Cutting Investment Fees – A Key To Secure Retirement?

flying one hundred dollar billsCharles D. Ellis wrote a thoughtful article in the Financial Analysts Journal recently about the hard choices that people– and institutions – must face sooner than later regarding retirement and pension systems.

One of the main facets of the article’s thesis:

We need to make hard choices on how much to save, how long to work, how to invest, and how much to draw from our savings for spending in retirement.

The article is full of great discussion on these points. After someone stops working, a big part of their financial security stems from controlling costs – not just living expenses, but investment expenses, as well.

From the article:

Most investors somehow believe that fees for investment management are low. Fees are not low. Here’s why: By convention, fees are shown as a percentage of the assets, say, just 1%. But that’s seriously misleading. The investor already has the assets, so the manager’s fee should be stated as a percentage of the benefit (i.e., returns).

If returns are 7%, then the same fee in dollars is 15% of returns. And because index funds deliver the full market return with no more than the market level of risk for a fee of 0.1%, the real cost of active management is the incremental cost as a percentage of the incremental benefit of active management. That’s why the true cost of active management is not 1% or even 15%. Because the average active manager falls short of his chosen benchmark, the average fee is more than 100% of the true net benefit.

Increasingly, investors are learning that one way to reduce costs—and increase returns—is to save on costs by using low-cost index investments, particularly with their 401(k) or other retirement plans.

How your retirement funds are invested is important because many of those dollars are invested for a very long time—20, 40, even 60 years.

The article, titled “Hard Choices: Where We Are”, is available for free from the Financial Analysts Journal.


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Growth Slower, But Still Steady For World’s Largest Funds in 2013


The annual pension fund survey from Pensions & Investments and Towers Watson contains news for both optimists and pessimists.

Glass half-empty: The world’s largest pension funds saw less growth in 2013 than they did in 2012.

Glass half-full: 2013 still marks the 5th consecutive year of positive growth for those funds.

All the details from Pensions & Investments:

Assets of the world’s largest 300 retirement funds increased 6.2% in 2013, growing at a slower pace compared with 2012’s 9.8% rate, according to an annual survey conducted by Pensions & Investment sand Towers Watson & Co.

That is the fifth year in a row of positive growth for the top 300 funds across the globe, with aggregate assets in defined benefit and defined contribution plans at $14.86 trillion. These funds represent 46.5% of global pension assets, according to Towers Watson’s most recent Global Pension Asset Study, declining slightly from 47% in 2012.

“Some funds are experiencing strong net inflows, some are experiencing increasing returns due to buoyant stock markets — that is true of Australia, Canada, the U.S. and the U.K.,” said Gordon Clark, professor and director of the Smith School of Enterprise and the Environment at the University of Oxford, Oxford, England.

“Indeed, we are in the midst of what some people think is maybe a nascent bubble in the stock markets, promoted by, in part, quantitative easing.”

Amid stubbornly low interest rates and a poor year for emerging markets strategies, developed markets equities followed up a strong 2012 with an even stronger 2013.

The Russell 3000 index returned 33.55% over the year, compared with 16.4% in 2012, while the MSCI All-Country World ex-U.S. index gained 15.97% vs. 16.5% in 2012.

Read the full breakdown of the survey here.


Photo by Horia Varlan via Flickr CC