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is expense ratio the most important thing for retirement fund?

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  • #1

    is expense ratio the most important thing for retirement fund?

    Hey everyone,

    My current IRA is comprised of a FFFFX Fidelity 2040 fund. The expense ratio is .81%.

    I have a small amount of money from an old job in Vanguard's 2040 fund (VFORX). The expense ratio is .20% but it's not taking contributions at the moment.

    Should I switch my IRA to Vanguard?

    I've heard that expense ratio is the single most reliable predictor of return. Can anyone point me to any articles where I can get an idea as to potential future savings between the two? Or just a better way to think about it the issue?

    Thanks!
    Jim
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  • #2
    Originally posted by StepRightUp View Post
    Vanguard's 2040 fund (VFORX). The expense ratio is .20% but it's not taking contributions at the moment.
    Why do you think VFORX is not taking new contributions? I just checked their website and saw no mention of that.

    I think expense ratios are important when comparing similar funds. Why pay 0.6% more than you have to assuming everything else is equal? That just cuts into your returns.

    Keep in mind that no two 2040 funds are exactly the same. For example, Vanguard's is basically 90% stock/10% bond right now while Fidelity's is 84/16. They also adjust their allocation at different rates as the years go by. Does that matter more than the expense ratio? I don't know but it is something to think about.
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

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    • #3
      The MOST important thing for a retirement fund is appropriate investment allocation.

      Appropriate meaning: meets your risk tolerance, time horizon, and goals.


      Once you find funds that are appropriate for your goals, then you should look among them for the lowest fees.

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      • #4
        @disneysteve, I worded my post poorly: I haven't been contributing to that fund since I left that job. But now I'm considering switching.

        @jpg - I thought of that after I made that post - asset allocation is key - I wonder if that 6% difference in stocks (and risk) is worth the .6% difference in expense ratio...something for me to ponder

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        • #5
          Maybe you can use Vanguards 2035 or 2030 fund to get more bond exposure. (if thats what you want?)

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          • #6
            Book Suggestion

            StepRightUp - Please read "The Smartest Investment Book You'll Ever Read" by Daniel R. Solin. I'm fairly certain you won't have many more questions after that...enjoy.

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            • #7
              Originally posted by jpg7n16 View Post
              The MOST important thing for a retirement fund is appropriate investment allocation.

              Appropriate meaning: meets your risk tolerance, time horizon, and goals.


              Once you find funds that are appropriate for your goals, then you should look among them for the lowest fees.
              +1 re read the above post

              the following will impact returns the most

              1) the amount of stocks in portfolio
              2) the asset allocation of portfolio (% stocks-% bonds)
              3) the funds performance and the risk the funds take
              4) the expense ratio of the mutual funds

              The expense ratio will have a low impact on overall performance.

              For example if you compare a fund with a .2% ER and a .8% ER, some people will say "one fund is 4 times more expensive than the other", however performance (assuming they own the same securities) will only be .6% difference- whether it is 12% to 11.4% or -4% to -4.6%.

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              • #8
                Expense ratios are a great indicator to look at, but they don't tell the whole story, at least for managed funds (for index funds, yeah expense ratio is probably THE indicator to look at). Total return is the thing you'll ultimately care about. Not many managers have been able to beat the market, but some do. You can find long term returns for funds with higher expense ratios that make it worth while. I'm willing to pay more in management of a fund if it specializes in something I believe in, for example a certain sector (i.e. energy), country (i.e. India), or long term trend (i.e. domestic spending in China).

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                • #9
                  By the way, I always ignore funds with any type of load or transaction fee. Too many good free or low-cost options out there to pay some huge up front load, and that WILL have a huge impact on your long term bottom line. I consider that a total rip off in a consumer environment that offers so many good investing options.

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                  • #10
                    Yes. The expense ratio is very significant over time since the monies taken for expenses are not compoundable to your benefit in the investment.

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