Wednesday, February 3, 2010

What A Difference [One Percent] A Year Makes

1. "If you could lower fees in your 401(k) by 1 percent throughout your working years, you could as much as double your account balance by the time you retire," said Kristi Mitchem, a managing director at BlackRock Inc., a mutual fund provider. Article at:

2. Another way to view the long-term effect of investment fees: say a prudent withdrawal rate is 4% per year. The savings to which withdrawals are applied result from hard work and have run a gauntlet of the cost of living, family obligations, deferred gratification and, significantly, taxes. With respect to investment costs of a 1% per year and assuming a desire to leave principal untouched, for your heirs, why pay to another 25% percent of the "life estate" fruits of your labor? In terms of years – say, a 40 year working career – what justifies paying another the equivalent of 10 years' worth of the fruits of a career's labor?

3. William Bernstein, in "Investors Manifesto," gives an example of how over time a broker extracting fees of 3% per year will have accumulated more value from a given investor's account than the investor retains in total. In the example the investor's return is the S&P 500 return less the 3% per year in fees and the broker's return results from investing the fees collected from the investor in a low cost S&P 500 index fund.

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