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Impact of Mutual Fund Fees in Your 401k to Employees....

Think the fees charged by the mutual funds in your 401k don't matter?  Think again.  Fees always matter, as evidenced by the following chart provided by Alliance Bernstein via the Retirement Plan Blog.  The skinny of the chart?  Lower fees by 1% (which increases return by 1%) translates into about $220,000 extra at retirement—and an extra 10 years of spending.

Onepercentimage_6

Curious about the methodology to arrive at the findings?  Here's the breakdown of the AB chart courtesy of the Retirement Plan Blog:

"For the mathematically inclined, following is the methodology Alliance Bernstein used to develop their chart:

Results are simulated. This is a hypothetical illustration only and its results are not indicative of any specific investment, including any AllianceBernstein mutual fund. The savings phase simulates a defined contribution participant salary of $45,000 at age 25, linearly increasing to $85,000 by age 65, making yearly contributions of 6% of salary at age 25 increasing by 0.5% per year to a maximum 10% with a 50% company matching contribution up to the first 6% of salary. In the spending phase, $63,750 (75% of final salary) is deducted at the beginning of each year. A yearly investment return of 9% is assumed at age 25, linearly decreasing to 6% at age 80 and remaining constant thereafter. In the “1% Greater Return Scenario” a yearly investment return of 10% is assumed at age 25, linearly decreasing to 7% at age 85 and remaining constant thereafter. Inflation is assumed to be a constant 3% and dollar values are expressed in real purchasing power terms."

So buck up and make sure your 401k fund selection includes some low-fee funds.  For me, fiduciary responsibility can be summed up in 2 words:  Index Funds, which typically feature low fees with returns beating 70-75% of actively managed funds. 

Comments

SoheilKhanzada

Great write up. Mutual Funds is a topic that is often complex described in terms beyond the scope of layman's mind but you did the justice with this topic. I've also tried my pen on this topic for the people who want to Invest in Mutual Funds in Pakistan but have no stock knowledge. Keep up the good work.

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