The Retirement Gamble
I really enjoy Frontline documentaries (airing on PBS). A program that originally aired in April has been airing several times recently and is about hidden and high cost fees on retirement accounts. If you didn't catch it, "The Retirement Gamble" is still available to watch online.
Jack Bogle at Vanguard (featured in the documentary) started his company with a goal of reducing the costs of investing for average people. He does that through index funds that mirror the market (and require little management) and thus seek to meet the stock market average, not beat it. Trying to beat the market, which usually comes through actively managed (read: high fee funds) has a slim chance of success. Pardon my French and you are free to disagree, but it's usually a crapshoot to beat the market. There is just no solid evidence that you can consistently design mutual funds to outperform the broader market.
I am so glad that my dad helped me transfer my Roth IRAs to Vanguard when I was in college, because they have been the industry leader in providing low fee mutual funds and I have been paying lower than average fees over the last decade plus. Unfortunately, my 403(b) is at Principal Financial, and their fees are much higher than Vanguard's. I pay those fees whether my portfolio gains or loses.
I'm not going to stop maxing out my employer match for the 403(b), but I am certainly not going to invest any more than that. I pick funds in the 403(b) that have the lowest fees and meet other requirements such as indexing and a track record of success.
I have a small amount of my overall investments in a fund with an expense ratio of 0.59%. The vast majority of my investments have expenses of 0.19% or less. Do you know the industry average at other companies? Vanguard reports it to be at 1.11%. That's almost 6x higher than Vanguard. That is 6x the amount of money that you don't get to keep, regardless of whether your investments made or lost money.
What does that translate to in actual dollars? Let's take an example of $10,000 invested in a stock mutual fund over 10 years with an amazingly steady track record of 10% growth every year.
- Total fees and forgone earnings from an average industry fund? $2,739.42
- Total fees and forgone earnings from an average Vanguard fund? only $488.62
What would you lose over 30 years? $49,654.57 with the industry compared to $9,676.94 with Vanguard.
Do you know how much your investments are costing you each year? I recommend that you set aside 2 to 3 hours in the next month to look at the details of all of your investment accounts and pay particular attention to the "expense ratio". Of course, there is more to picking a mutual than just looking at expense ratios, but it is one trait that you really can't afford to ignore.