How Much is Your Retirement Costing You?
Recently while purging some old personal financial documents, I came across my old paperwork for my Edward Jones account. Back in 2009, I rolled my 401k into a simple IRA with Edwards Jones and had it with them for 8 years. While going through my documents I happen to notice the fee page. This page is on the 7th of 8 pages explaining my IRA and mutual funds with them. The “program fee” is set at 1.35%.
For some of you that may seem like a tiny amount. I mean, they are managing your money and only getting 1.35%. However, after reading “The Little Book of Common Sense Investing”, by John C. Bogle, I realized what little benefit if any I receive of this “management” fee that I paid. Also, the concept of compound interest can make this seemingly small fee explode into real wealth lost.
In 2017 I decided to invest in S&P 500 Index Funds at a fee rate of .09%. The S&P 500 has generally out performed managed mutual funds and so paying such a high price for managed mutual funds doesn’t make sense to me. According to research released in 2017 from Standard and Poor’s:
For easy math, lets take $100,000 invested in these “managed” mutual funds provided by Edward Jones and most 401K providers. To make things easy, let’s say that this account stays exactly at $100,000 the entire time, and that the investor never contributes to the account. After just 10 years of “management” fees, the “financial advisor” would receive $14,444.99 of your retirement funds.
I don’t know about you, but paying $14,445 for worse performance than the $904 S&P 500 unmanaged stocks, seems like a really silly thing to do.
Now let’s take a look at what we would earn if we invested the difference between the above listed fees of $13,035 for another 10 years with an 8% assumed return:
That's another $15,898 of growth lost out on because of fees. Again these calculations were kept very simple, but you can imagine what the fees would be if I had calculated the accumulating compound interest and the lower return on investment with the mutual funds.
Simply said, paying roughly 15 times the amount in fees for a lower return makes moving your retirement funds from managed mutual funds to the S&P 500 index funds a no brainer. Take time to contact your company’s 401K provider or your IRA manager and find out if you can put your investments into S&P 500 index funds. The longer you wait, the more fees you have to pay for underperforming mutual funds.