In April I contributed a piece to Yahoo that discussed the eroding impact of fees on the performance of an investor’s portfolio. I wrote:
Consider the Department of Labor’s analysis of 401(k) investment fees: An individual with a 401kbalance of $25,000 has 35 years remaining until retirement. That individual pays an investment management fee of 0.5 percent (a conservative assumption) and earns 7.0 percent per year (a reasonable assumption). At the end of the 35-year period and assuming no additional contributions (unlikely and, therefore, conservative), the balance will grow to $277,00.00. However, increase the fee to 1.5 percent (somewhat aggressive), and the account balance grows to only $163,000–or $114,000 less than the portfolio paying the lower fee. According to the DOL, that one percent higher fee compounded over 35-years reduces the ultimate account balance by 28 percent. Fees, it seems, make a difference.
I cite that passage here because the importance of fees paid by investors for investment management related activities cannot be underestimated or overlooked. As a former professional investment manager I collected similar fees on the assets I managed for my clients. Obviously, I am not condemning the payment of fees. If you hire the right manager and they provide performance well in excess of the market they have earned their fee and you, as a client are much better off. However, if the manager does not exceed the performance of the market by at least the annual fee charged (and according to NerdWallet only 24% of active investment managers have consistently done so over the last ten years) then the DOL’s analysis should alarm you.
Consider fees carefully. Saving 1.5% per year is as good as earning 1.5% per year.