Focus on Fees: What Are Your Investments Really Costing You?

We talk a lot about fees at the Blue Ocean Portfolios blog. However, most investors still have no idea what the true fees and expenses associated with their investments are.

In an effort to educate investors and help them make more informed investment decisions, we're starting a series of blog posts we're calling "Focus on Fees." We'll examine some fees and expenses many of you may be familiar with such as expense ratios. We'll also examine some that you may have never heard of before like M&E and wrap fees.

We do not recommend making investment decisions solely on the basis of fees and expenses. There are many factors that you should take into account when building your portfolio (or working with an advisor to do so).

However, fees do matter. And they are arguably the one aspect of your investments that you have the most control over. We hope this series will educate and enlighten so that you can make the most informed investment decisions and make the most of your money.

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It’s Not Just the Size Of the Fees In Your 401(k) Plan, But the Funds It Uses

Add Wal-Mart to the list of companies being sued by employees for breach of fiduciary duties of their company 401(k) plan.

One of the interesting things about the Wal-Mart suit is that employees are not just suing over the alleged unreasonable fees charged by the plan. The suit also claims that participants’ returns were adversely affected because most of the funds offered in Wal-Mart’s 401(k) plan were actively managed funds. An article from Pensions and Investments describes why employees added this to their suit (emphasis ours):

The suit against Wal-Mart alleged the basic fees weren't the only factor that adversely affected workers' 401(k) savings. It stated that most 401(k) plan fund options are actively managed funds, which carry higher management fees. The Wal-Mart plan's actively managed funds, which cost more because they aim to garner better returns than market indexes, often did not meet or exceed their investment benchmarks, according to the suit. This underperformance compounded the effect of the fees, as participants paid more for lower returns, the suit said.

The suit breaks down the fees on many of the actively managed funds in the Wal-Mart 401(k) plan and measures them against funds from Vanguard Group, known for offering relatively low-cost mutual funds. In one example, the suit compares the AIM International Growth Fund — an actively managed retail fund in the Wal-Mart 401(k) plan that has an expense ratio of 1.59% of assets — with Vanguard's International Growth Fund, also an actively managed retail fund with a fee of 0.55% of assets. The difference for Wal-Mart plan participants: $2.8 million less in fees over a six-year period with the Vanguard offering.

We’ve been beating this drum for a long time now. It’s not just the fees that can eat into your 401(k) returns but active management risk (aka the fallacy that fund managers can consistently outperform the market). A 401(k) plan that only uses actively managed funds is doing a huge disservice to plan participants who will often do much better sticking with index funds.

It looks like more 401(k) plan participants (and lawyers) are starting to take notice.

You can see the full version of the P&I article here.

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Want to Know Warren Buffet's Single Best Investment Idea?

Last weekend Berkshire Hathaway shareholders made their annual pilgrimage to the company’s annual meeting to hear the Oracle of Omaha and his partner, Charlie Munger, share their wisdom on investing.

One shareholder asked what is the single best specific investment idea that Mr. Buffet would recommend to an investor in their 30s.

The answer?

“I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought in a very strong bull market, I would feel confident that I would outperform . . . and I could just go back and get on with work.”

Wall Street has spent billions of dollars trying to convince investors that their money managers have special skills, powers or magical abilities that enable them to regularly outperform the market.

And here, the man widely regarded as the Greatest Investor Who Ever Lived, says the low-cost index fund is his best investment idea. Not only that, but he thinks investors who use index funds will “outperform.”

So you have:

• “Low cost”
• “Outperform”
• A strategy that lets you “go back and get on with work” or whatever else you want to do (ie. peace of mind)

So tell me again why investors paying money managers around $100 billion a year to try to beat the market?

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Save the 401(k)! What’s Really At Stake For Plan Participants

The other day we blogged about the House Education and Labor Committee passing H.R. 3185. This is a bill that would require full disclosure of 401(k) fees by plan providers to plan participants.

A recent article in Morningstar examines many of the factors surrounding the legislation and the problems with the current 401(k) plan landscape. Among the topics the article covers:

• The disconnect in the current retirement system where ERISA requires plan sponsors (employers) to fulfill their fiduciary duties by disclosing all fees to plan participants while the plan providers (mainly insurance and mutual fund companies) don’t (won’t?) take fiduciary responsibility for the plans they provide and don’t (won’t) disclose the plans’ expenses.

• A solution proposed by Independent Fiduciary, Matthew Hutcheson, that bridges this disconnect in the current system.

• How the huge profits of the insurance and mutual fund industries rely, in part, to making it as difficult and confusing as possible to figure out exactly what they are charging in fees to 401(k) plan participants.

• What’s at stake: Whether billions of dollars of retirement savings end up in the hands of American workers or those in the financial services industry.

If you are a plan participant or plan sponsor this information is simply too important to ignore. You can read the entire article here.

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