It’s not Mickey Mantle, Willie Mays and Duke Snyder; nor Diana Ross, Florence Ballard and Mary Wilson. The big three for retirement plan participants (and investors in general) are cost, consistency and attribution. Here’s why.
Cost
I can’t emphasize this more strongly—cost is the single greatest drag on long-term investment performance. As we can see in the first chart, if a plan participant is paying 50 basis points in investment operating expenses vs. 100 basis points, the resulting terminal value is 30 percent higher.
Source: U.S. Securities and Exchange Commission
If we take the “opportunity cost” of higher fees into consideration, the difference widens by another $12,000 over 20 years.
And if we calculate on a percentage basis what the terminal value would be based on a 4 percent annual return over 20 years with a beginning balance of $100,000 in with a fund that charges 50 basis points vs. one that charges 100 basis point, the number is rather large: a 40 percent difference in terminal value ($220,000 vs. $180,000).
Source: U.S. Securities and Exchange Commission
We’ll explore the second of “The Big Three,” which is the power of consistency, in our next installment, but for now, think about the impact that high fees are having on in your client’s retirement account.
Many plan sponsors simply do not understand what it is that they’re providing to participants when attempting to comply with 408(b)2 regulations. Some may be surprised and unprepared when participants read the notices and ask questions.
An opportunity may exist with the recently passed tax law to approach plan sponsors with a comparison of the pros and cons of revenue sharing, where participants pay a portion of the plan’s administrative fees through funds provided. It also might be the right time for retirement plan advisors to shine a light on the costs to plan participants overall.
It is vital that plan sponsors understand fee flows in their plans, and that they “act solely in the best interest of the participants and their beneficiaries.” Our job is to help plan sponsors meet that requirement.
So let’s do it.
Dan McConlogue, AIF, PPC, is director of corporate retirement plans with Ritholtz Wealth Management.