401k And 403b Plans: Are You Doing More Harm Than Good?
The bottom line is this: How much money do you have in your 401(k) plan, 403(b) plan, or IRA account after you pay for everything, which includes any hidden and camouflaged costs that you are paying but don’t see, yet?
This is important: Always compare your results to an appropriate benchmark. That way you will know, for certain, if you are doing more harm than good to yourself and your loved ones.
For instance, let’s say that your net return was 4.00% per year because you paid 3.10% in expenses.
In other words, we are using an illustration whereby your mix of investments earned 7.10%, per year, but after expenses your net was 4.00%.
Got it?
Okay. Now, let’s say you are using an appropriate benchmark, and after expenses it had a net return of 7.00%, per year, because it did the right thing and paid only 0.10% in total expenses.
Now let’s compare the two returns after compounding each ROI.
Both portfolios invested in the same mix of investments, so both earned 7.10%, per year.
- At 4.00%, per year (after expenses), your money will double every 18 years.
- At 7.00%, per year (after expenses, your money will double every 10.29 years.
Which 401(k) plan, 403(b) plan, or IRA account would you rather have? The plan that had lower costs and doubled your money every 10.29 years, or the plan that had higher costs and doubled your money every 18 years–don’t forget that both plans had same mix of mutual funds that earned 7.10%, per year.
Now, do you see why it is important cut your plan’s expenses today and not procrastinate? If you cut your plan’s expenses today, you are guaranteed to have more money tomorrow. That is a fact!
Cutting a plan’s expenses gives the plan’s participants more money every time it is tried.
Best wishes,
Your teacher, Frank Cirullo
Tags: 401k, 403b, IRA account