April 8, 2016
Transparency Encourages Accountability (but we aren’t there yet)
On the subject of 401Ks – We’ve got some good news, and some bad news.
We’ll start with the bad news: According to Morningstar “a 401(k) plan is one of the very few products that people buy that they have no idea what it costs.”
I also mentioned there was good news: According to a new Investment Company Institute Report 401(k) participants paid an average expense ratio of 0.54% of assets for equity mutual funds in 2014 (down 30% from 0.77% in 2000). High investment fees can erode your retirement nest egg in a hurry, so this is a positive trend. Still, 12% of 401(k) mutual fund assets are invested in high-cost funds, with fees of 1% or more, ICI found. We’re on the right path, but there’s plenty of room for employer and investor education surrounding fees.
Do you ever feel that the expense ratio for your large-cap index fund is a tad high? It could very well be padded with revenue sharing fees. Usually a mutual fund will pay service fees (in addition to 12b-1 fees) back to the transfer agent or custodian. So assets invested in a particular type of fund pays a fee back to the service provider for the 401(k) plan. This poses a problem because it encourages service providers to choose the funds from which they will receive commissions.
Although investing in a mutual fund may promise high returns, the hidden fees that are associated with these investments are usually not worth the risk. Returns are always uncertain, while fees are a sure bet. Working with a financial advisor who operates as a fiduciary will eliminate these unnecessary fees and other hidden costs. No surplus in return that a skilled mutual fund manager will promise can make up for the high fees that come as well. A smart investment plan will take both fees and appropriate returns into consideration.
In the end, the cost of a retirement plan is just one piece of the retirement puzzle, and fees are only one consideration out of many. Some of the most salient influences on a retirement nest egg include the rate of return, the amount of time the money is in the market, and the amount saved over the years. Working with a financial advisor that services you as a fiduciary should be a preliminary step when planning for your retirement.
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