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I know you can tell me to the penny how much you paid for that last gallon of gas. But do you have any idea how much you are paying in 401(k) fees?
If not, don’t worry…you are not alone. Sixty-five percent of investors have no clue what they are paying…but that’s no excuse. There are several fees that you should always be aware of. Otherwise you could be losing out on an exorbitant portion of your hard-earned retirement.
“An ordinary median-income, two-earner household will pay nearly $155,000 over the course of their lifetime in 401(k) fees.” That’s according to a report titled The Retirement Drain: The Hidden and Excessive Costs of 401(k)s.
The concept is simple. Over time, the higher the fees, the more you stand to lose.
For example, the difference between a fee of 0.25% and 1.0% may seem small. But on a starting account balance of $100,000 invested for 20 years with 5% annual returns, the extra fees will cost an investor $30,000.
Courtesy of Investor.gov
In a world where many investors are focused on finding the next high flying stock for big profits, it’s often difficult to concentrate on the pesky details like expense ratios. But when high fees can cost you 35% over your total retirement returns, you should take the time to learn one simple step that could potentially save you thousands.
It’s known as the expense ratio.
This all started after I took a look at a few of the holdings within my 401(k) and stumbled across some very glaring no-nos.
The one I want us to focus on today was the expense ratio in the actively-managed small-cap fund within my 401(k) plan…it was over 1.8%.
Let’s compare that to the low 0.20% average expense ratio in a comparable Vanguard, Fidelity or T. Rowe Price index fund, the three largest fund companies. It’s easy to see how much an investor is “giving away” in fees for products that historically underperform their benchmark counterparts.
When comparing the two expense ratios over a 20 year period with an average rate of return of 5% annually I got the following results:
- The fund with the 1.8% made $13,399, but gave away $5,108 in expenses for a total of $8,291.
- The fund with similar holdings made $16,154, but only gave away $662 in expenses for a total of $15,493.
Same investment, same return…subtract the annual expense ratio and you get a stark difference in return…almost $7,000 or 84% over the life of your investment.
So it pays tremendously to focus on the expense ratio.
A tool I like to use to compare expense ratios is Finra.org’s Fund Analyzer. Check it out…it could save you thousands.
Always look for low-cost-cost passively-managed index funds. There are plenty of actively managed mutual funds charging 1% or more, hopefully you can find a few comparable passive index funds charging 0.25 percent or less.
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