Company's 401(k) Plan.
| 26 April 2010
A one percent difference in 401(k) plan costs sounds insignificant, right? When you're buying a gallon of milk, you won't think twice before spending $3.03 instead of $3.00.
But a one percent difference is too important to ignore when you pick investments for participants in your 401(k) plan.
For example, let's assume
- Your plan offers index funds that charge plan participants 2% in annual fees and costs.
- Your competitor's plan offers identical index funds charging only 1% in annual fees and costs.
After 20 years, your plan's participants will have significantly less money in their plan than the participants in your competitor's plan. Why? Because the power of compounding raises the impact of initially small difference in fees.
Look at the table below for an illustration of how costs make a difference for a hypothetical investor who contributes $5,000 annually for 20 years.
|
Costs Make A Difference
|
|||
| Total Annual Fees & Costs |
1.00%
|
1.50%
|
2.00%
|
| Annual Gross Rate of Return = 6.00% | |||
| Fixed Account Value at Retirement |
$173,596
|
$163,916
|
$154,846
|
| Reduction in Final Value Due to Fees |
$ 21,367
|
$ 31,048
|
$ 40,118
|
| Percentage Reduction in Final Value Due to Fees |
12.31%
|
18.94%
|
25.91%
|
| Annual Gross Rate of Return = 8.00% | |||
| Fixed Account Value at Retirement |
$219,326
|
$206,745
|
$194,964
|
| Reduction in Final Value Due to Fees |
$27,789
|
$40,370
|
$52,151
|
| Percentage Reduction in Final Value Due to Fees |
12.67%
|
19.53%
|
26.75%
|
| Annual Gross Rate of Return = 10.00% | |||
| Fixed Account Value at Retirement |
$278,823
|
$262,445
|
$247,115
|
| Reduction in Final Value Due to Fees |
$36,190
|
$52,567
|
$67,898
|
| Percentage Reduction in Final Value Due to Fees |
12.98%
|
20.03%
|
27.48%
|
In an era of 6% investment returns, the 2% annual fee would cut the participant's final account value by a whopping 25.91% vs. only 12.31% for a participant paying annual fees of 1%. The participant paying higher fees ended up with almost $20,000 less. This data comes from a report prepared by the staff of the Joint Committee on Taxation for the U.S. House of Representatives Ways and Means Committee.
Do you agree this is too big a difference to ignore? If so, it's time to examine the fees paid by your 401(k) plan participants. To learn more, call me at 916-435-2100 or email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
This is a hypothetical example and is not representative of any specific situation. Your results will vary.
Investment advice offered through Smart Investor, a Registered Investment Adviser.