Slide 1: Title Slide - Understanding Investment Fees and Their Impact

Content: Understanding Investment Fees and Their Impact. Don't Let Fees Eat Your Returns!

Today, we're diving into a topic that might not sound as exciting as 'compounding' or 'asset allocation,' but trust me, it's just as crucial for your long-term wealth. We're going to talk about something called 'investment fees' and how they can have a huge impact on your money over time.

Slide 2: Recap: Investing for Growth

Content: Investing helps your money grow and outpace inflation. Your asset allocation sets your strategy. But growth isn't free!

Just to quickly recap from our previous lessons: we know that investing is essential. It's how your money works for you, growing over time and staying ahead of inflation. We also talked about asset allocation, which is essentially your game plan for how you spread your investments across different types of assets, like stocks and bonds. That strategy sets the stage for your growth.

But here's the thing: that growth isn't entirely free. There are some costs involved in the investing world.

Slide 3: Investment Fees: The Costs of Investing

Content: There are costs associated with managing investments and accounts. These fees are deducted from your returns. Even small fees add up over time!

So, what exactly are these costs? We call them investment fees. These are charges that come with managing your investments and your investment accounts. These fees are deducted directly from your investment returns. That means they reduce the actual money you get to keep. Now, they might seem small at first, just a tiny percentage, but as we'll see, even those small fees can really add up, especially over the many years you'll be saving for retirement.

Slide 4: Most Common Fee: The Expense Ratio (for Funds)

Content: An annual fee charged as a percentage of the money invested in a mutual fund or ETF. Covers fund management, administration, etc. Example: A 0.50% expense ratio means you pay $5 per year for every $1,000 invested.

The most common fee you'll encounter, especially if you're investing in mutual funds or ETFs – which are very popular for retirement savings – is called the expense ratio. Think of this as the annual operating cost of the fund. It's charged as a small percentage of the total money you have invested in that particular fund. This percentage covers all the behind-the-scenes work: the fund management, administrative costs, legal fees, and so on.

Let's look at an example: If a fund has an expense ratio of 0.50%, that means for every $1,000 you have invested in that fund, you're paying $5 per year in fees. Five dollars might not sound like much, right? But remember, this is an annual fee, and it's a percentage of your total investment, which hopefully will be growing a lot over time!

Slide 5: Other Potential Fees

Content: Trading Costs/Commissions (when buying/selling individual stocks/ETFs, less common now). Account Maintenance Fees (less common with major brokerages). Advisor Fees (if you hire a financial advisor).

While the expense ratio is usually the big one to watch out for, there are a few other potential fees you might come across.

·         Trading Costs or Commissions: In the past, you'd often pay a fee every time you bought or sold individual stocks or ETFs. The good news is, many major brokerages now offer commission-free trading for stocks and ETFs.

·         Account Maintenance Fees: Some brokerages might charge a small fee just to maintain your account, especially if it falls below a certain balance. However, with larger, modern brokerages, these are also becoming less common, or they are waived if you meet certain criteria. Signing up for e-delivery may also reduce fees.

·         Advisor Fees: If you choose to hire a financial advisor to manage your investments for you, they will charge a fee for their services. This is usually a percentage of the assets they manage for you, or sometimes a flat fee. This can be a valuable service, but it's another layer of fees to be aware of.

For our purposes in this lesson, the expense ratio is where we will focus most of your attention.

Slide 6: The Long-Term Impact of Fees

Content: Chart comparing the growth of a starting amount + regular contributions over 30- years with different expense ratios (e.g., 0.1%, 0.5%, 1.0%)]. Show the significant difference in the final account balance.

Alright, this is the slide where we really see why these seemingly small fees matter. This table illustrates the power of compounding, but in reverse. It shows how much money you could have at retirement, starting with the same initial investment and making the same regular contributions, but with different levels of fees.

(Point to the chart, walking through the lines)

Look at the difference. Let's imagine three individuals, investing for 30 years. CLICK

One chose an investment with a low 0.1% expense ratio, another chose one with a 0.5% expense ratio, and a third picked one with a 1.0% expense ratio. That 1% fee, over three decades, could potentially cost someone hundreds of thousands of dollars in lost growth compared to a 0.1% fee. That money isn't just gone; it's money that never had the chance to compound and grow for you. It drives home that fees are not just a small annoyance; they are a major factor in your financial future.

Slide 7: Fees Directly Reduce Your Returns

Content: If a fund earns 8% before fees and has a 0.5% expense ratio, your net return is 7.5%. That difference compounds over time!

Imagine your investment fund performs really well and earns a gross return of 8% in a year. That's fantastic! But if that fund has a 0.5% expense ratio, that 0.5% is subtracted before you see your return. So, your actual, net return for that year is 7.5%.

Now, 0.5% might not seem like a lot in one year, but that difference compounds. Next year, you're earning 7.5% on a slightly smaller amount, and the year after that, and so on. Over decades, this seemingly tiny annual subtraction turns into a massive sum of lost wealth. It's like a small leak in a boat – over a long journey, even a small leak can sink it.

The chart on the slide is a visualization of the table in the previous slide.

Slide 8: Finding Fee Information

Content: Look for the fund's "prospectus" or "summary prospectus" (online). Check the "fact sheet" for Mutual Funds/ETFs. Review your brokerage account's fee schedule. Check your employer's retirement plan documents or website.

So, how do you find out what fees you're paying, or would be paying, for your investments? It's easier than you might think once you know where to look.

·         Fund Prospectus or Summary Prospectus: Every mutual fund and ETF has a legal document called a prospectus. You can always find this online on the fund company's website. Often, there's a more digestible 'summary prospectus' too.

·         Fact Sheet: Many fund companies also provide a shorter, simpler 'fact sheet' or 'overview' for their funds. This is often easier to read and will clearly state the expense ratio.

·         Employer Retirement Plan Documents/Website: If you're investing through a 401(k) or similar plan at work, your plan administrator (like Fidelity, Vanguard, or Empower) will have documents or a website where you can find the specific fees for the investment options offered in your plan.

·         Website: there are many websites that post Funds/ETFs information. These sites list the fees and other important information. Such sites as Google finance, Morning Star, Yahoo finance, etc.).

Important NOTE: when viewing mutual fund performance percentages, the gains typically include the expense ratio. The expense ratio is deducted from the fund's returns before performance is calculated and reported.

Don't be afraid to dig for this information! It's your money, and you have a right to know what you're paying.

Slide 9: What's a "Low" Expense Ratio? 

Content: For broad-market index funds, often below 0.20% is considered low. For target-date funds, perhaps slightly higher but still competitive.

So, when you're doing your research, what's considered 'low'?

For broad-market index funds, like those tracking the S&P 500 or the total U.S. stock market, an expense ratio below 0.20% is generally considered good. Some funds even go as low as 0.03% or 0.04%!

For target-date funds, which automatically adjust your asset allocation as you get closer to retirement, the fees might be slightly higher because they're essentially a 'fund of funds' and offer convenience. But even then, you'll still want them to be competitive, perhaps in the 0.20% to 0.40% range for good options. Just know what you're paying and compare it to similar options."

Slide 10: Actively managed funds and index funds

There are two popular types of investment funds:

Actively managed funds referred to as active investing
and
Index funds often referred to as passive investing.

Slide 11 Actively managed funds

Actively managed funds often employ highly paid professional investors (fund managers) whose full-time job is to decide the 'best' stocks to buy and sell. Their goal is to beat the market. They aim for their fund to perform better than a relevant market benchmark, such as the S&P 500, that aligns with the fund's investment strategy. Fund managers conduct research, analyze company financials, and make predictions about the economy.

Slide 12  - Index funds

Index funds are designed to track an index rather than having a manager constantly buying and selling specific stocks. Because of this, they typically have lower expense ratios compared to actively managed funds, which pay a team of people to try and beat the market. Think of it like buying a pre-made "basket" of the entire grocery store's most popular items. Less effort, less cost!

Slide 13 The Long Run - Why Index Funds Often Win

Fees, especially expense ratios, significantly impact your long-term wealth due to compounding. Understand the fees you're paying and choose low-cost options when available. While active funds sound appealing, index funds offer a powerful, low-cost, and historically effective way to participate in the stock market's long-term growth. Studies shows that over periods of 10, 15, or 20 years, a significant majority (often 80-90%+) of actively managed funds fail to outperform their benchmark index funds after fees.

Slide 14: Wrap-up 

To wrap it all up: The core message is that fees, especially expense ratios, are a HUGE deal for your long-term wealth because of the magic of compounding. That same compounding force that makes your money grow also makes fees erode your money powerfully.

Whenever possible, choose low-cost investment options. This simple act can add thousands of dollars to your retirement nest egg over your lifetime. It's truly one of the easiest "wins" in investing. However, some employer retirement plans have limited options. Therefore, it is important to understand the expense ratios available in your plan.

Slide 15: Action Step for This Week

Content: Find the expense ratios for the investment options available in your retirement account(s). Compare them and understand what you are paying.

So, for your action step this week, I want you to empower yourselves. Go find the expense ratios for the investment options available in your own retirement accounts – whether that's a 401(k) through work, or an IRA you've set up. Look up those numbers, compare them, and really understand what you're paying. You'll likely be surprised by how much difference even a small percentage point can make.

You're taking charge of your financial future, and understanding fees is a massive step in that direction.