Investing in Your 401(k) is not free, but because you don't get a bill showing how many fees are withdrawn every quarter (or every year), many don't know they're paying or how much they're paying to invest in their Company's Plan.
And if you don't know, you should work to find out. Admittedly, I don't know exactly how much I pay but I have an idea. If your company allows you to see your 401(k) information online, chances are all you see is fund performance. You don't know that you're paying fees. Our company offers about 12 different funds, and I have 4 major funds in my account. Two are with Vanguard, one with Neuberger and one with American Century. I really had to dig to find out the fees associated with each, because they're not really all that apparent.
These management fees can eat into your returns if you're not careful. Consider the example below:
Fund A:
1-yr return: 5%
5-yr return: 10%
10-yr return: 11%
Management Fee: 2.0%
Fund B:
1-yr return: -5%
5-yr return: 13%
10-yr return: 10%
Management Fee: 0.35%
Fund C:
1-yr return: 33%
5-yr return: 13%
10-yr return: 7%
Management Fee: 0.75%
Think of the management fee as the "cost" of managing your money. Which fund would you choose if you were finding a place to put your money for a long time (5+ years)? Smart money would be in (B) of course. Some investors love to see those high returns in the 1-yr numbers, but it's unproven. Long term returns are what count. Note that although choice (A) may have a higher return, the management fee is deducted from the returns. Also note that your returns should be at or above the S&P 500 long-term average. One more thing: that fee is deducted from your account yearly regardless whether you make money or lose money.
So, if your 401(k) is accessible online with your employer, you should try to get access to the prospectus, which gives all the details on the fund you own. (Or, go to the fund's website) and download it from there. Inside you should look for the management fee section, which will give upfront cost (usually) of owning that fund. Some of the older funds may charge fees as high as 2-3% of your account balance, while others (like Vanguard) charge very low management fees.
Posts
3 comments:
Hello. My name is Nellie. I like your blog and I wonder if you could write a post (review) about my credit card site and place it on your blog (around 150 words, 1-2 anchor). Is it possible? What is your lowest final price?
If not, tell me what kind of links you can offer. Non- site-wide links please. NellieHawkins55@gmail.com
Don't know if you would read this here or over on your site (I'll cross post) but I can definitely take a look and do a blurb. (What is a 1-2 anchor)?
When you invest in the typical mutual fund (assuming outside of a qualified retirement plan), you face costs that erode your benefit. Chances are you’re not aware of them, they’re not in your prospectus and your broker isn’t going to sit down and tell you about them. The five costs of mutual fund investing are:
1. Tax costs – excessive capital gains from active trading.
2. Transaction costs – the cost of the trades themselves.
3. Opportunity costs – dollars taken out of portfolios for a fund’s safekeeping.
4. Sales charges – both seen and hidden.
5. Expense ratio, or “management fees” – no end to increases in site. This is a calculation based on the operating costs of the fund divided by the average amount of assets under management.
How radically do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return.
Post a Comment