What if I said YOU could make 1% more in your retirement account, every year, for life? As far as things go, a 1% advantage is pretty good these days. The market isn’t returning twenty-odd percent like it did in the lead up to the ’08 crash. I’m talking about the fee’s you pay to invest. Vanguard, which has some of the lowest fees around, has a handy calculator. According to Vanguard, the industry average fee is 1.01%. Vanguard pegs their average fee at 0.18%. Their calculator does a fantastic job showing the cost of high fees over time.
Fees and inefficiencies you might incur.
- Results of active management:
- transaction costs: caused by trade commissions incurred during “rebalancing”
- cash drag: Delay between a fund’s receipt of a dividend and its use.
- sales loads: Both Front end and Back end, these mutual fund fees reduce your investment an/ or returns. These are paid to your broker.
- tax inefficiencies: funds may sell positions, creating a taxable gain for you.
- Management or advisory fees
- Fees to participate:
- Brokerage fee: fee to participate in a Brokerage platform.
- Trade commission: fee to buy or sell a stock, etc.
- Expense Ratio: a percentage of your total, which ostensibly pays to maintain the fund
- Administrative fees: 401k fees passed on to you by your employer
- Capital Gains
Fee’s eat directly into your investments.
Investment fees attack you wealth in two ways. First, they may reduce the amount you may be able to invest by lowering your total contribution. This results in less principle to grow over the years. Secondly, any annual expense ratios reduce the entirety of your portfolio by a percent or fraction of a percent, every year. For example, a 1% fee would lower a 4% annual return to 3%, a reduction of 25%!
What is the TSP’s Expense Ratio?
The average expense ratio is 1.01%, Vanguard, which consistently offers about the lowest fees available to civilians, averages 0.18%. Its lowest fee for any fund is .05%. The TSP blows Vanguard out of the water. The net expense ratio for every TSP portfolio, including the L Fund’s, is
*As of 2015
No, I did not misplace a decimal. Thats less than three-tenths of one percent. Additional Expenses, which comprise fees paid to the investment manager for administering the funds range from and additional 0.000% to 0.038%. To compare, the lowest investor class Vanguard fund charges an expense ration of .05%, less “other expenses, and the NAV. The Net Asset Value, a measure of fair value, may raise or lower the premium you pay for a share of the fund by a percentage. The highest the TSP will charge you is .067% (S Fund, 2015), all fees combined. The TSP funds are not traded with a NAV, therefore no premium is added to your purchase price.
But the TSP can’t beat the rock star investor my Uncle knows.
Your uncle is a gambler. Let’s face it. Chasing big gains in the market is gambling. The IRS even penalizes pattern day traders to discourage this behavior. Furthermore, its gambling with fees.
In reality, you can bring your own money to the Casino, drink for free, and only pay your regular tax rate on the winnings! Just like every rational casino goer knows “The house always wins,” every rational investor should know it is impossible to time the market, or beat it 100% of the time. Only Bernie Madoff can do that.
Never believe a fund manager that says they can guarantee you a higher rate.
Here is Jack Bogle, industry titan, decrying fees and active management:
Financial advisors don’t have your best interest at heart.
Even with recent laws passed regarding advisors either disclosing their profit motives or forcing them to only consider their clients’ interests, your financial manager is getting paid for his work. Since he is getting paid, someone is making a profit, somewhere. Beware that it isn’t at your expense. Low Fee Retirement Index Account Comparison*
|Benchmark||Fund name/Expense Ratio TSP||Vanguard ETF’s||Blackrock iShares||Fidelity|
|S&P 500||TSP C/ .029%||VOO/.05||BSPIX/ .11%||FUSEX/ .09|
|DJ US Completion TSM||TSP S .029%||VXF/ .09%||IYY / .20%||FSEMX/ .10%|
|MSCI EAFE Stock||TSP I .029%||VEA / .09%||EFA / .33%||FSIIX / .19%|
|Barclays Capital US Agg Bond||TSP F .029%||BND/ .06%||AGG / .05||FBIDX / .15%|
*investor class index funds, net expense ratio. Data poll Jan 2017. Not exhaustive. Best approxination of Benchmarks- not all funds share the exact same benchmark.
So now what?
Examine your retirement accounts and goals.
- Do your funds have high fee’s.
- Can you move your money into lower fee funds?
- Have you or an advisor been unnecessarily rebalancing your portfolio?
- Consider opening a TSP account, rolling over your eligible plan with TSP-60, or moving your future contributions there.
- If you are only using IRA’s through a company like fidelity or even Vanguard, you are losing out on an additional $18,000 of tax-advantaged contributions.
- Consider rolling over your high fee non-retirement accounts to a lower fee company, like Vanguard.*
*I don’t make money from this link.
How much have high fee’s cost you?
Recommended reading: Disclaimer: I am not a licensed financial counselor of any sort. The opinions contained here are my own. Investing has implicit risk, past gains are no guarantee of future returns. You may lose money, including the principal. The US Government does not endorse any of my opinions.