In January my wife started a new job. She gave me her 401(k) plan brochure so that I can discuss her investment options with her. I was pretty upset to find out that her plan offered extremely high-fee actively managed mutual funds (every fund had an expense ratio greater than 1%) and her plan only presented one index fund - an S&P 500 fund that charged a pretty high .60% expense ratio.
An expense ratio of 1% means $1 on every $100 you have in the plan is paid by you to the fund itself. You don't see these fees come out of your account at the end of the quarter, these fees are rolled into the price of the mutual fund. The mutual fund price is known by the acronym NAV (net asset value) - it's like the price of a stock, but for a mutual fund instead. It might not seem like a lot, but it is, and it adds up over time to a lot of lost money on your part. If your plan offers low-cost investment alternatives in the form of index mutual funds you can see that fee drop to maybe 20 cents on $100 or even less.
To put that into prospective would you pay $20 for a gallon of gas or would you go across the street and buy it for $4 a gallon. And the gas is the same; $20 gas isn't 5 times better. And what if your car maker forced you to buy $20 gas and you had no other choice even if you knew there was equally good gas out there for $4?
It's not my wife's fault, and it's not even her company's fault either. Too many companies are unknowingly placed into 401(k) plans with poor investment options because they haven't been shown there's a better way to invest and unfortunately I think at times advisors are someway incentivized or even compensated to set up employers with these inferior plans. Those additional fees are going to somebody.
Check out this great mutual calculator provided by bankrate.com: http://www.bankrate.com/calculators/retirement/mutual-funds-fees-calculator.aspx
Keep these numbers constant: investment amount, rate of return, and holding period (you want to compare apples to apples). Take the expense ratio for your mutual fund, that amount goes into total operating expenses, put in 1%, .5%, .2% and see how that impacts your final balance over time - it's drastic and startling at the same time.
Here's an example: say my wife had $100,000 in the S&P 500 Index fund with the .6% expense ratio. She's got 30 years until retirement (holding period), if she were to get an average annual return of 7% (rate of return), she would have $635,484 in her plan at retirement. This is good, but it can very easily be better. If her plan offered a low-cost S&P 500 Index Fund with say a .15% expense ratio, my wife would have $727,705 in her plan at the end of 30 years - both plans will offer the same return cuz they simply track the same index - they're both the same gallon of gas. That's a difference of over $92,000 just because of the lower operating expenses!
Fees matter!!! Check your 401(k) plan's investment options, are your mutual fund choices loaded with high fees? Look at the expense ratio for the fund, if you can't find it (generally a warning sign right there) punch the fund symbol (it should be 5 letters long and end with an X) into the quote lookup box at yahoo/finance.com. Click on 'profile' and check out the Fees & Expenses box at the bottom. Generally if your fund is not less than .5% you've got a high-fee fund and it is secretly stealing your retirement fund!
The solution: go to your employer and demand low-cost index funds for your 401(k) plan; it will simply save everyone more money for retirement. If enough people speak up, or maybe it just takes one person to alert his/her employer that there are better less expensive options out there, we can all start saving more money for retirement.
To put that into prospective would you pay $20 for a gallon of gas or would you go across the street and buy it for $4 a gallon. And the gas is the same; $20 gas isn't 5 times better. And what if your car maker forced you to buy $20 gas and you had no other choice even if you knew there was equally good gas out there for $4?
It's not my wife's fault, and it's not even her company's fault either. Too many companies are unknowingly placed into 401(k) plans with poor investment options because they haven't been shown there's a better way to invest and unfortunately I think at times advisors are someway incentivized or even compensated to set up employers with these inferior plans. Those additional fees are going to somebody.
Check out this great mutual calculator provided by bankrate.com: http://www.bankrate.com/calculators/retirement/mutual-funds-fees-calculator.aspx
Keep these numbers constant: investment amount, rate of return, and holding period (you want to compare apples to apples). Take the expense ratio for your mutual fund, that amount goes into total operating expenses, put in 1%, .5%, .2% and see how that impacts your final balance over time - it's drastic and startling at the same time.
Here's an example: say my wife had $100,000 in the S&P 500 Index fund with the .6% expense ratio. She's got 30 years until retirement (holding period), if she were to get an average annual return of 7% (rate of return), she would have $635,484 in her plan at retirement. This is good, but it can very easily be better. If her plan offered a low-cost S&P 500 Index Fund with say a .15% expense ratio, my wife would have $727,705 in her plan at the end of 30 years - both plans will offer the same return cuz they simply track the same index - they're both the same gallon of gas. That's a difference of over $92,000 just because of the lower operating expenses!
Fees matter!!! Check your 401(k) plan's investment options, are your mutual fund choices loaded with high fees? Look at the expense ratio for the fund, if you can't find it (generally a warning sign right there) punch the fund symbol (it should be 5 letters long and end with an X) into the quote lookup box at yahoo/finance.com. Click on 'profile' and check out the Fees & Expenses box at the bottom. Generally if your fund is not less than .5% you've got a high-fee fund and it is secretly stealing your retirement fund!
The solution: go to your employer and demand low-cost index funds for your 401(k) plan; it will simply save everyone more money for retirement. If enough people speak up, or maybe it just takes one person to alert his/her employer that there are better less expensive options out there, we can all start saving more money for retirement.
