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Mutual fund fees and expenses

Flawed Advice for Picking Mutual Fund ‘Winners’

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The markets are efficient to the extent that stock picking, market timing and track record investing do not work. The only evidence that can be used is to own equities, globally diversify and rebalance. Combine this with discipline and a successful financial future can be yours.

Common Sense on Mutual Funds: New Imperatives ...
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (Photo credit: Wikipedia)

If there was a way to identify “topnotch” actively managed funds that were likely to outperform their benchmarks, investors should include only those funds in their portfolios. Regrettably, I am aware of no data indicating anyone has the expertise to make this determination. Looking at past performance is not helpful. One studylooked at the performance of the top 100 mutual funds over a thirteen year period from January 1, 1998 until December 31, 2011. It found that about 15 percent of the top managers from one year periods repeated their top 100 performance in the second year.What about Mr. Zimmerman’s advice to consider outperformance over a ten year period? Using Morningstar Direct, I did a search for current active fund managers with 13 years or more of experience. The dates used were July 1, 1999 through June 30, 2012. I then eliminated all managers who did not beat their benchmark by 2 percent or more during the first 10 years of this period (July 1, 1999-June 30, 2009), which left 340 funds in my database. My goal was to determine how investors would have done in the past three years if they had followed Mr. Zimmerman’s advice and selected “topnotch” funds that had outperformed their benchmarks in the prior ten year time period. Here’s what I found:

Mr. Zimmerman is correct that lower expense ratios have an impact on returns. Funds with expense ratios less than 1 percent for the prior 10 year period had an average “alpha” of 4.64 percent. Very impressive. I can understand why investors would believe these fund managers had figured out how to beat the markets. They would have been very disappointed. In the ensuing three year period, these same funds on average underperformed their benchmarks by 0.53 percent.

The data was worse for active funds with an average expense ratio greater than 1 percent. The average outperformance of these funds was 5.17 percent for the ten year period. In the following three years, average underperformance was 1.19 percent.

via huffingtonpost.com

Seeking actively managed mutual funds based on past performance will only disappoint the investor. There has been no method to consistently predict which active fund manager will repeat their stellar performance. To success, long term, we must own equities…globally diversify….rebalance.

Please comment or call to discuss how this affects you and your financial future.

Posted via email from Curated 401k Plan Content

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4 Ways to Minimize 401k Fees to Maximize Your Savings |

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The best way to manage your 401(k) plan is to build a globally diversified portfolio, at the appropriate risk level and rebalance. The best plan will do this for you and take full responsibility.

K Mart, NYC
K Mart, NYC (Photo credit: mrmoneda)

Now that he’s got your attention, Hiltonsmith has four tips for minimizing those fees in order to maximize the benefits of your 401k retirement plan.1) Utilize Your Employer Match

Most companies make matching contributions to 401k, at least up to a certain level. It’s imperative that workers make sure they’re getting largest possible participation from their employer. Over the long haul the benefit of maximizing company matching programs will more than offset the impact of hidden fees.

2) Choose Low Fee Funds

When choosing from the various fund options forget going with the hottest hand or best trailing returns. “Over the long horizon, over 30 years, you’re going to get the highest returns just by picking the lowest fee plan,” says Hiltonsmith.

Your fund choices will have the expense ratios outlined, or at least summarized. Pick the fund with the smallest price tag, even if the option sounds less sexy than some of the alternatives.

3) Consider an IRA

Too many people think a 401k is all they need for retirement. Not so fast. It may seem like wearing both belts and suspenders but Hiltonsmith says savvy investors have both an IRA and 401k.

Not only is too much savings never enough, a low-fee IRA can give investors a place to rollover their 401k’s into lower fees as the option becomes available over time.

4) Talk to Your Employer About Plan Options

Don’t just blindly plug your 401k contributions into the plan. Talk to your company’s investment adviser to make sure you’re optimizing the amount of money you’ll eventually be able to take out of the plan.

via finance.yahoo.com

Plan participants must realize they they are responsible for their own retirement.

Please comment or call to discuss how this affects you and your financial future.

Posted via email from Curated 401k Plan Content

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401(k) investors: If your employer can’t sort out plan fees, how can you be expected to?

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The 401(k) plan fees have been a ‘cash cow’ for the financial institutions at the expense of plan participants. This year this will all change as the plan participants will learn what fees they are paying and to whom. Service providers will need to eliminate the paypoints which do not add value to the plan. The problem is the fees will be disclosed in a mass of paper. Insurance company disclosure documents have been found to be over 40 pages long. These ‘hidden’ fees hurt investor performance and therefore their retirement benefits.

Investment percent gdp
Investment percent gdp (Photo credit: Wikipedia)

Half the plan sponsors did not know if they or their plan participants paid investment management fees, or they mistakenly believed those fees were waived. That was the case for 57 percent of small plan sponsors, defined as those with fewer than 50 participants. Even among large sponsors with at least 500 participants, 31 percent didn’t know. It’s disturbing because investment management fees account for the majority of overall 401(k) fees. They’re paid to managers who select stocks, bonds or other investments in funds that 401(k) assets are invested in. Plan sponsors may be unaware because management fees are typically deducted from a participant’s account, rather than being invoiced to the plan sponsor, the GAO said.

— Many sponsors reported they asked providers little about which fees were charged. For example, 70 percent hadn’t asked about whether the plan charged 12b-1 fees. Those charges can cover everything from compensation for brokers selling funds to advertising and promotions. Eighty-two percent didn’t ask about fees to reimburse plan record keepers for services including maintaining participants’ accounts and distributing disclosures sent to fund investors.

via therepublic.com

Plan participants lack clarity regarding the fees they pay, until now. The new disclosure regulations will help plan sponsors and plan participants build a successful retirement.

Please comment or call to discuss how your company sponsored retirement plan compares to others.

Posted via email from Curated 401k Plan Content

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Why your employees may balk at their 401(k) fees

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Most plan sponsors are unaware of the scope of fees that the plan participants pay for their 401(k) plan. This will be a game changer for many [lan providers as pln participants become aware of fees later this year. Remember higher fees result in lower returns and lower retirement accounts. Not all fees are created equal, in that some add no value to the plan.

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The individuals responsible for the plan will need to first understand the fees. Here are some of the main types of fees that 401(k) providers commonly charge:●Recordkeeping and administrative fees: This is what the provider charges to keep track of participant accounts and process their transactions. These fees also typically include services to keep the retirement plan in compliance.

●Investment adviser fees: Some plans have an independent adviser select and monitor the plan’s investment options.  These fees cover the adviser’s services.

●Expense ratio: This will usually be the largest component of plan fees. Most plans utilize mutual funds that will have expenses associated with them. Investment companies charge a fee to run the funds, and they generally take a certain percentage off the top. But built in to those fees can be other fees paid to third parties, arrangements loosely known as revenue sharing.

via washingtonpost.com

Many plan sponsors are unaware of the fees charged their employees. Many believe that their plan is free with no administrative costs to them. This will become clear when the new regulations become effective later this year.

Please comment or call to discuss how your plan compares to your peers.

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Why 401(k) Fee Disclosure is a Big Win for Small Business Owners

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Improving the quality of retirement plans to their employees can reduce anxiety and improve results. This employee benefit is becoming more and more important as the number of defined benefit plans decrease. Just today GM announced it would freeze pension benefits for their salaried staff.

Look to pay 1% or less for all-in participant feesSmall and mid-size businesses have historically been subjected to the most confusing and, unbeknownst to most, the highest-cost plans.  Many providers have designed their plans so that employers pay a small administration fee while their employees pay large participant fees that go well beyond general fund expenses and typical asset management and recordkeeping services.   They often include extra loads, wrap fees, 12b-1 fees, and often consist of high expense actively-managed mutual funds or even annuities versus lower expense equivalent fund options.  This can mean employees are paying two or even three percent in all-in fees – an amount that’s two to three times more than an appropriately priced plan.

All-in participant fees including fund expenses should come in at one percent or less.  Just paying one percent more in fees can cost employees tens if not hundreds of thousands of dollars in retirement savings over their career.

via forbes.com

Plan sponsors will realize added responsibility when the new fee disclosure rules become effective later this year. Many employees will begin asking why they are paying such high fees. This will result in greater scrutiny and should help plan sponsors provide a true employee benefit.

Please comment or call to discuss how this affects you and your company.

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Plan reviews – replacing funds is only part of the solution

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There is more to fiduciary responsibility than changing plan investments. Most plan sponsors should consider outsourcing most of these duties to independent professionals. This will reduce their fiduciary risk and improve the quality of the plan they offer their employees.

Monitoring and making investment line-up revisions is only a part of the equation. A plan can offer 5-star funds with low expense ratios across all major asset classes, but if participants make poor choices, the plan falls short.They say the definition of insanity is doing the same things over and over and expecting different results.  How would you describe continually monitoring the funds available in a plan without analyzing how effectively they’re being used?

Plan fiduciaries are required to make decisions in the sole best interest of their participants, so sponsors should make tools and services available to help participants make appropriate savings and investment decisions – and monitor the results.

As you gear up for your annual meetings this year, I challenge you to look beyond the investments to how your participants are doing.

Study after study shows that, as a whole, participants are poor investors. If this is an issue with your plan, take action. Whether through changes in plan design, such as defaulting participants into a QDIA, or by offering products and services geared toward improving participant behaviors, take action.

And regardless of the solution you choose, measure results. Putting a solution in place and walking away is not the answer.

If we, as an industry, begin to monitor participant behavior and results with the same level of detail and scrutiny that we monitor investments, participants are going to be much more prepared for retirement.

via smart401k.com

Having the best funds in your plan is only part of the solution. Would you give a novice all the best tools and not tell them how to properly use them? A retirement portfolio or plan should be treated the same.

Please comment or call to discuss how to improve your company retirement plan.

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  • Fiduciary Responsibility for Plan Investments. (401kplanadvisors.com)
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Paying More in Fees Can Get You Less in Returns

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S&P 500 with trend lines from 1950 to 2008
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Expenses in mutual funds and insurance products can prove very costly to your long term financial goals. Remember the larger the organization the larger the paypoints involved. There is a cast for marketing, executives, managers….

The expense ratios of S&P 500 index funds range from very low to extremely high. For an egregious example of an indefensibly high expense ratio, consider the State Farm S&P 500 Index B (SNPBX). It has an expense ratio of 1.49%, and a deferred load of 5.00%. This fund has assets of $547 million.A small difference in expense ratios can have a dramatic effect on returns. Let’s assume an S&P 500 index fund and Vanguard’s both return 8% annually, before costs and you invest $10,000. A savings of only 1% annually on expenses would mean the lower cost fund would yield an additional $63,000 over forty years ($201,000 versus $138,000). That’s a big difference.

via huffingtonpost.com
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