If you are like most people saving for retirement may not be the first thing on your mind. Stocks, bonds, mutual funds, expense ratios, index funds, actively managed funds are all probably terms you’ve heard before.
Generally speaking you don’t have to be a Wall Street whiz to save for retirement and start to build up a nest egg. One of the best ways to have a reasonable chance at reasonable stock market returns is to create a lazy portfolio that merely seeks to keep up with the gains of the overall stock and bond markets. That’s what an index fund is. It doesn’t try to outsmart or beat the overall stock market; it just aims to stay with it. Most actively managed funds (where the portfolio manager trades stocks and bonds more frequently cost you more money in trading fees and commissions and result in sub-par returns for you over the long haul.
On the subject of expenses or expense ratios (the percentage of the money you have invested in a mutual fund that the mutual fund company charges to manage the fund), Vanguard is the most well known mutual fund company for helping investors keep more of their money by keeping fund expenses low.
When you signed up for your company 401K, did you happen to pay much attention to the fees associated with your account? Some 401K providers offer retirement plans for businesses in which the company providing the plan harvests a FORTUNE in fees which greatly diminishes your overall returns.
When you buy funds through a company like Vanguard, the expense ratios are typically much less than 1%, sometimes as low as 0.1%. If you have a 401K plan through some other 401K custodians, you will have a selection of funds to choose from, each with what are often higher than average expense ratios. Often times, since the 401K custodians send business to those mutual funds by administering 401K plans, the custodian is likely to get a referral fee from the fund company. Sometimes buying through a 401K custodian can benefit you buy eliminating the loads some fund charge. A load is a fee you pay to buy (front end load) or to sell a fund (back end load).
In addition to a 401K custodian getting a (reasonable) kickback from the fund company, they also tack on another fee in many cases. This fee can be at least as high as 1.45%, which mean that each and every year, they take up to 1.45% of your total assets to administer your 401K plans.
So what does that mean to you in plain English?
Lets say you’ve been a 401K participant for a while, your investment choices have done reasonable well and your balance is $100,000. At the end of the year or maybe with each contribution you make when you get paid, your employer gives you some kind of matching contribution. Lets say the match ends up being $1,500 for the year. Well, if you have a balance of $100,000 and your 401K provider charges an additional 1.45% annually of your assets to administer your 401K, they will take $1,450 for administering your account each year. It was nice of your employer to give you a match; to bad the fund company took it all to pad their pockets. If the funds available in your 401K plan are not Vanguard funds with really low expense ratios, you may pay another 1% or more so that annually on a $100,000 balance you pay $2,500 to have your 401K.
Unfortunately unless you can get your company to switch 401K providers, there isn’t much you can do about this if you want to max out your tax deferred retirement accounts. If you are not maxxing out the total amount you can save between a 401K and an IRA and your 401K plan has outrageous expenses like this, you should consider putting in just enough to get the employer match and the starting a traditional IRA or a ROTH IRA. Companies like Vanguard are great for no transaction fee, very low expense ratio funds. E*Trade Brokerage is great for ETFs or individual stocks. Vanguard has a great variety of stock and bond index funds to track various benchmarks and indices and target retirement date funds that adjust your asst allocation for you as you get older.401K plans 401K Retirement Plans mutual fund expense ratios Retirement Planning & Investing retirement plans retirement savings ROTH IRAs SEP IRAs Traditional IRA Investment Plans401K plans 401K Retirement Plans mutual fund expense ratios Retirement Planning & Investing retirement plans retirement savings ROTH IRAs SEP IRAs Traditional IRA Investment Plans