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Do We Live in the Golden Age of Investing?


The landscape for individual investors is unequivocally better than it was last century.


Savings at work

That's great for your personal investment account or your IRA, but many of us do most of our investing at work through a 401(k) or similar workplace retirement plan. Here, the facts are less golden but things are looking up.

A 401(k) plan has recordkeeping and other expenses that individual accounts don't. Except at the largest companies, 401(k)s will likely always charge at least a little more than individual accounts.

Many 401(k)s, however, charge a whole lot more. As of 2011, the median annual fee paid by participants in 401(k) plans was 0.78%. That sounds small, but:
  • The fee compounds over time, taking more and more of your savings as you get closer to retirement.
  • That's just the average fee; some plans are much, much worse, charging well over 2%.
  • That average fee is over 19 times the price of that cheap Schwab ETF, and nearly 28 times the price of the nation's best 401(k), the Federal government's Thrift Savings Plan (TSP).
But the trend in 401(k) fees is pretty good and getting better. Average fees dropped by over 9% between 2009 and 2011. And this summer, new 401(k) fee disclosure rules went into effect.

You may have already received a statement from your 401(k) showing exactly what you pay in fees and expenses; if not, you should get it by early November.

In theory, at least, employees should be marching into the benefits office waving their statement and complaining about high fees.

Don't people already know what they pay for their 401(k)? Not at all. When the AARP surveyed 401(k) investors last year, 71% of respondents believed incorrectly that they pay no fees.

The Bottom Line

Why all this harping on fees and expenses and so little attention to the performance of the markets themselves? Because you can't control, predict, or successfully time the market, and markets are never safe and boring. You can only control:
  • How much risk you take, by deciding how much to invest in stocks and how much in bonds or cash.
  • How diversified you are, by choosing broad-market mutual funds or ETFs.
  • How much you pay in fees and expenses for your investments.
What if your 401(k) is one of the poorly performing ones, with a base of expensive funds and administrative expenses piled on like rancid frosting? Fight back.

Plenty of people who would argue over a $25 parking ticket wouldn't think of spending ten minutes to write a letter to their benefits office asking for cheaper investment options in their 401(k), even though the latter could save them thousands.

Here's a guide that includes a sample letter.

The best investors are unrepentant cheapskates. For them-for us-the golden age is now.

Editor's Note: This article by Matthew Amster-Burton was originally published on MintLife.

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Twitter: @mint
No positions in stocks mentioned.
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