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Impoverished: Retirement in Jeopardy


The separation of you and your money can take place in many different ways, often unrecognized. If the following scenario applies to you, then your retirement is in danger, too.

This is a true story. If the scenario applies to you, then your retirement is in danger, too.

Jim, a service provider I know, works hard for his money. Also, he is conscientious, saves and teaches his pre-teen daughter about money management.

Still, he is worried about his retirement savings. Jim noticed that when he makes a contribution to his Roth IRA, the sum diminishes almost immediately. His original investment is devalued when he invests with Edward Jones.

“Is my manager placing my money in a fund that loses money or is something else going on?” Jim wondered, and he asked me to take a look.

Invesco Charter Fund A (CHTRX) and Invesco Diversified Dividend Fund A (LCEAX) were the two mutual funds in Jim’s account. Notice the A. It refers to a load on the fund, a fee that is taken off the top that goes to the manager for selling Jim the fund.

For both CHTRX and LCEAX, the maximum load is 5.50% and, almost surely, what Jim’s manager is taking. So, if Jim places $10,000 with Edward Jones in his retirement account, his manager would receive a reimbursement of $550 taken off the top. That means Jim would have only $9,450 to invest, not $10,000. Since any gain compounds over time, the long-term accrual is less for $9450 than $10,000. This is because Jim’s initial investment was diminished right from the get go.

This isn’t all. Invesco is charging a 12B-1 fee yearly on each fund. This is theoretically used for promotion of the fund that doesn’t benefit Jim at all. It can also go back to Edward Jones or the manager that Jim is using. Either way, this percentage, too, is lost to Jim’s account.

And adding insult to injury, the expense ratio for the manager running the fund is about four times as high as if Jim was in a comparable index fund, also known as a passive fund. For example, CHTRX is a large blend fund (large and medium plus small stocks but weighted toward large) that can have an expense ratio as low as 0.35%, or less if it were an index fund.

Experts that study the result of high fees to investors say that a young person can save up to 33% more for retirement by simply investing in index funds rather than managed mutual funds. In Jim’s case (for example), he could have $400,000 instead of $300,000 at age 65.

To find the figures referred to in this article, go to Yahoo! Finance. Put in the ticker symbol of the mutual fund. Then, choose profile from the left-hand column. The style of the fund will come up on the lower left and the expense ratios on the right.

Beyond this you can compare the cost of a managed mutual fund to similar low-cost index funds. If the managed mutual fund’s style is large blend, then look up that category in index funds with a profile similar to the managed mutual fund. The latter may require the help of an educator because matching accurately can be challenging depending on the complexity of the managed fund. But, paying an educator $200 or $300 dollars once or twice a year for five or 10 years ($600 per year times 10 is $6,000) until you can manage yourself is much less expensive than $100,000 lost to an Edward Jones manager over a lifetime.

There is one word of caution. The brokerage firm at which your account is located has to allow self-directed IRAs, meaning you can manage it yourself. To find out, simply call them. Otherwise, sadly, all bets are off and you will be stuck supporting your manager and his firm almost as much as yourself.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice