When I was contemplating rolling over my 401(k) from my former employer into a Vanguard IRA, one of the chief concerns I had involved the fund fees I was being charged at my old job. It took some digging but eventually I discovered that I was paying anywhere from 0.6% to 1.3% in expenses (which includes administrative fees) to the fund managers. The only time you would agree to pay higher expenses is if you thought the fund could outperform funds with lower feeds.
My aggregate performance the last year is 11.8% and that’s based on a mixture of 90% funds (which are themselves comprised of mostly stocks and some bonds) and 10% in my own misguided investment efforts (mostly in Fortune Brands, which has recovered nicely as of late). I’m paying three to seven times the fees by staying with my 401(k) compared to the following set of comparable Vanguard funds.
- Vanguard Target Retirement 2050 (VFIFX) – 0.21% in fees for a 1 Year return of N/A. (It’s too new).
- Vanguard Target Retirement 2035 (VTTHX) – 0.21% in fees for a 1 Year return of 9.70%
- Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) – 0.19% – in fees for a 1 Year return of 10.25%
- Vanguard 500 Index Fund Investor Shares (VFINX) – 0.18% in fees for a 1 Year return of 10.63%
As a frame of reference, the S&P Index performance over 1 Year is 10.79%.
So, in this particular case it’s been “worth it” for me to keep it in my 401(k), mostly since I had no choice, but now that I do I may opt to go the route of a Vanguard fund instead of sticking with my old 401(k). In the long run, funds that have higher fees have a tougher time because you always have to outperform comparable funds with lower fees by that margin in order to “stay in business,” so to speak. I’m going to roll my 401(k) funds over to a Vanguard account.
Why Do Fees Matter? It’s just a percent.
Let’s say you have two funds, Fund Caviar Dreams and Fund Boring Index, and each started with $1,000 and had identical performance numbers year after year of 11%. Now let’s say Fund Caviar Dreams, in order to support the expensive tastes of its fund manager, had fees of 1.5% of its assets where as frugal Fund Boring Index only had fees of 0.5%. After 30 years, Fund Caviar Dreams’ balance would be $4,192.98 less than Fund Boring Index. If you started with $10,000, now you’re talking a difference of $41,929.83 – or approximately half a semester of tuition in thirty years. That’s why fees matter.