Killer Fund Fees

Apr 23, 2014 by

In “Fund Fees: Nest Egg Killer” I wrote about the surprising and shocking toll even seemingly low—in percentage terms—investing fees will take on savings. I put together this graph to make the point:

mutual fund fee impact on $10,000

How Investing Fees Slash Savings

My simple graph shows the impact of fees ranging from 0% to 2% on the growth of $10,000 earning 6% per year for 10 years. As you can see, a 2% annual fee would scramble this small nest egg by about $3,300, slashing it from $17,908 to $14,633, or by 18%.

Investing Fees Labeling

A new report on investing fees recently crossed my radar. Fixing the Drain on Retirement Savings, published by the Center for American Progress (CAP), advocates that “all retirement funds should have a clear, understandable label that provides consumers with relevant, concise, and accessible information about fees.” For example, CAP proposes a simple label like this:

Center for American Progress fund disclosure label

CAP has also proposed “creating a new type of plan that combines the best elements of 401(k)s with the best elements of pensions to address the inherent weaknesses of self-directed retirement plan” and that all workers be given access to the government employee Thrift Savings Plan.

Lifetime Impact of Investing Fees

CAP’s report includes a couple of startling tables to illustrate the lifetime impact of different investing fees. Check these out:

investing fee impact - median income worker

impact of fund fees - high income worker

So a worker earning the median salary of about $30,000 at age 25 will pay more than $167,000 in investing fees before retiring at age 67, if fees average what many might consider a reasonable 1.30% per year.

And the high income worker gets zapped for well over $400,000 over his or her working lifetime. Even a low fee outfit like Vanguard would suck about $100,000 from the high income worker’s savings over a working lifetime.

Wow. See the report’s Appendix for the assumptions and details underlying these calculations.

What Can You Do About High Investing Fees?

Unless you operate a Self-Directed IRA to invest your retirement savings, fees are unavoidable. But understand that expensive, actively managed funds do not consistently outperform low-fee index funds like those offered by Vanguard. I see no reason for any investor to turn over money to an actively managed fund, period, ever.

I know—you think you’re smarter than the average investor and have the ability to pick “hot” funds and get in and out at the right times. The short answer to this is: you’re mistaken. Sure, you might be able to pull off a spectacular demonstration of market timing once or even twice (and so could a chimpanzee trained to use an iPad), but no one can time the market consistently in the long run. If you truly think you can successfully time the market, you’re wasting your life with a career when you could be raking in billions just playing the market!

To keep your investing fees as low as possible, stick with ultra low-cost investments and look to invest elsewhere besides fee-happy Wall Street. The proposition that you must invest the lion’s share of your savings in financial securities or risk retiring on a cat food diet is BULLS__T, invented by the super-powered Wall Street marketing machine.

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