3/3/2014 3:45 PM ET|
The 401k move that guarantees a higher return
When it comes to company retirement plans, costs loom large, though few people pay much attention to them. It's simple math: Lower your fees and reap the reward.
Costs matter. Vanguard founder Jack Bogle has been saying that for years and I've been echoing him every chance I get.
When it comes to 401k expenses, costs loom large, although few pay any attention to them. Most workers assume their employers are getting the best deals for them when, in most cases, they aren't.
Enter the exchange-traded fund (ETF) platform. This is a new way of tapping ultra-low-cost ETFs for retirement plans. ETFs pool money like mutual funds, only they are listed on stock exchanges. Most of them are passive index funds that invest in large baskets of commodities, stocks and bonds.
Although the $2.4-trillion-plus ETF market has been growing like topsy for years, only recently have they been added to retirement plans. Companies like InvestnRetire, for example, have made it possible to own ETFs and reinvest in them through vehicles like 401k's. The bookkeeping technology has gradually caught up with the explosion in ETFs.
Now that the discount brokerage giant Charles Schwab (SCHW) has entered the ETF 401k business, employers might get serious about lowering costs. Schwab is offering a platform that covers 27 asset classes and offers funds from rivals iShares and Vanguard. The cost savings are going to be dramatic.
Why costs matter
Fund expenses are typically expressed as an annual percentage of assets under management. Most employees think that 1 percent annually -- which is close to the average for most actively managed stock funds -- is no big deal. But what if you could save on expenses by a factor of 10?
Schwab says it will offer ETFs that cost about $7 to $10 for every $10,000 invested, compared to around $70 for an actively managed fund. Those savings will be huge over time and will automatically boost your return. It's simple arithmetic.
Let's say you invested $100,000 over 30 years at a conservative 5-percent annual rate of return. With a 0.70-percent annual expense ratio, you'd have $350,000 after three decades, but you will have lost $82,000 to fees and foregone earnings.
What would happen to the same amount invested under similar assumptions with a 0.07-percent annual expense in an ETF-based portfolio? After 30 years, you'd have nearly $100,000 more. That's because your fees would be roughly ten times less and you could compound more of your money.
You don't have to believe me on this. Do the math yourself using the SEC mutual fund cost calculator. It will take you less than a minute and could vastly boost your retirement kitty. Once your eyes pop out of your head after you do a comparison between what you're paying now and what you could be earning, your next step is to approach your boss and 401k administrator.
Not only could you do much better, but everyone in the company plan could benefit. Do the math today and stop griping about your lousy returns at the water cooler.
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I think the whole premise of this article is overly simplistic. There's no guarantee lower costs will mean you get higher returns. A fund with slightly higher expenses may perform better. It's true the odds are on your side with low costs funds, but it's still far from a guarantee of higher returns.
We really can't win for losing!
Duh, If you pay money you will have less money after you have paid it.
Ok, that is pretty simple, but this is such an old story. I suppose it is a good thing for people to look into the fees they pay, but most people have a company 401K and a select number of funds. If you want to chose the balanced fund they offer you pay that fee, choice in the matter.
If you self direct, look at the funds prospectus.
One thing you can do when you retire is to move your 401K into an IRA and put the money
into a MLP.On 100,000 the monthly dividend is about $640 a month,without touching the
principle.If you need income,that`s hard to beat.
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