Saturday, October 17, 2009

ETF’s in a 401(k) Plan?

If you are looking to maximize performance in a 401(k) plan, a good place to start is with fund expenses. A Government Accountability Office report illustrates exactly how much expenses matter: over the course of 20 years, a $20,000 investment, earning 7% annually and paying 0.5% annual fees, will grow to about $70,500. But if fees are 1.5%—a mere 1% difference—that same $20,000 will only grow to about $58,400. This is approximately a 17% reduction in asset value.

A 401(k) fund menu made up primarily - or exclusively - of ETF’s can address this issue, but you do have to shop around. Because ETF’s aren’t laden with subsidies, you probably won’t find them inside packaged programs (like those from insurance companies). And a broker might be hesitant to bring them to your attention (no commisssions bulit in, either).

But an advisor, who charges a fee, is a good candidate. An advisor can easily choose ETF’s and build portfolios using one of several available platforms and, because the advisor, ETF, and platform fees are all transparent, you can be assured of low cost performance.

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