Excessive FeesPrint This Page
In his article, "The Tyranny of Compounding Costs," author John Bogle (founder of Vanguard) used the following illustration. If an individual made a $1,000 investment at age 20 and received 8% annualized returns, the account balance would grow to $109,358 by age 80. If a 2.5% annual management fee was added into the equation, the ending account balance would only be $26,206. Over the 60 years, these annual management fees eat up a staggering 76 percent of what the investor would have earned with no management costs.
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Most investors believe the "Expense Ratio" is the only fee paid within a mutual fund. However, in addition to the Expense Ratio, one must add the Transaction Costs (brokerage commissions, market impact costs, spread costs), Tax Costs, Cash Drag, Soft Dollar Costs, and Advisory Fees. Forbes Magazine estimates the average cost of owning a mutual fund to be 4.1% annually (if held in a taxable account) and 3.1% (if held in a 401k plan). However, according to the Government Accountability Office, the average annual administrative charge of the 401(K) plan itself is an additional 1.3% annually. This brings the grand total to 4.4% as the average gross annual cost of owning a mutual fund in a 401(k) plan.
"Imagine a business in which other people hand you their money to look after and pay you handsomely for doing so. Even better, your fees go up every year, even if you are hopeless at your job. It sounds perfect. That business exists. Its called fund management."The Economist March 1, 2008
What about "No Load" mutual funds? The only difference between a No Load fund and a typical fund is the absence of a commission. All the other costs described above are still charged.
Mutual funds are also allowed to publish their returns without showing the deduction of all expenses first. Although they are required to deduct the expense ratio, the transaction costs, which can be the largest single expense, are omitted. John Bogle, founder of Vanguard wrote "Surprise, the returns reported by mutual funds aren't actually earned by mutual fund investors."
The information on this page is for informational purposes only and should not be used as the basis for any financial decisions. Please consult a qualified fax, legal, or financial professional before making any decisions.