Are You Paying Too Much in Retirement 401(k) Fees

Gone are the days where all we had available were mutual funds with high expense ratios and management fees. Today, there are a variety of funds including exchange traded funds which trades on stock exchanges similar to stocks. ETFs have been available in the US since 1993 and Europe since 1999 and includes both index funds and actively managed ETFs. The main benefit of an ETF when compared to a traditional mutual fund is the availability of very low transaction and management costs. ETFs also offers diversification across various market segments and tax efficiencies due to the low turnover of the portfolio’s securities.

Traditional Mutual Fund (0.5% Expense Ratio)

There are ETFs for every sector and ETFs that span across multiple sectors. Some examples are Bond ETFs, Stock ETFs, Index ETFs, Commodities ETFs, Currency ETFs, and Leverage ETFs. iShares S&P 500 Index (IVV) which provides exposure to large cap U.S. equities is one of the lowest ETFs out there today. With an expense ratio of 0.04% and holdings spanning across multiple industries and companies including Microsoft, Apple, Amazon, Berkshire Hathaway, Johnson & Johnson, JP Morgan Chase, ExxonMobil, e.t.c. It is easy to see why the S&P 500 is one of the world’s best known benchmarks and IVV is one of the best S&P 500 ETFs out there today.

Low Cost ETF (0.04% Expense Ratio)

The average expense ratio for actively traded mutual funds is between 0.5% – 1.0% while that of IVV is 0.04%. A comparison of a portfolio comprised of mutual funds as well as a portfolio tailored towards an index fund ETF such as IVV is shown above. The basic assumption for both cases is a time period of ~40 years with an annual growth rate of 7.5% and a yearly 401k contribution of $17,500 with a company match. Just changing funds can save upwards of 15% and can greatly impact retirement planning as it impacts cash flow.


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