Size does matters. Don’t let anyone tell you different. At least in the world of finance and investing that is!
One way that size is important is when it comes to the amount of fees you will pay on your retirement accounts. Someone who has a $10,000 IRA will usually pay a larger percentage of fees than someone who has a $1,000,000 account. Likewise a small company 401(k) plan will most likely pay higher, sometimes much higher fees than say a plan of a Fortune 50 company. This is just where economies of scale and the ability to leverage a big stick come into play. Yea, size does matter.
But what if you’re not one of the big boys? What can you do to manage your fees?
Well, let’s get some perspective first. Our goal, in the case of these accounts, is retirement. The starting point is to work with your financial advisor to establish an asset allocation that fits into your larger financial plan. Your asset allocation should include all your retirement assets including your 401(k). Too often advisors won’t look at a client’s 401(k) allocation since they don’t get paid for it. If your advisor told you this, it may be time for a new advisor!
Once your allocation is established you can identify the investments within each asset class that should perform the best NET of fees. That’s the performance after the fees are taken out. For most of us this will most likely be a portfolio of mutual funds. You may not have many choices inside your 401(k) but you have almost unlimited choices in your IRA.
As a rule of thumb, actively managed funds with a lot of trading are often more expensive than passive investments such as index funds or Exchange Traded Funds (ETFs). Stock funds are usually more expensive than Bond or Stable Value Funds. Even within a class of funds, some funds are just more expensive than others. The principle is the same if you have investments in your accounts other than funds.
Remember, we are interested in NET performance. There are many investments, usually reserved for the larger investor, which will charge much higher fees than even the most expensive mutual fund. These “sophisticated” investors are only concerned with the performance after the fees are paid and not the amount of fees that are paid. Sounds like good advice.
Proper asset allocation and establishing and following a plan are among the keys to achieving your long-term financial goals.
Don’t be scared by all this talk about fees. Think value not cost. As long as you are getting value, cost should not be an issue.