The Advantages of Index-Based Investing
Index funds offer a lower-cost and a historically better performing alternative than most actively managed funds, while also offering investors access to a broad array of asset classes. From large cap, mid cap, small cap equities to bonds, treasuries, commodities, and REITs, index funds offer robust options for long-term investing.
Paying Just 1% More Can Seriously Add Up
While you can't control the markets, you can control investments costs. Every dollar paid in investment expenses is one less dollar invested in the markets. Paying just 1% more in fund and investment expenses can cost each employee hundreds of thousands in savings over a 40-year career.
The effects of higher costs can compound and become profound over time. In this hypothetical example, Jill and Dan invested the same exact amount over 40 years, but because Jill paid 1% less in fees, she saved an extra $376,321, which is 27% more than Dan.
Paying 1% Less Can Make a Big Difference!
This example shows the effect that expenses can have on your 401(k) retirement account over a career of 40 years by comparing the costs of paying 1% versus 2% on investments and how savings may accumulate. It assumes the investments have a fixed annual 7% return before expenses with no distribution or tax considerations, and does not imply future returns. The example assumes each employee has a salary of $75,000 in year one and receives a 3% merit raise each year on-going. In addition, the employee contributes 5% of her salary each year and receives a 3% of salary company matching contribution.
The Benefits of Index Funds Over Actively Managed Funds
Index funds are investments that track a specific benchmark like the S&P 500, the Russell 2000 or the total US Bond market. Index funds tend to hold expense advantages over actively managed funds as they don’t incur the costs of bigger teams to analyze, trade, and predict where the markets could be going. Index funds also tend to not have 12b-1 or other marketing or revenue sharing that can increase the cost of the fund.
Historically, few actively managed funds have been able to consistently outperform their benchmarks.
10-Year Performance of Actively Managed Funds Vs. Benchmark Indices
| Fund Category | Comparison Index | Percentage of Funds Underperforming Index* |
|---|---|---|
| Large-Cap Core | S&P 500 | 97.38% |
| Mid-Cap Core | S&P Mid-Cap 400 | 92.03% |
| Small-Cap Core | S&P Small-Cap 600 | 96.72% |
| International | S&P 700 | 77.78% |
*Source: SPIVA (Standard & Poor's Indices Versus Active Funds) U.S. Scorecard, End of Year 2019, S&P Dow Jones Indices.
When You Consider the Expense Ratios of Comparable Investments, It Becomes Evident That Costs Really Do Matter
MorningStar, U.S. Fund Fee Study, April 26, 2018 for end of year 2017. Expenses ratios from comparative assets classes from the Study to respective ShareBuilder 401k options by class: US Equities -- Vanguard Growth, Vanguard Value, iShares Core S&P Small Cap, and Schwab US Mid-Cap; International Equity – Vanguard FTSE Developed Markets and iShares Core MSCI Emerging Market; and Taxable Bond – iShares 7-10 Year Treasury, Vanguard Total Bond Market, Vanguard Short-Term Inflation Protected Security, and Schwab Short-Term US Treasury. Average expense ratio is calculated on an asset-weighted average basis. For ShareBuilder 401k this is as of March 6, 2019. Expense ratios for ShareBuilder 401k funds may be substantially less those of most mutual funds. A specific mutual fund may compare favorably to a ShareBuilder 401k investment option.
Automatic Pricing Discounts
The more your company has in total plan assets, the more you save with ShareBuilder 401k. Once your plan exceeds a pricing tier, the savings on your investment management expense automatically kicks in. This program has helped clients continually lower costs and eliminate the hassle and pain of regularly negotiating expense.
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We Can Help You Compare Plans
If you want some guidance in determining whether your plan makes the most financial sense for you and your employees, we can help by reviewing your costs and even forecasting the impact.