The Fees you’re paying may be much higher than you think


 

While doing research for her new book (The Bank On Yourself Revolution, to be published on February 11). Pamela Yellen discovered four stunning new revelations about 401(k)’s and IRA’s, Here’s one that I’d like to share with you.. Wealth-Killer #1: The fees you’re paying may be much higher than you think

highfee Congress passed a law in 2006 protecting  employers from liability as long as they  automatically put employees’ contributions into  certain types of mutual funds, known as “default”  investments.

 Target-date funds (TDF’s) have emerged as the  default investment of choice. Unfortunately,  they’ve also proven to be very risky AND they’re  among the most costly mutual funds you can buy. (Would it surprise you to learn the mutual-fund industry lobbied Congress to get that law passed and make sure their interests were protected? Didn’t think so.)

So last month, an article in Forbes (“The Trouble With Target Funds”) revealed that, according to the prospectus of one popular target-date fund, your projected fees and expenses for each $10,000 invested is $2,478 over a ten-year period (assuming it grows at 5% a year). That’s 25% of your savings!

So, if you had $300,000 in that fund for ten years, you’d get soaked for – are you sitting down? – $74,340! (And that’s just over a ten-year period!) It also doesn’t take into account all the other fees you’re charged in a 401(k). The author of this article concluded, “Whoever is buying the funds would not be at the genius level. They have not figured out that they are getting ripped off.”

The bottom line is that compounding is great when it’s working for you. But in traditional retirement plans, the compounding of fees works against you. The more you save and the longer you save it, the more you’ll pay in fees.

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