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A recent study of over 3,000 401(k) plans conducted by Yale and University of Virginia professors revealed some 401(k)s had fees so high that they actually cancel out the tax benefit for long-term investors. It also reports the plans with the highest fiduciary loss (table on pg 41) in this PDF from Yale. Although fiduciary risk is always a major factor in any stock-based investing, fees are generally the biggest enemy when managing your retirement portfolio.
Assessing over $120 billion in 401(k) assets, the Yale/Virginia study found that high fees result in investors paying an average of 86 basis points over what they would if they invested in low-cost retirement funds. When referring to low-cost retirement funds, many investors associate this with low-cost index funds. Index funds are collective investment plans, including mutual funds, and attempt to replicate the trends of a specific market index.
Where Do The Fees Come From?
The most significant fees associated with a 401(k) plan’s collective account come from the administration of the account. Since low-cost index funds take advantage of complex statistical software and require very little input, they are therefore able to provide lower fees. Essentially, the high costs regarding the average 401(k) plans evaluated in the aforementioned study are associated with the administration of the mutual funds account which is managed by a professional investment adviser.
When you have a larger pool of investors for a mutual fund, there are usually more advisers and investment professionals that manage the account. This leads to higher administration fees but also increased fiduciary risk or an increased chance of fiduciary negligence.
You may be beginning to wonder whether mutual funds, or even low-cost index funds, are the reason your retirement portfolio may not be resembling optimal performance. Please check out Robert Kyosaki’s take on mutual funds to see whether rolling over your 401(k) into other low-cost retirement investing may help you meet your goals more quickly.
Note that low-cost funds do not just refer to low-cost index funds. Low-cost index funds will have lower administrative fees and overall costs than traditional 401(k) mutual funds, but it won’t eliminate fiduciary risks solely because there are less humans involved in managing the account. Fiduciary risk is still involved when a computer algorithm is used to project market trends and manage the collective account (of which you would own a share).
The Best Low-Cost Retirement Funds
There are a variety of options when choosing better alternatives to that old, and perhaps mismanaged, 401(k), and seasoned investors argue about their top picks, but:
“U.S. News has identified exchange-traded funds best suited for long-term investors seeking low-cost, diversified portfolios” – money.usnews.com.
Even with that being said, exchange-traded funds (ETFs) cover a wide variety of funds:
- Natural resources
- Corporate debt
- Municipal debt
- China region
- Emerging markets
- Real estate
The fact is that ETFs are still traded on the stock market. The 2008 financial crisis led many investors to sell a large portion (if not all) of their shares for companies in which they held stock. This is a major contributor to the plummeting stock prices in recent years. The investors who favored hard assets (tangible and not traded on the financial markets) as a result experienced massive growth and are some of the richest men in the world.
Hard assets like precious metals have become quite popular especially for investors looking for low-cost retirement funds with stability and peace of mind.
When considering tangible assets for retirement, fiduciary risks (and thus costs due to negligence) are greatly reduced making it one of the most popular retirement funds of the decade among top investors like Peter Schiff, Thomas Kaplan, Seth Klarman, Carlos Slim, and many others.
The wealthiest investors in the world also favor tangible assets because they believe it pertinent to hedge against inflation and be independent enough of the financial markets to avoid being devastated by economic downturns.
Read more about the top choice for low-cost/low-risk retirement investing in hard assets.