I recently stumbled across this video from John Oliver’s tonight show on retirement plans:
Warning: Some of the content in this video can be kind of crude/explicit.
I found this video particularly insightful since my employer’s 401(k) plan is through John Hancock. I promptly logged into my John Hancock account to review the expense ratios on my current investment funds. When I had first enrolled in my company’s 401(k) plan, I pretty much selected the fund that was suggested to me by John Hancock. This fund was the JH LS Grow Active Strategy. I figured investing my money in this fund would create good diversification.
As of March 31, 2016, this fund has an expense ratio of 1.09%. That basically means that for every $1,000 I have invested I’m paying $10. Now this may not seem like much, but over the long term this can be significant. Here’s an example:
Let’s say I have $1,000 invested and it grows by 4% over the year. However, the expense ratio is 1.09%, which means I effectively earned $29.10 instead of $40. Then say I earn 4% the next year on $1,029.10, which would net me $41.16. After the expense ratio of 1.09%, I’d have $29.94 in earnings. At the end of year two, I would have a total of $1,059.04. Compare that to if the expense ratio were only 0.5%, at the end of two years, I would have had $1,071.23.
Now I know what you might be thinking… the difference is only $12.19. What’s the big deal? As your retirement account grows, you’re talking hundreds of dollars lost. For instance, change this example to $10,000 in your retirement account and you’re losing $121 and that’s just in the first two years.
Don’t forget that earnings compound! Over several years the loss in possible earnings is significant. As soon as I started to realize how much money I was losing to fees, I immediately changed my fund allocations. Higher fees/expenses don’t necessarily mean more growth. After all was said and done, I decided to invest my money in funds that had lower (albeit still ridiculously high for what they are composed of) expense ratios. I allocated current funds to a 500 Index Fund, Total Stock Market Index Fund, Large Cap Value Fund, and a couple other lower expense ratio funds. All of these funds’ expense ratios were under 1%.
On the left is my old allocation and on the right is my new allocation:
I hope this post encourages you to take control of your retirement accounts. With all the technology we have today, it’s not that hard to do. Just a few simple clicks and you can reallocate your retirement funds to less expensive funds.