I'm 27, looking to start planning for retirement. My company has an arrangement through The Hartford group for our 401K and I read your article on Fund Level Expenses and how the broker will be earning compound interest on MY compound interest. I also ran across this article while researching:(and it also links to a Mutual Fund Expense Analyzer that might be handy for other Consumerist readers). The article is talking about getting yourself involved in an Index Fund that would have fee's of around .19% or so and going it alone.

Most of the 16 investment options I have through The Hartford have a fee of over 1% (many over 1.25%)...

But to undertake the medium-high risk plan I've devised, I am able to keep my fee's around .91%. I'm about 30-35 years from retirement, and of course I'd like to get the most bang-for-my-buck. But I'm really REALLY green in this area. Now, my company DOES offering matching up to 3% of my wage, and will then match HALF of what I contribute up to 5%...so for every 5% I invest, they'll match 4%.

I don't know how to calculate all this, but I need to know if I'm better off sticking with my matching plan in my company, or if I should go it alone with something that has a much smaller fee? I don't have a lot of up front capital to invest, so maybe that means I wouldn't even HAVE the option of going it alone. But I'm also hoping to move in about 4-5 years from where I live, and I would have to change companies to do so...so I doubt I'd be fully vested by then, but I figure that starting something now is better than nothing.

If you don't feel able to point me in the right direction, I've read a lot of comments about other investors on the site and was hoping you could pose this to them as well so I could get some feedback.

Thank you!

Matching policies vary by plan so you'll have to read the plan documents very carefully to figure out what's up. UPDATE: But you should probably take the match while you work there, then roll it over into a 401k after you leave and invest it in whichever low-fee fund you like. I'm going to go ahead and assume that your employer won't continue to match after you don't work for them. Since you think you'll only be around there for 4-5 years, you're probably better off going with a low-fee fund. While the employer won't keep matching your investment, the fund will still keep chomping away at your capital through its compounding fees.

For more information on how seemingly innocuous fund fees can devour most of your retirement fund, read our previous post, "How Your 401(k) Is Ripping You Off."

(Photo: Getty)

For instance, he dissects the way mutual funds are created, culled to isolate the best-performing ones, and then marketed as if they're built on sound strategies and not luck:

The mutual-fund industry was all but founded on [survivorship bias]. Firms create ("incubate") far more funds than they need and fill each with different investments. Some win, some lose. Guess which ones go on to get marketed and which get quietly closed? Decades of research have shown that the average managed stock fund falls miserably short of the broad market's returns. Yet survivorship bias ensures a constant supply of magazine ads with splashy performance figures. Dead funds tell no tales.

• they're based on a strong correlation
• they're based on logic
• the strategies are carefully screened to eliminate survivorship bias and to ensure the clue in question is the best explanation for what's happening, and not some other, hidden variable
• the strategies are practical
• the strategies can be reduced to the language of stock screeners

Of course, he saves the actual strategies for the book, but says he'll excerpt two of them in future columns over the next couple of weeks.

"Author Debunks Financial Parlor Tricks" [SmartMoney]
(Photo: Getty)

The financial sector of our economy is the largest profit-making sector in America. Our financial services companies make more money than our energy companies — no mean profitable business in this day and age. Plus, our healthcare companies. They make almost twice as much as our technology companies, twice as much as our manufacturing companies. We've become a financial economy which has overwhelmed the productive economy to the detriment of investors and the detriment ultimately of our society.

From the transcript:

JOHN BOGLE: Well, let me say it very simply. The rewards of the growth in our economy comes from corporate, largely - from corporations who are a very important measure, from corporations that are providing goods and services at a fair price innovating and bringing in new technology — providing a higher quality of life for our society and they make money doing it. I mean, and the returns in business in the long run are 100 percent the dividends a corporation pays and the rate at which its earnings grow.

That still exists. But, it's been overwhelmed by a financial economy. The financial economy, which is the way you package all these ways of financing corporations, more and more complex, more and more expensive. The financial sector of our economy is the largest profit-making sector in America. Our financial services companies make more money than our energy companies — no mean profitable business in this day and age. Plus, our healthcare companies. They make almost twice as much as our technology companies, twice as much as our manufacturing companies. We've become a financial economy which has overwhelmed the productive economy to the detriment of investors and the detriment ultimately of our society.

BILL MOYERS: By the financial sector, you mean?

JOHN BOGLE:Banks, money managers, insurance companies, certainly annuity providers. They're all subtracting value from the economy. They have to subtract. To be clear on this now — I don't want to overstate it. To be clear on this, they have to subtract some value. But, the question is—

BILL MOYERS: What do you mean they subtract some value?

JOHN BOGLE:In other words, — you've go to pay somebody something to provide a service. It's just gotten totally out of hand. My estimate is that the financial sector takes $560 billion a year out of society. Five hundred and sixty billion.

BILL MOYERS: Where does it go?

JOHN BOGLE:It goes into the pockets of hedge fund managers, mutual fund managers, bankers, insurance companies. Let me give you this just one little example. If you didn't make a $129 million last year — I'm presuming that you didn't. You don't rank among the highest paid 25 hedge fund managers. A $129 million doesn't get you into the upper echelon.

BILL MOYERS: This seems to me to be your great concern, that this self correcting faculty that is built into both democracy and capitalism is in jeopardy?

JOHN BOGLE:Actually, I think it's fair to say it's in jeopardy. But there's one sense that it's not in jeopardy. And that is, ultimately, the system will correct. The bigger the boom, I fear, the bigger the bust. In other words, you pay the price. It's not a self sustaining system at this kind of a level.

BILL MOYERS: Do we need new rules?

JOHN BOGLE: One thing is, I believe, to have a federal standard of fiduciary duty for money managers. They've come from eight percent ownership of American business to 74 percent ownership of American business. It's staggering, over unbelievable change. Without any rules as to how they're supposed to behave. We have state laws of proven investing and fiduciary duty and things of that nature. But they don't seem to be working. And our founding fathers actually thought about having a federal statute— a federal corporate chartering statute. I think we probably need one because if some of the states step up and say improve their governance provisions, corporations will move to another state. So the state system I don't think can prevail.

So a federal standard of fiduciary duty which demands that our pension trustees and our mutual fund directors make sure that those pension funds and mutual funds are operated in the prime interest of those who have entrusted their money to them. And that includes responsibility for corporate governance. And it will ultimately turn to be focused more on long term investing.

When I came into this business in the 1950's, it was a business focused on the wisdom of long term investing. We changed in that period to a business that is focused on the folly of short term speculation. And think about this for a minute. If you're a true investor holding a company for the long term, you're well aware that the value in that company is company's earnings compounded over time, developing new products and services, developing efficiencies— trying to size up the proper corporate strategy, you know, making the company more valuable. But, in the folly of short term speculation, you're just thinking will that stock be worth more or less six months from now or a year from now?

Give you a very specific example. In the first 15 years I was in this business, the average mutual fund held the average stock for seven years. Call that long term investing. Now, the average mutual fund holds the average stock for one year. That's short term speculation. So, if you're a speculator, you don't care much about ownership interest. You don't care so much about corporate governance. Why vote a proxy, for example, if you'll not even be holding a stock in three months?

The other part of it is,and this is really makes it a very difficult problem to solve. And that is a little about of — I guess it's Pogo — we have met the enemy and they are us. These mutual fund companies— these management companies are now owned largely by corporate America. Or international corporations — Deutsche Bank — AXA, big international companies who have bought their way into the US financial system, which is— don't mean to demean that. But, they own these public corporations— giant public corporations like insurance companies, big banks— foreign insurance companies and banks own 41 of the 50 largest mutual fund managers.

Now, what is the job of a corporation when they buy into a mutual fund management company? It's to earn a return on the capital they invest in that company. It's not to earn a return on the capital of the investors who invested with that mutual fund. Now, in fairness, they want to earn as much money as they can for the fund shareholders. But, not at their own expense.

What we've done is have you know, what I call in the book, a pathological mutation of capitalism from that old traditional owners' capitalism to a new form of capitalism, which is manager's capitalism. The evidence is quite compelling that today corporations are run in a very important way to maximize the returns of its managers at the expense of its stockholders.

BILL MOYERS: Its CEOs.

JOHN BOGLE:Its CEOs, well, the upper level of five or six top officers. And they get enormous amounts of pay for actually doing very little. I'm a businessman. Listen, we all— we chief executives get an awful lot of credit that we don't deserve. Real work in companies is done by the people who are getting themselves together and doing the hard work of making companies grow—

BILL MOYERS: And, yet, these—

JOHN BOGLE: every day.

BILL MOYERS: These are the people who most often get laid off, right?

JOHN BOGLE:They get laid off. And, of course, the ironic part of that is they often get laid off — used to be called downsizing. But, of course, in today's America, it's called right sizing. They get laid off. That reduces expenses. That increases earnings and that means the CEO gets more.

Just think about the country for a minute. For an agricultural economy, 95 percent, 98 percent agricultural when this country came into existence. And even by 1850, half agricultural. Now it's about, they moved from agricultural economy, to a manufacturing economy, to a service economy. And now to a financial service economy. And the financial service economy is what troubles me. Because it's diverting resources from the investors to the capitalists. To the entrepreneurs. To Wall Street. To the investment bankers. The hedge fund managers. To mutual fund managers. And that is a negative to our societal values.

Where agriculture and manufacturing and services, I mean, I'm perfectly willing to give a high value, for example, to art and poetry and literature. They add value to society. It may not be easy to measure it in a society that measures too much of what's not important. And not enough of what is important. As the sign in Einstein's office says— "There are some things that count that can't be counted. And some things that can be counted that don't count."

Transcript - September 28, 2007 [PBS]
Watch The Interview [PBS]

Why not? One theory is that investors were burned when the S&P 500 lost 45% from 2000-02 and are stashing their money elsewhere. Another is that investors remember the mutual fund trading scandal of 2003. Still another theory says that consumers just have less to invest. Real income is down and consumer spending is up.

Which is it? We don't know. Probably all three.

Many investors snub actively managed mutual funds [USAToday]
(Photo:FastFords)

This is not the secret to investing superstar success. It's just an example of successful application of the principle.

Shares were purchased after dip, then sold after steeper dips that followed a crest. Then, when shares began to rebound, they were repurchased.

Of course, he coulda just held all the way and not incurred any transaction costs...

PREVIOUSLY: Thinking Differently About "Buy Low, Sell High"

The article quotes Duncan Richardson, chief equity investment officer of the Eaton Vance financial service company as saying,

"I've never seen a great investment that you won't have another opportunity" to buy back at a lower price, after the requisite 30-day period."

And recently we also read someone talking about how selling after rises is good because it "locks in gains."

Now, the following is probably going to be obvious to some of you, but hey, if we didn't know it, maybe some other investment novices will benefit too. Before, we had sorta thought about buy-low-sell-high as like you want to get in on the ground floor of a stock, sell it after it gets to the top, and then you're out and onto the next one.

But really, Richardson is saying you can buy low, sell high, then buy low again, if the investment is good and your timeline is long, sell high again, and perhaps again and again.

Then again, we barely have any idea what we're talking about here, so please correct us if either we or are misinformed.

Of course, you don't want to do this too much because the transaction costs will eat into potential profits, and you can drive yourself crazy with "over-steering." We're still believers in a buy-and-hold strategy, but the revised buy-low-sell-high concept is something we'll be keeping in consideration.

Don't Pay Tax Twice on Your Fund Gains [New York Times]

He agreed, cautioning to make sure we looked into funds with low expense ratios.

Then, he, a man who will proudly die never having been accused of being a smidge too politically correct, added,

Look into commodities. It's an old story, but true. Some of these growing countries, these communist countries that were kept under oppressive regimes for so long and not allowed to participate in the market economy.... in the 1920's, China had no middle class. And countries like India. Now everyone wants a dishwasher. That takes a lot of raw materials.

Interesting, we had never thought about it that way. Not that we've ever done much thinking about commodities. We do know at least international funds and commodities are hardly mutually exclusive. A nugget to save in the ol' noggin'.

Vanguard says:

"Some funds charge a 12b-1 fee to pay the fund's marketing and distribution costs. This fee, which is incorporated into the expense ratio, can include a sales charge to compensate sales people."

Feeling looser with its tongue, the Securities And Exchange Commission says:

Distribution [and/or Service] Fees ("12b-1" Fees) — fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares and sometimes to cover the costs of providing shareholder services. "Distribution fees" include fees to compensate brokers and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature. "Shareholder Service Fees" are fees paid to persons to respond to investor inquiries and provide investors with information about their investments.

It's important to know the fees involved with a mutual fund, 12b-1 among others, as it can dip into the total profit you might gain (or increase what you might lose).

The SEC again:

Be sure to review carefully the fee tables of any funds you're considering, including no-load funds. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858 — an 18% difference.

With NADS's free online Mutual Funds Fee calculator, you can compare up to three funds and their various fees based on how much you invest and how long you plan on holding them.

PREVIOUSLY: What Is "R-Squared?"

R-squared measures how much a fund's past returns can be explained by the returns from its benchmark index.

If a fund's total returns were precisely synchronized with the index's return, its R-squared would be 1.00 (100%). If a fund's returns bore no relationship to the index's returns, its R-squared would be 0.

The higher the R-squared, the more the fund's return can be explained by the performance of the index, and so the performance of the market or market segment. The lower the R-squared, the more the return can be explained by the fund manager's decisions.

So, no-load index funds, which we're interested in, handled completely by computers, which attempt to sync with the performance of a benchmark index, like the S&P 500, should have an R-squared of 1. For example, the Vanguard 500 Index, whereas the "Vanguard Capital Value" fund seeking "companies that are out of favor with investors and that are trading at prices below what the stocks are worth compared to potential earnings" has an R-Squared of 50.88%.

(Don't think we have a crush on Vanguard or anything, we just have an account there so that's the easiest place to go for us for this information)

This is also referred to as the "coefficient of determination" and can be determined using scary Greek symbols.

Luckily for mere mortals, places like Google Finance figure out the R-squared for ya.

The expense ratio is the operating cost of a fund, including fees (or "loads"), and it is passed on to investors.

Expense ratios are expressed in a percentage. For example, a $10,000 investment with a 0.2% expense ratio results in $20 in yearly expenses (100,000 * .002).

Funds with lower expense ratios are seen by some as delivering better investor value. For this reason, many are attracted to "no-load" index funds and no-load index exchange traded funds (ETFs), which are managed mainly by a computer.

Recently, we plunked down a chunk in our first mutual fund, the Vanguard 500, a no-load index fund that tries to mirror the performance of the S&P 500, and has an expense ratio of 0.18%

For further discussion, check out:
An Argument For Index Funds
Comparing Index ETFs and Mutual Funds

— BEN POPKEN

(Photo: Getty)

MyMoneyBlog says to look at the index ETFs Historical Bid/Ask Spread Values and the mutual fund's NAV (Premium or Discounts to Net Asset Value).

Since ETFs are by definition traded on an open exchange, there can be differences between what people are currently willing to pay (the "bid" price), and what people are willing to sell at (the "ask" price). Even if you assume the ETF is priced correctly at it's inherent value, this bid/ask spread means you will be overpaying a bit when you buy, and losing a bit when you sell...

...NAV is simply the value of the shares of the mutual fund minus any liabilities like expense ratio. A mutual fund always trades once a day, exactly at its NAV.

We'll admit we don't really know much about this particular subject, but we've bookmarked it for when we're older. The post also has links to different sites that reveal different fund's historical data. — BEN POPKEN

Tools For Evaluating Index ETF vs. Mutual Fund Purchases [My Money Blog]
(Photo: Getty Images)

The kicker? Paying more for such a fund doesn't earn you more, it actually helps to ensure your results are less than what you could have otherwise. The details from SmartMoney Magazine...

When you pay a load, you're essentially paying for advice. A load is really just a sales charge you pay for buying a fund that's available only through brokers and financial advisors — unlike, say, a Vanguard fund, which can be purchased directly from the company with no additional charge. So if the guidance you're getting from your broker is helpful, it may be worth the price tag. But if you're comfortable investing on your own, then you probably need it about as much as a fish needs swimming lessons. While there are many good funds out there that charge a load — including those from American Funds, which are known for their reasonable expense ratios and solid team management — there's also no shortage of solid no-load (and low-cost) alternatives. Cost shouldn't be your only driver when it comes to fund selection, but higher fees can lead to weaker performance. It's not easy to beat a comparable no-load fund when you're starting $575 in the hole.

You're just as good as plenty of pros at selecting mutual funds.

The brokers' choices are more expensive. And they have lower returns too.

Load Funds [Ask Smart Money]