High fees erode retirement savings
Wall Street firms, mutual fund companies, and other money managers love to talk about compounding returns. But fees are critical to long-term investment performance. Too bad many employers in the public and private sectors don't fight to reduce fees on retirement savings plans. Here's a striking example sent to me by Henry "Bud" Hebeler as part of a correspondence he was having on the impact of high fees.
Three teachers contribute $250 per month for 35 years. Let's assume for the exercise that they earn on average an 8 percent annual return. Look at the impact fees have on how much money the teachers have at retirement.
- Teacher 1 pays 2.25% in fees (just about what the average California teacher currently pays) and ends up with $336,320.
- Teacher 2 pays 1.25% in fees (about the average mutual fund charge) and accumulates $409,585.
- Teacher 3 pays 0.18% in fees (which is about what a fee hawk will pay) and amasses $548,750.
The difference between the high-fee plan and the low-fee plan is $212,430.
Let's look at the impact of fees on living standards in retirement, assuming a 4 percent withdrawal rate. It's a standard number for running baseline simulations.
- High-fee is getting $13,452/year or $1,121/month.
- Medium-fee is getting $16,383/year or $1.365/month.
- Low-fee getting $21,950/year or $1,829/month.
My hope is that new regulations requiring greater fee disclosure and transparency will encourage employers to negotiate lower plan costs with their money managers. Imagine, you don't need to find a great money manager to boost returns. All you need to do is push for lower charges.