Check your retirement fund costs now!

Fellow Savers, since my financial journey has tackled present, past and future in that order, dealing with my future finances is my newest area and thus the one I feel the least certain about. Plus, you know, it’s the future. I know what happened in the past, I can assess what’s happening in the present. I can only guess at what’s going to happen in the future.

And financial-services companies don’t make it any easier. Why should they? As long as you’re confused and uncertain, you’re at their mercy. Plus, without regulations, no company is going to be transparent about when they’re charging you more than they should.

Luckily for us, new regulations in 2012 make it a requirement that retirement fund choices show the gross operating expense. Unluckily, it’s pretty confusing and intimidating still. That’s why I avoided it for over a year. Until I watched the Frontline documentary “The Retirement Gamble.” (Here’s the transcript if you can’t watch it or would rather read, but I do highly recommend the video.)

I’m still not 100% sure I understand all this, but I’m going to give you my best shot. Please, let me know if you think anything I’m saying is inaccurate.

The gist is, if your retirement provider charges 2% to manage your funds, they will end up eroding 60% of the returns you would have made over the course of your contributing! Now that’s a direct statement made in the documentary. Does that mean, as I immediately thought, that if you made $100,000 in compound gains, you’d only see $40,000 of it? That if you had 10% returns on your investment, you’d only get a 4% return for yourself? If so, you would barely be getting enough return to cover inflation, let alone building wealth.

That’s where I’m not sure if I’m thinking things through completely accurately. But even if it’s not that bad, it’s gotta be pretty bad.

Then the documentary reveals that many funds widely vary in the costs they charge. I knew a bit about that, but not HOW widely. So I looked into the funds my 401(k) was currently invested in. It took a little bit of digging, but under “E-Documents” I found a PDF called “2013 Overview of Plan Investment Options and Fees.” (Yours may be called something else, but hopefully this helps you find it. If not, talk to your HR representative.)

In that document were some columns titled “Fees and Expenses.” Under that the subhead said “Total Annual Operating Expense.” Helpfully, this stat was expressed both “As a Percentage” and “Per $1,000.”

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When I saw how the funds my “target-date” retirement fund had chosen for me, vs. some of the other available options, I started cussing. Check this out (note, my provider did NOT choose either of the Vanguard funds for me; my funds are the others pictured):

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See that column on the far right? That’s the amount per thousand dollars they charge me per year. This particular 401(k) is at about $50,000, and 13% of it was in that top one, the Westfield one. By my calculations, they charged me $84.50 over the past year to hold that fund, when I could have been in the Vanguard one right above it, a better-performing fund by the looks of it, and it would have cost me $15.60.

$70 more doesn’t sound too bad, right? But keep in mind that’s for only 13% of my money; I got charged fees for the other parts too. And I don’t have a huge 401(k). Imagine if it was at $200,000! You can start to see how these fees eat away at your future.

Ordinarily I’d hold off posting until I was better-versed in the subject and could give my own advice with certainty. But this seemed crucial to get out there as soon as possible. So do your own research; watch the documentary, read up on the topic, ask a more math-savvy person than me if my calculations are right. But also, check the costs of your 401(k) options! If there’s a significantly cheaper one that performs just as well and is in the same area of investing, why not go for it?

I changed my holdings in my plan the very next day. I just called the number on the site and a guy did it for me. No matter how much I’m saving myself, I feel good that I’ll be keeping more of what my money earns.

PS: I would love to edit or retract any inaccurate info you see. As I said, I’m no expert and just starting to learn about this myself.

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Stuart Miles / FreeDigitalPhotos.net

4 thoughts on “Check your retirement fund costs now!

  1. Dan

    Nice post, Rosie the Budgeter! I enjoyed the Frontline story. Although I’m not convinced that government regulation is the ONLY solution to the problem, I’m glad to hear it is being dealt with.. I was also shocked by how much a 2% fee would cut into your returns so I ran the numbers myself and got the same results: If you get 7% returns but pay 2% fees over a period of 50 years, you will only have about 37% of what you would have had if you paid 0% fees.

    If anyone is interested in index funds like John C. Bogle was advising, I highly recommend looking into Betterment. They only charge 0.10-0.35% fees and are expected to get anywhere from 4%-9% returns depending how aggressively you want to invest. I could write a short book about why I love them, but I’ll just post the link instead (there’s a signup bonus if you follow the link):

    https://www.betterment.com/invite/danielluedke

    Reply
  2. Rosie the Budgeter Post author

    Wow, thanks for doing the math! It really is shocking. None of our 401(k)s had anywhere near 2% fees when I looked into them, thank GAWD. But we averaged out in the 1.1% range, so that’s still taking over 33% of the returns over time. We’re making adjustments to the 401(k)s, but basically when we’re ready to start contributing more to our Roths. We use Vanguard for that, which I believe Bogle founded. Betterment sounds really interesting from the brief search I did! Vanguard is awesome, with similar fees, but you need $3000 to start an account. Sounds like Betterment is a good way to get in on the action with a smaller starting amount.

    Reply
  3. bluesfemme

    You guys are doubly right – it’s very hard to fathom that 2% p.a. in fees eats away at returns so badly and it’s imperative to check your own!

    I just went and checked my superannuation fees (our mandated retirement savings scheme in Australia) and with a fixed annual account keeping fee and admin/mer of 0.78% on my balance, on current balance the fees are 0.85%.

    I’ve done some Excel formulas, and even 0.85% is scary.
    Starting with my existing balance, an average return of 6% and 9% of my salary put in each year (with salary increasing by a small amount each year), after 20 years it plays out like:
    No fees: ~$600k
    0.85 fees: $72k less
    2% fees: $155k less!!

    When i get the retirement funds, there’s an additional 15% tax on it, which makes the difference between the fees less – but at 2% fees that’s $132k less money in my pocket.

    I’ve used a conservative 6%, as my average growth in the past 5 years is woeful – and who knows which disaster will be affecting the economy in 20 years!

    In theory, my fees should go down a little as i near the 20 year mark – I’m currently in a growth portfolio which has the highest mer – cash would be 0.21 and conservative 0.53, so hopefully this is worst-case scenario – and i will now always keep checking.

    Thanks again for pointing this out.

    Reply
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