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.”
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):
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.