Myth No. 3: A broker can help you get higher returns.
Although many money managers vow to beat the market, the odds are against them doing so. "About 80 percent of mutual fund managers underperform the market," Kotlikoff says. "In addition to buying securities that are risky, you are buying a money manager who is risky, and you are also paying a high price." Brokerage fees can take a hefty bite out of retirement plans. A reasonable expense ratio for investments is 0.1 percent, Kotlikoff says. The typical investment brokerage account charges 2 percent a year in fees. For a portfolio yielding 5 percent after inflation, that reduces annual returns by 40 percent.
For example, a 30-year-old employee saving 6 percent of his $50,000 annual salary in a 401(k), with a 50 percent employer match, might accumulate $505,474 by age 66 (assuming a typical 60-40 split between equities and fixed income and an 8 percent annual return) in an ultralow-cost plan with, an annual cost of just 0.03 percent. But if you subtract the typical 2 percent annual brokerage fees, the same person would have only $340,653 at age 66.
"You can do all this stuff on your own without paying high fees," Kotlikoff says. "Just invest in index funds for stocks and TIPS for bonds."
Ernie Zelinski @ Feb 27, 2009 23:35:27 PM
J.Parce of ID @ Jul 16, 2008 15:18:08 PM
J.Parce of ID @ Jul 16, 2008 15:18:07 PM