Sunday, March 11, 2012

401(k) Costs

I remind members who participate in the TAG 401(k) Plan that nobody can control returns of various funds. People can, however, control costs:

... [E]xpenses built into target-date funds are a growing peeve. Most such products are "funds of funds" that spread assets among multiple other investment vehicles. As a result, target-date-fund expenses span an unusually wide range. Vanguard's target-date products, which rely heavily on index funds, have average expenses of $18 a year per $10,000 invested; at the opposite extreme, Oppenheimer uses actively managed funds and charges $168 per $10,000.

... The differences can add up. According to human resources consultant Towers Watson, an increase of just $50 per $10,000 in target-date-fund fees could cost a high earner the equivalent of eight years' worth of retirement savings over the length of his career.

The TAG 401(k) Plan is pretty much like most plans across the fruited plain. It's got PIMCO Total Return. It's got some (relatively) low cost index funds. It's got a range of actively-managed equity funds that charge dearly for their management services (1% and up.)

And it's got the Vanguard Target Retirement Funds, the most cost-efficient offerings TAG 401(k) offers. (These replaced pricey, under-performing specimens that we didn't like very much.)

Fund expenses will hurt returns badly over long periods of time. While many people are excited to jump into the hot fund of the moment, what participants should aim for are funds inside a plan that are

A) broadly diversified and

B) have the lowest possible expenses.

That happens to be the Vanguard Target Retirement Funds, coming in under 1/5%. They're funds of index funds, and index funds out-perform 90% of managed funds over ten and twenty year periods because of ... (surprise) lower costs.

If you choose one of the Vanguard Funds based on your preferred asset allocation and stick with it, by the time you're finished you'll have achieved better results than most investors, particularly the ones who performance chase via expensive, actively managed funds.


Ciaran said...

I'm invested in a Vanguard target fund (not through TAG, since I'm not a member…) and wonder, since it's essentially a fund investing in other funds is the quoted fee percentage just the target fund's cost or does it include the fees of the sub-funds?

Yeah I know I should just ask Vanguard but I guess others would be interested too.

Anonymous said...

jester says: what is 401(k)?

Anonymous said...

its the target funds price but thats all you pay. Some people disregard the target date and mix and match target date funds to create their own asset allocation blend

Steve Hulett said...

The Target Funds charge the "investor shares" rates for Vanguard funds, but no fees on top of that.

"Admiral shares" are generally 8 to 12 basis points lower than investor shares. (100 basis points = 1%.)

Total Bond "Investor Shares" are 22 basis points (1/5 %) while "Admiral Shares" are 11 basis points (1/10 %)

Anonymous said...

jester: Thanks Mr. Anonymous.

Site Meter