What are high fees costing you?
A theme of these blog posts is that fees matter when it comes to investment returns. For instance, low fees are a major reason for the sterling record of index funds compared to actively managed mutual funds. More than 60 percent of the assets in the S&P 500 index funds have expense ratios of 0.10 percent or less, according to the Investment Company Institute, an industry trade group. The median expense ratio for all equity funds is around 1.4 percent.
Sad to say, I don’t think enough employers have paid close enough attention to the impact of fees on their plan participants. Instead, the focus has been on adding additional investment options.
Here’s the thing: No one knows how the markets will do over the next 35 years — let alone the next year. Yet by negotiating for razor-thin fees for their employee retirement plans, employers can boost the odds of their employees doing decently in a well-diversified portfolio relative to the market’s performance.
The good news is that employers and employees will be more aware of fees when the new retirement savings plan disclosure rules come into effect in July. The rules are intended to make fees more transparent. The hope is that employers will feel pressure to shop around for a better deal. I think it’s a realistic goal.
You can use this calculator to determine what high 401(k), 457, or 403(b) fees might be costing you.
Thanks to Ted Leber for the pointer.
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