NCPA - National Center for Policy Analysis


March 13, 2007

Most workers are losing more to the expenses of their managed plans than they will ever lose to the taxman, says economic columnist Scott Burns.

A couple of examples:

  • Schoolteachers have 403(b) plans that are dominated by expensive insurance-based products, which often costs 2.5 percent a year; this expense often takes 24 percent of the return in the first year, 32.6 percent by the 10th year, and 42.6 percent by the 20th year.
  • Overall, a career schoolteacher pays an investment management "tax" that is far higher than anyone, at any income level, pays.
  • Employees in medium-size 401(k) plans may pay 1.4 percent in management expenses for their mutual fund choices; which translates into a 19.1 percent loss by the 10th year and 26.1 percent loss by the 20th year.
  • Over a working career of 40 years, management expenses reduce their accumulation by a stunning 40.8 percent.

Conversely, employees who are blessed with the wisdom lacked by their employers can invest in low-cost index funds in their IRA and Roth IRA accounts, says Burns. Assuming an average annual expense of 0.2 percent, they lose a minuscule 1.9 percent of their return in the first year.  The tab rises to 2.9 percent after 10 years and 4.1 percent after 20 years.  By the 40th year, their accumulation has been reduced by only 7.1 percent.

Source: Scott Burns, "Investment expenses higher than they seem," Dallas Morning News, March 12, 2007.


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