Digging into the the wild world of retirement planning, Frontline walked through how administrative, asset management, and marketing fees cut into a 401k over time. Frontline shows that over the course of a lifetime, ordinary Americans can pay as much as $109,407 in retirement fees to their mutual fund providers. What’s worse, as many as six in ten Americans are unaware of how much their plans are actually costing them.
The argument, as spelled out by Frontline, is that the expense ratio applied to mutual fund accounts is fundamentally misleading. Frontline’s example case uses a $50,000 investment in a mutual fund that has a gross return of 5.88 percent. The expense ratio on this account is 1.23 percent.
The mistake that many investors make is that they assume the expense ratio is applied to the gross return on the account. This would mean that in one year, the account would yield $2,940, and only cost the investor $36.16. However, in reality, the expense ratio is applied to the full balance of the account, coming up to $615 in this case. On top of this, the report suggests that trading fees can double those costs.
Frontline calculates that ten years down the line, investors could pay as much as $20,603 in fees. As fees compound, after 20 years, the cost climbs to $73,406.
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