Why Switching 401K Investments From Mutual Funds To ETF’s Makes Sense

By: Pete
Date posted: 04.07.2012 (3:34 am) | Write a Comment  (0 Comments)

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Increasingly, companies are encouraging their employees to hold ETF investments instead of the more traditional mutual funds. Why? In the end, the much lower fees make up a very large difference, especially over very long periods of time.  I was reading yesterday about the fact that Apple (AAPL) is one company that has now made the switch to ETF’s for its employees 401K’s in an attempt to save them 1% per year or so. Wondering how much of a difference 1% can end up making? Let’s consider the case of an employee that has $1000 per month saved, making a 7% return. One of them has mutual funds that charge on average 1.25% per year while the ETF employee pays an average fee of 0.20%. Take a look at the differences over 5, 10, 20 and even more years. For simplicity’s sake, the investment is made at the end of the year, as one $12,000 investment.

ETF Investor

YearStartFees (0.20%/year)ReturnInvestmentTotal
0$-$-$-$12,000.00$12,000.00
1$12,000.00$24.00$840.00$12,000.00$24,816.00
2$24,816.00$49.63$1,737.12$12,000.00$38,503.49
3$38,503.49$77.01$2,695.24$12,000.00$53,121.73
4$53,121.73$106.24$3,718.52$12,000.00$68,734.00
5$68,734.00$137.47$4,811.38$12,000.00$85,407.91
10$164,239.40$328.48$11,496.76$12,000.00$187,407.67
20$481,334.74$962.67$33,693.43$12,000.00$526,065.50
30$1,093,547.52$2,187.10$76,548.33$12,000.00$1,179,908.75
40$2,275,540.56$4,551.08$159,287.84$12,000.00$2,442,277.32

Mutual Fund Investor

YearStartFees (1.25%/year)ReturnInvestmentTotal
0$-$-$- $12,000.00 $12,000.00
1 $12,000.00 $150.00$840.00 $12,000.00 $24,690.00
2 $24,690.00 $308.63 $1,728.30 $12,000.00 $38,109.68
3 $38,109.68 $476.37 $2,667.68 $12,000.00 $52,300.98
4 $52,300.98 $653.76 $3,661.07 $12,000.00 $67,308.29
5 $67,308.29 $841.35 $4,711.58 $12,000.00 $83,178.51
10 $156,324.77 $1,954.06 $10,942.73 $12,000.00 $177,313.44
20 $429,745.57 $5,371.82 $30,082.19 $12,000.00 $466,455.94
30 $907,973.92 $11,349.67 $63,558.17 $12,000.00 $972,182.42
40 $1,744,422.17 $21,805.28 $122,109.55 $12,000.00 $1,856,726.45

And the chart that says it all….

I keep saying how big of a difference a 1% reduction in fees can make. This chart tells it all. You can diminish the numbers, change them, etc. The point is that over time, those fees do compound and end up making a huge difference.  It is not always warranted but I would say that for most people, investing in long term, passive ETF’s is a great and very simple way to do it.

Who Isn’t Switching?

My big question here would be who is not making this move and why not? I would love to hear the reasons. Simply being lazy? Having good “relationships” with those selling the mutual funds? What else?


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