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From Bob Irish in the Wealth Builders Club: If you don’t know what fees you’re paying in your 401(k) plan, you may be paying too much—to the tune of hundreds of thousands of dollars…
The good news is you have control over the biggest expense: investment management.
This is the fee charged by your plan’s investment managers. In mutual funds, it’s known as the expense ratio. How much you pay depends on your investment choices. (Some funds are more expensive than others.)
A lower expense ratio can radically increase the size of your retirement nest egg. Here’s a simple example:
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John and Mary both accumulate $100,000 in their 401(k)s by age 30. From that point on, they make no additional contributions. John invests in a stock mutual fund with an expense ratio of 1%. Mary chooses an index fund with an expense ratio of 0.25%. Let’s say the stock market averages 8% over the next 35 years. John would have a net return of 7%, and Mary’s return would be 7.75%. At age 65, John now has just over $1.15 million in his 401(k). But Mary has over $1.49 million—almost 30% more. That’s a difference of over $340,000… just because Mary chose lower-cost investment options for her 401(k). |
Here’s another example:
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In a 2014 study, the Center for American Progress compared the total lifetime fees paid by three workers each making $75,000 per year. We’ll call them Alice, James, and Roger. (The study assumed the employees enrolled in their 401(k)s at age 25 and retired at age 67. After retirement, they lived for an additional 21.6 years.) Alice invested in low-cost index funds with an expense ratio of 0.25%. James chose actively managed funds with an average expense ratio of 1%. Roger invested in more expensive funds with expense ratios averaging 1.3%. The difference in fees doesn’t sound like much… but as the chart below shows, it adds up quick when compounded over many years. |
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Over their lifetimes, Alice paid $104,000 in fees, James paid $340,000, and Roger paid $409,000. Chances are James and Roger were oblivious to the loss of their money… |
The bottom line here is to figure out the expense ratio of any funds you are invested in. If you don’t know these, the odds are good you’re losing an enormous chunk of your nest egg—for no good reason.
Reeves’ Note: Wealth stealers—like the one Bob describes above—are a hot topic in the Wealth Builders Club. And this week, Mark’s hosting a free online wealth-training event filled with proprietary lessons from the Club. It’ll cover the exact formula Mark used to go from $60,000 in debt to an eight-figure fortune. Click here to participate.
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