Employer-provided 401(k) plans are a very popular retirement savings vehicle. In fact, according to a 2015 study, 85% of employees who have access to a 401(k) plan participate in it.
While 401(k) plans typically offer a variety of investment options, one key factor is often overlooked by both employers and employees in deciding the funds to offer and invest in: plan fees.
Best Predictor of Fund Performance is…
Plan fees can run from well under 1% to over 2% of assets under management. While 1% or 2% might not seem like a lot, the fee will heavily impact the growth of savings toward retirement over time. According to Morningstar and Consumer Reports, the best predictor of fund performance is not the experience of the fund manager or the fund’s past performance. Instead, the best predictor of performance is…
- To illustrate the point –
- Suppose you invested $225 per month each month for 35 years, and it grew at 7% annually.
- After 35 years, with fees at 0.5 percent, your ending value is $360,000.
- The same investment with fees at 1.5 percent grows to $287,000.
- That is $73,000—27 percent–less to live on in retirement. $73,000!
- Bottom line: you need to consider fund fees when evaluating 401(k) plans.
To see how your plan and fees stack up, get a free plan comparison.
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