Investment Fees Are Something, but Not the Only Thing
HUNT VALLEY, Md. (TheStreet) -- The big talk in the 401(k) world is fee transparency and lower fees. It seems as if everyone has concluded that, "If we can get fees down, the rate of return will improve."
But the cheapest index funds cost 0.1% to 0.4%, and the most expensive active open-end funds cost between 1.2% and 2%. Assuming both have the same annual total return, the most you can increase your return is 1.9%.
|Lower fees may mean a better rate of return, but they're only a piece of a much bigger picture.|
No doubt 1.9% compounded over 20 years or more is a significant increase, but that is an extreme example; the normal difference is maybe 0.5 to 1%. The lower the additional yield, the lower the long-term impact.
The real issue is that fees are only a piece of a much bigger picture.Investing is not simple. Index funds and active funds are not always the best answer. The best answer is that sometimes, for some assets, indexes are best, and sometimes, for some assets, active funds are the best. The 401(k) industry and the Department of Labor have been looking for the holy grail of simple investing so the average person can make a good rate return to be able to retire on their 401(k) balance, but the problem is there is no simple investing concept -- and even if an approach works for a time, it will not always work. Pre-retirees should know 401(k) investing is built on Modern Portfolio Theory, and the most important point here is that MPT is nothing but a theory.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV