Put a Powerful Force to Work in Your Retirement Savings Program

Apr 05, 2017

achievement-18134_1280“The most powerful force in the universe is compound interest.” Some say Einstein said this. Others say he quipped ‘compound interest’ in response to a question about man’s most powerful invention. Regardless of its exact derivation, the effects of compound interest are undeniably astonishing. 

When we compare employer sponsored retirement savings plans, we can easily see this force at work in the superior benefits that group plans offer over individual retirement accounts (group versus retail). What’s more is that it’s clear even when you look at only one, and here’s that word again, powerful, factor. Fees.

Fees can cost you the equivalent of years in work. Just like a beach slowly losing its sand, fees can erode your account by sometimes hundreds of thousands of dollars. It’s even highly possible you might pay more in fees than your investment earns. Crazy? Yes, but true.

These fees are known by a dizzying array of terms and acronyms like, MERs, IMFs, deferred sales charges or back-end loads. Then there’s the ‘not-so-deferred, give us your money now front end loads.’ And the ‘somewhere-in-between trailing commissions.’ Of course, as we’ve said before in this space, there is no free lunch. So yes, group plans also charge fees but they’re lower and far less complicated.

On the other hand, individual retail plans can have  all of these fee types in various combinations, and then obscure the details and figures by burying them in the investment contract. These collective fees can range anywhere from 1% to 3% or even higher.

However, the specifics should become clearer soon with recent regulatory changes that will see all investors receive annual reports detailing the fees specifically charged on your investments and investment performance after accounting for those fees. This new, industry-wide transparency might actually highlight the superior benefit of group plans. This is because the fees on these types of plans are generally about .50% to 1.00% lower than those of retail investment accounts. You may think that doesn’t sound like much but you would be wrong.

Remember compound interest? Here’s a very basic illustration of this force at work on lowered fees: Say you inherit a $100,000 and invest it with a return of 4% for 20 years. At the end, you’ll have $219,112.31 But if you’re able to earn the equivalent of 1% higher by paying lower fees you’ll have another $46,000 (not counting inflation). It’s worth noting that no additional money is put at risk in gaining that extra $46,000. It’s just unspent money. Remember that old saw, a penny saved is a penny earned…another simple, but ‘powerful force.’

So clearly, lowering your fees by opting for a group benefit plan over an individual retail account puts extra money in the accounts of your employees. But how is it done?

It’s essentially the added value of an employer sponsored savings plan. The cash flowing into a group plan comprises each employee’s contribution and after the employer matching contribution is added, and aggregated, the result is lower fees. Overtime, the growth and cumulative effect of aggregated contributions for all employees, will result in constant downward pressure on fees. The performance gap between retail and group plans will continue to widen. This multiplicative effect of compounded interest together with reduced fees is truly spectacular when you evaluate it over a lifetime. Some may have even called it the ‘most powerful force in the universe.’

So do your employees and their spouses a favour, pick up the phone and let us show you how to save your money. Because the interest may be compound but the plan to mobilize it is simple.

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