Warm Yucatan greetings to all my trillionaire readers! This week I was poking around on my Personal Capital account and found something that I have to share with the world. As most of you know, I’m usually a pretty easy-going guy, but there is one thing that really spikes my blood pressure. Any guesses? Yeap, you nailed it–investment fees. I especially hate the fees found in the 403b and 457 plans offered to most educators. If your district provides you with solid cost-effective options, consider yourself fortunate. If you have fee-bloated plans (or have no idea what kind of plans you have), keep reading to learn how fees are hazardous to your wealth.
Let’s start with what I found on my Personal Capital account. While looking under the “Planning” tab, I found an awesome option, “Retirement Fee Analyzer.” How could I resist? It’s not hard find; look for a red arrow in the picture below:
Did you find it? If not, turn in your driver’s license immediately and get someone to take you to the ophthalmologist. Okay, so here’s what I discovered about the total fees on our portfolio:
Boy oh boy, was I ever happy to see that our total fees were a puny six bips (basis points). Put another way, we pay a fee of .06% on our portfolio of $1.1 million. The total bite was $649 lost to fees. That’s like putting your hand into a tank of piranhas and expecting to lose a few fingers or possibly the whole hand. Instead, you pull your hand out and notice that your overgrown fingernails have been nibbled on. There’s no blood, bites, or cuts, and, most importantly, you still have all of your fingers.
by Quitting My Job
by Taking "Crappy" Jobs
I know what you’re thinking: “Ed, how did you get your investment fees so low?” My regular readers know that on three previous occasions (LaGrange, Statenville, and Douglas) my wife and I quit our jobs in order to move our 403b and 457 savings to our Vanguard IRAs. I realize that seems like a radical step to most people, but if you want control of your investments (and their fees), you have to take a mercenary approach. The main reason our fees are so low is that the majority of our portfolio is invested in Vanguard’s Total Stock Market Index Fund (VTSAX). The VTSAX fund has an expense ratio of, brace yourself, 4 bips (.04%)!
Now that you know how we keep our investment fees so low, I’d now like to show you just how bad your typical 403b or 457 plan can be.
Average 403b and 457 Investment Fees
Unlike the mutual funds that we use for our Vanguard IRAs, most 403b and 457 plans use variable annuity products as the plan’s platform. Let me be very direct here, I hate variable annuities for one simple fact–they are insanely expensive. How expensive? A quick Google search of “average variable annuity fees” leads to posts claiming that the average fee is 2.25%. Yikes, that is high, but I’ve seen variable annuity plans with fees well over 3% a year. Nonetheless, I’m going to give these variable annuity providers (i.e., insurance companies) the benefit of the doubt and use that 2.25% figure to make a a simple calculation. How much would we pay in fees if we used an average variable annuity for our 403b and 457 investments? To illustrate this lower math, behold this magnificent table:
For the sake of the example, I even rounded our investment fees up to $660. Isn’t it amazing that an average 403b or 457 plan would generate almost $25k a year in fees on our $1.1 million portfolio? To me that’s like putting your hand in that piranha tank and instantly watching it get devoured up to your wrist. I’m sorry, but I refuse to feed the piranhas. To make matters worse, those annual fees would apply in a down market as well. How do you think I’d feel watching a falling portfolio lose an additional 2.25% a year due to fees? I think you already know the answer to that question.
Would you like to read how teachers lose $10 billion a year due to excessive fees? If so, check out this PDF file. Let me finish by saying that keeping your investment fees in check is vital to your long-term wealth. If you ignore investment fees, you are essentially allowing your plan provider to plunder your retirement savings. Know what you are paying in fees and refuse to be abused! I look forward to your comments and questions.
|Health Savings Account: We use Elements Financial to access commission-free, low-cost Vanguard ETFs at TD Ameritrade.