Costs Are One Thing Investors Can Control with the Popular Funds
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live with dignity and fulfill their moral obligations towards charitable activities)
Target-date funds keep growing in popularity for retirement accounts. But many investors may be paying higher fees on these funds than they need to.
The funds are pitched as automated retirement-planning assets. They are mutual funds made up of other funds—stock, bond and money-market funds—and adjust the balance, getting more conservative as they approach the target date, near the person’s expected retirement.
But fees often take a sizable bite out of a fund’s returns—particularly a fund designed to be left alone for decades. What’s more, fees are perhaps the only determinant of a fund’s performance that an investor can actually be sure of ahead of time, which makes them particularly important to monitor.
You don’t know which fund’s going to do better than another, but what you know is what you pay.
For the more-than 2,200 target-date funds that Morningstar tracks, the average expense ratio stated in the prospectus is 0.903%. (The company doesn’t maintain historical data on these fees.) But, given a choice, investors don’t need to pay nearly that much.
Target-date funds can vary greatly in their costs to the user, and we see in our data a range of expense ratios from 0.10% to over 1.00%.
A 401(k) staple:
When you have 401(k) with your employer you have a little choice what funds to invest in. However, that little choice can still make a big difference in the overall performance if you do your homework properly and try to pick out the fund with the best performance but lowest expenses.
Of the employer-provided 401(k) plans that FeeX analyzed, 78% had target-date options. Typically they are the default option for payroll contributions if the employee hasn’t selected a different fund.
Among those funds, Fidelity Freedom K 2050, a target-date fund designed for investors who plan to retire in 2050, had an expense ratio of 0.67%, while other funds with the same date and similar portfolios had lower fees. Blackrock LifePath Index 2050 charged 0.45%, while Vanguard Target Retirement 2050 Fund charged 0.16%.
Target-date funds offer a shifting investment allocation over time, known as a glide path, usually by using underlying investments of the same fund family, either cheaper index funds or more-expensive actively managed funds, each of which has its own expense ratio. A target fund’s own resulting expense ratio, thus, is based on the underlying fees and whether the fund manager is charging extra fees on top.
Vanguard doesn’t add fees to manage its Target Retirement 2045, which charges 0.16%. That’s the weighted average of the fees of the funds it contains: Vanguard’s Total Stock Market Index, Total International Stock Index, Total Bond Market and Total International Bond Market.
When you are opening educational account for your children or grandchildren you have full control and total authority to select the fund that you want to invest in. If you do proper research and pick out the best of the best funds based on their performance at same time lowest expenses. This can make a great difference.
By contrast, American Funds 2030 Target Date Retirement has 22 funds from the American family, which have a weighted average expense ratio of 0.39%. The target-date fund’s expense ratio is 0.73%, for a 0.34-percentage-point premium over the underlying funds, FeeX found.
A sign of greed
Extra premiums are generally a sign of greed because the fund manager is double-billing you
An American Funds spokesperson notes that the 2030 Target Date fund offers several share classes with different fee structures, including one limited to employer-sponsored retirement plans that charges 2 basis points (0.02 percentage point) above the underlying funds’ fees. If investors buy target-date funds within an employer plan, the plan administrator is the one who chooses which share class they can buy.
Fees are what you pay, but results are what you can actually spend. In this day and age everything is so radically available. On the net and choice of funds or other investment vehicles that you have can make great difference in total performance of your investment for example the cost if you are trading stock with the stockbroker can range with single transaction with a broker negotiated price $39 per transaction. Buying or selling the same stock can cost you overall $100 with a full service stockbroker. There goes all of your profit and the total performance. What service are you getting from the full service broker anyway? What kind of advice full service broker is providing you? There are also in between services. It all boils down to do your research and home work properly.
((Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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