Over the years there has been a shift of burden in retirement savings from the employer to the employee. The era of company pension plans is fading, leaving Americans on their own to save for retirement; primarily through company-sponsored 401(k) plans.
Frontline recently aired The Retirement Gamble, where it highlights some of the downfalls of company 401(k) plans and how they are keeping many investors from ever reaching a successful retirement.
Have you ever looked at one of your 401(k) statements and asked yourself “Why does it seem like this thing never goes up in value?” The market has been good and you are making regular contributions to it, so why does it seem like something is eating away all your return? It’s because there is: FEES!
So how can you control or minimize your fees? The easiest way to do so is to cut your mutual fund costs. The average actively managed mutual fund costs 1.3% annually to own, when you can purchase a passively managed mutual fund for a fraction of that price. Very few actively managed mutual funds outperform their benchmark index, and picking which ones will do so ahead of time is yet another challenge. Jack Bogle, founder of Vanguard, states in the documentary “that to maximize your retirement outcome you must minimize Wall Street’s take”!
Jack Bogle goes on to say that if you expect to get a 7% gross return each year and give 2% of that up to fees, then you are ultimately sacrificing almost two-thirds of your potential return!
Assumptions: Start with $100,000 earning 7% annually for 50 years. Red line
shows 5% annual return (7% return reduced by 2% of annual fees)
Jack continues by saying that “if you want to gamble with your retirement, be my guest. Yet be aware of the mathematical reality that you may have a 1% chance of beating the market. This has been proven true year after year, because it can’t be proven wrong”!
Jason Zweig, an investing columnist for The Wall Street Journal, added that “one of the ultimate dirty secrets of Wall Street is that a great deal of fund managers own index funds in their own retirement portfolios. This is something they don’t like to talk about unless you put a couple beers in them!” So if these highly paid fund managers don’t even believe in their ability to outperform index fund returns, then why should we?
Remember, that as investors, we have to control the controllable, and mutual fund costs is one cost we can control. We can’t know what direction the market will be heading in or what our annual return might be, but we can maximize the percentage of that return that goes into our pockets and stays out of Wall Street!