per fund. They have a smaller fund selection than Fidelity or Vanguard, but they now offer their own auto-pilot retirement funds. Their Lifecycle 2040 Fund (TCLOX) has an expense ratio of 0.61%. No annual maintenance fees.
T. Rowe Price
Another large mutual fund house, you’ll need $1,000 to open an IRA account here. A $10 fee per year is charged for each IRA mutual fund account under $5,000. Their Retirement 2040 Fund (TRRDX) has an expense ratio of 0.84%. You can set up future automatic investments with a minimum of $50 per month.
Discount Stock Broker ($5-$10 per trade)
You can also go out an open an IRA at a stock brokerage and buy some ETFs every so often. You probably wouldn’t want to do it more than quarterly since those trade commissions will add up fast. So let’s say you save up $200 a month and every quarter you buy just 1 ETF with it, at $5 a trade. That’s like having a 2.5% front-end load on your ETFs, although you won’t have to pay any ongoing fees later. While many ETFs have a bit lower expense ratio than their mutual fund counterparts, I don’t know of any ETFs of auto-pilot retirement funds. You’ll also have to remember to execute the trades yourself, unlike with an automatic investment plan. Most brokerages now offer IRAs with no annual fee.
FirsTrade (Discount Mutual Fund Broker)
Another option is FirsTrade, which actually offers no-load mutual fund trading with zero commissions with an initial minimum investment of $500 and additional investments of at least $100. Still, you must still satisfy the minimums of each mutual fund itself. For example, you won’t be able to get around the $2,000+ TIAA-CREF or Fidelity minimums since you aren’t using their automatic investment plans. This shouldn’t matter, but a $19.95 fee will be applied to redemptions of no-load fund shares held less than 180 days. No annual maintenance fees.
My main concern with this broker is the ongoing feasibility of offering free mutual fund trades. Scottrade also did this for a while, but couldn’t keep it up and had to cancel their program abruptly, leaving people with positions in mutual funds they could not longer add to without incurring high transaction costs. Still, this way you get to choose from a ton of mutual funds.
While there are other options out there, I think these are most of the big guns. I also realize that different mutual fund companies construct their 2040 funds differently, but again, I’m just trying to make the initial choices as simple as possible.
In the end, I would say that TIAA-CREF is the best low-cost choice, with the lowest funding requirements, although Fidelity still isn’t that far off. I hope I didn’t kill you all with too many options.