Retirement Portfolio, Fees, and an Outdated Beneficiary
Denise is 58, divorced, and earns $105,000. She contributes 8% of pay to her employer's 401(k), which has a $640,000 balance and a 3% employer match. The plan's default target-date fund has a 1.10% expense ratio; a low-cost index fund menu is available with a 0.05% expense ratio. Her allocation is 60% stocks and 40% bonds. She also has $120,000 in a taxable brokerage account, $45,000 in a Roth IRA, and $85,000 in a traditional IRA. She plans to retire at 62 and delay Social Security to age 67, when her benefit is estimated at $2,800 per month. Her mortgage payment is $1,200 and will be paid off when she is 66. Her 401(k) beneficiary form still names her ex-spouse from her 2012 divorce; her will leaves everything to her adult daughter. She wants to leave at least $300,000 to her daughter and asks about fees, a Roth conversion, and her beneficiary forms.
1. Quantify the fee drag and recommend an allocation or fund change inside the 401(k).
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The expense-ratio difference is 1.10% − 0.05% = 1.05% per year. On $640,000, that is about $6,720 per year in additional cost. Over the four years until age 62, even before investment growth, the difference is about $26,900; with growth, it is roughly $30,000. Over a 20-year retirement, a 1% annual fee can reduce the ending balance by roughly one-fifth, which directly threatens her $300,000 legacy goal.
Denise should keep her 60/40 target but implement it with the lowest-cost index funds available in the plan. She does not need to abandon diversification; she needs to stop paying 1.10% for a default fund when a 0.05% menu exists. She should confirm whether the plan charges additional record-keeping or advisory fees and check for stable-value or bond index options.
Asset location. Bonds are generally better held in the traditional 401(k) or traditional IRA, while stock index funds are better in the Roth and taxable account where tax efficiency matters. She should also capture the full 3% employer match; that is an immediate return that outweighs fee differences. A fee review is not a one-time task - she should repeat it annually and at retirement.
2. Should Denise convert her traditional IRA to a Roth before retirement? Consider her bracket, the years before Social Security, RMDs, and Medicare or ACA effects.
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At $105,000 of salary, Denise is likely in the 24% marginal bracket (after 401(k) contributions, possibly 22%). Converting the entire $85,000 traditional IRA now would add taxable income at that rate and could push her into a higher bracket. That is usually less attractive than waiting.
Her best window may be ages 62 to 67, after she retires and before Social Security begins. Her taxable income may be low enough to convert in the 12% or 22% brackets. She can do partial conversions each year to fill the lower brackets rather than converting all at once. This also reduces future RMDs, which begin at age 75 for someone born in her cohort, and may reduce the tax burden on her daughter.
She should pay the conversion tax from the taxable brokerage account, not by withholding from the IRA, so the full converted amount stays invested. She must also watch the IRMAA lookback: Medicare premiums at 65 are based on income from two years earlier, so large conversions at 63 can raise Part B and D premiums. If she retires before 65 and uses an ACA marketplace plan, a large conversion can reduce premium tax credits. A partial, multi-year plan is better than a single large conversion.
3. What is wrong with Denise's beneficiary designations, and how should she coordinate them with her will and her legacy goal?
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The 401(k) beneficiary form still names her ex-spouse. A will does not control a 401(k), IRA, or other beneficiary-designated account. Generally, the plan beneficiary designation controls, and divorce does not automatically revoke an ex-spouse designation unless the plan documents, a QDRO, or a divorce decree specifically provide otherwise. If Denise dies, her ex-spouse could receive the 401(k) even though her will leaves everything to her daughter.
She should immediately request new beneficiary forms from the 401(k) administrator, naming her daughter as primary beneficiary and adding a contingent beneficiary. She should do the same for the traditional IRA and Roth IRA and coordinate TOD or payable-on-death designations on the taxable brokerage account. She should keep copies and confirm the changes in writing.
Legacy goal. To leave at least $300,000, she needs to review the beneficiary structure alongside the portfolio. A trust may be appropriate if her daughter has creditor, divorce, or incapacity concerns, but a trust must be named correctly as beneficiary. She should also consider whether a per stirpes designation is desired. Beneficiary designations should be reviewed after any birth, death, marriage, or divorce.