Q: I understand that the mutual funds in my 401(k) plan charge me fees. But it’s not clear to me how much or what those fees are for. Can you please help me better understand this?
A: As part of your retirement plan, you should receive regular disclosures about the fees you are charged, including those charged by the fund companies in which you invest. Here’s a bit more information specifically about fund fees that may be helpful:
Fees can make a big difference in the bottom-line performance of your fund investments over time. That’s one reason why many investors have flocked to low-fee index funds, and why average fees on all funds have steadily declined.
At first glance, this would seem to be a radical move. But eliminating fund fees may just be the logical next step in the long-term industry trend toward lower-cost investing. Average expense ratios have been declining since 2003 (see chart below).
Lower fund fees also reflect a response by the mutual-fund industry to the growing popularity of exchange-traded funds (ETFs). ETFs are typically passively managed — i.e., they attempt to mirror the performance of a particular market index — allowing them to offer lower expenses than traditional actively managed mutual funds.
Does all this mean that fund fees will soon be a thing of the past? That might be premature. After all, someone has to pay for the costs of administering a fund, even if those costs are low. But the trend of lower-cost investing appears to be here to stay.
What’s in fund fees?
Fund fees represent the ongoing costs of running a fund. They include expenses such as portfolio management, fund administration, daily fund accounting and pricing, shareholder services, distribution charges (known as 12b-1 fees) and other operating costs. These expenses are paid from fund assets and are deducted from fund returns.
Fund fees should not be confused with “sales loads,” which are separate and paid when shares are purchased (front-end loads), when shares are redeemed (back-end loads) or over time (level loads).
Keep in mind that expense ratios differ considerably from fund to fund. A given fund’s expense ratio depends on many factors, including its investment objective and the size of the fund.
Why do fees matter?
At first glance, a difference between expense ratios may seem insignificant. Even a ratio of 1 percent translates to only $1 per $100 investment. But over time, the difference can be significant. For example, a $10,000 investment that earned 8 percent annually for 20 years would have a gross market value of $46,610. If that investment were in a security with a 1 percent expense ratio, it would cost you $7,913 in expenses over that time period, and you would end up with an account balance of $38,697. On the other hand, an identical investment in a security with a 0.25 percent expense ratio would cost you only $2,111 over 20 years, and your account balance would grow to $44,499.1
Of course, expenses are only one factor to weigh when choosing funds for your retirement plan or investment portfolio. You’ll also want to consider how well the funds match your goals, time horizon and risk tolerance. But keep an eye on expenses as well — they can make a big difference over time.
Jeremy R. Gussick is a CERTIFIED FINANCIAL PLANNER™ professional affiliated with LPL Financial, the nation’s largest independent broker-dealer.* Jeremy specializes in the financial planning and retirement income needs of the LGBT community and was recently named a 2018 FIVE STAR Wealth Manager as mentioned in Philadelphia Magazine.** He is active with several LGBT organizations in the Philadelphia region, including DVLF (Delaware Valley Legacy Fund) and the Independence Business Alliance (IBA), the Philadelphia Region’s LGBT Chamber of Commerce. OutMoney appears monthly. If you have a question for Jeremy, you can contact him via email at [email protected]
Jeremy R. Gussick is a Registered Representative with, and securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
This article was prepared with the assistance of DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
© 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.
*Expense ratio = fund expenses (including 12b-1 fees, management fees, administrative fees, operating costs, and other asset-based costs incurred by the fund) as a percentage of total fund assets.
1DST Systems, Inc. Example is hypothetical and does not include the effect of taxes, loads, or other fees. Your results will differ.
Investing in mutual funds involves risk, including possible loss of principal. Upon redemption, the value of fund shares may be worth more or less than their original cost.
Index funds are subject to market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Also, an index fund’s target index may track a subset of the U.S. stock market, which could cause the fund to perform differently from the overall stock market.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
*As reported by Financial Planning magazine, June 1996-2018, based on total revenues.
**Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2018 Five Star Wealth Managers.