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Here’s some news about 401(k)s you probably haven’t seen: Investing in your 401(k) has never been cheaper!
In fact, the cost of investing in mutual funds for the average 401(k) investor has fallen 31% since 2000. With most financial news focused on how high expense ratios eat into your investment returns, the Investment Company Institute’s report that those costs have actually been on a long-term slide is a breath of fresh air.
According to the ICI report, 60% of 401(k) retirement assets are invested in mutual funds. In 2015, expense ratios for funds with the most assets reached their lowest point: .53% for stock mutual funds. That’s less than half the industry-wide average of 1.31% for all stock mutual funds offered in the Unites States.
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That .78% difference may not sound like a big deal, but over 30 years of retirement investing, it can have a $155,000 impact on your long-term savings.
Too Much of a Good Thing?
While low 401(k) costs are great for retirement investors, the news comes with a word of caution. According to the ICI report, the reason for the drop in costs is mainly due to more investors choosing funds with lower fees for their 401(k)s.
On one hand, that’s a wise move. You should pay attention to fees, but they’re only part of the picture.
A good mutual fund also has a long history of above average returns and a team of experienced fund managers. A fund like that might warrant a slightly higher expense ratio, especially if its returns cover the fees and still deliver higher than average investment growth.
You’ll also want to choose several different fund types, such as an even mix of growth, aggressive growth, growth and income, and international funds. Mixing up your funds allows your investments to work together as a team—lowering your risk when the market is down without sacrificing growth potential when the stock market is riding high.
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Fund-Jumping Can Destroy Your Retirement
Decades of studies on investor behavior prove that when investors jump from one fund to another in hopes of higher returns, they end up with the opposite result. Dalbar’s most recent study shows that over 30 years of investing, the average stock mutual fund investor has underperformed the S&P 500 by 6.69%!
We’ve already seen that a fraction of a percentage point can mean a six-figure difference in your nest egg. A 6.69% difference in your investment growth means then difference between a $330,000 nest egg and a $1.16 million nest egg after 30 years of investing!
Jumping from fund to fund in search of lower fees can be just as disastrous as habitually switching funds to chase higher performance. Focus on choosing a mix of high quality funds you can stick with for the long term.
Pick Quality Funds With Help From a Pro
An experienced investing professional can help you identify the best quality funds in your 401(k) and help you choose from thousands of mutual funds for your Roth IRA.
If you’re looking for an investing pro near you, check out SmartVestor. It’s a free, easy way to find a pro who is committed to showing you how to reach your long-term investing goals.