How Much Do Lower Cost Funds Impact Retirement Plans? Hot

0.0 (0)
Write Review


It seems hard to believe that in today’s world, filled with easy access to information, the average actively managed fund still charges 1.5% per year in expenses while Vanguard offers its S&P 500 Exchange Traded Fund (ETF) at an unimaginably low 0.06% per year. But that is the case and this is one way to quickly show clients and prospects how they can quickly and easily save more money for retirement.


It is a simple exercise to compare high-cost funds vs. low-cost funds over time. Using our free calculator called Compare Investment Fees I ran a comparison of the Vanguard S&P 500 ETF vs. the typical mutual fund that charges 1.5% in fees, as well as a fund that charges 1% in fees. I assumed an 8% annual return for 30 years for each fund. We see the results in the chart below.

Starting with an initial investment of $10,000 the investor will have slightly over $97,000 using the Vanguard ETF. Using the actively managed fund, the total amount will be only a little more than $66,000. This is a 48% difference in the total amount of money at the end of 30 years and all simply due to a difference in expenses. Also note that this does not take into account the higher tax bill in the higher-cost fund due to its turnover. With this taken into account, the difference in the investment values would be even larger.


This is a nice visual way to easily show people just how much money you can help them save by pointing out lower cost ETFs that are available to them.


Also of interest is this: Studies have shown that due to the higher expenses and higher tax bill, actively managed funds on average would have to outperform index funds by 4.3% each year just to break even with them. Of the 452 equity mutual funds that have existed in the Morningstar database for at least 20 years, only 13 have outperformed the S&P 500 index by more than 4.3% annually over this time period. That is less than 3% of the funds investigated.


It is also worthwhile to show clients how lower cost funds might affect their overall retirement plan. Using our Retirement Planner, I used a typical plan with a couple that is 45 years old, they currently have $500,000 in assets, and 75% of this amount is in actively managed equity funds that charge 1.5% per year in expenses. They will retire at age 65. I also assumed they will have $50,000 in expenses in retirement and they will receive a combined $25,000 per year in social security benefits. I found the following results:


In Funds With 1.5% Fees

In Funds With 0.1% Fees

Value of Investments at Retirement
 (Adjusted for 3% inflation)



Age of First Shortfall in Retirement




It is always interesting to see the power of compounding over long periods of time. With 20 years of compounding the 1.4% savings from the lower cost fund, this couple is able to change when they run out of money by 10 years while having $117,000 more in their retirement nest egg.


Not all retirement plans have access to a wide array of low cost ETFs and funds. But if they do, it is always worth having the conversation with clients and prospects as to how much money they might save if they simply move to lower cost investments.


This Website Is For Financial Professionals Only

User reviews

There are no user reviews for this listing.
Already have an account? or Create an account