(Less than) pennies on the dollar
Originally published on: January 29, 2016
Some big corporate retirement plans have been hit with lawsuits lately claiming that the plans charged investors too much. Nobody wants to overpay. But in at least one case, the investment funds were already low-cost options from a low-cost provider. The difference between those funds and ultra-low equivalents amounted to just few hundredths of one percent.
At that point, does it really matter? Or is worrying about such small fractions like driving across town to save a few pennies on a gallon of gas?
The answer is, yes, every cent matters. In a retirement account especially, when the gains you earn are reinvested year after year, small differences in performance can be magnified dramatically over time. Every dollar you pay in fees is not just a dollar you won’t have in retirement – it’s a dollar that won’t be actively working to build more savings until then.
It’s also worth remembering that retirement math uses a lot of zeros. One-tenth of one percent of most things seems almost impossibly small. But applied to a $500,000 retirement account it’s a hefty $500. Compounded over 30 years it can add up to thousands of dollars. The financial industry rather opaquely calls 0.01% a “basis point.” We think you should call it “real money.”
In an ironic twist, one of the best-known investment philosophies focusing on lowering costs belongs to the financial firm involved in the lawsuit we discussed: Vanguard. One of their favorite sayings is “Markets are unpredictable. Costs are forever.” Meaning that unlike so many aspects of investing, getting a grip on costs is something you can entirely control. You can read up here about how paying lower costs can lead to higher returns.
If you get really excited about such things, there’s even a club for you. A renegade group of self-described “bogleheads,” follow (roughly) the tenets of simplicity, frugality, and low costs laid down by Jack Bogle, the founder of Vanguard.
You’d think that between them, the low-fee fund experts and the healthcare bean counters at Anthem could get the cost of their retirement plan as low as possible. The fact that someone doesn’t think so means that investors are really paying attention and becoming more aggressive. While we don’t recommend litigation, we think every investor should set their sights high, and keep their costs low.
Image courtesy Julie Jablonski via Flickr Creative Commons