haha
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My son has 401K administered by Fidelity. He doesn't know anything about investing, and feels that he should spend his time on his job skills, not trying to be an investor.
He chose one of their target date retirement funds- I think target 2040. This is a fund of funds. My question is about expenses in this type of fund. It appears to me that an investor in one of these pays fees at 2 levels- the level of the target date fund, and the level of each underlying investment.
I think the Target Date Fund has a ratio of about 0.67%. The underlying funds vary, but for the most part they are higher than this. To make it simple, I assumed that the fee at both levels is 0.65%, meaning that each year, at each level he has 99.35% working for him, and 0.65% working for Fidelity. But it seems to me that these piggyback on one another, so that in total he is only keeping 0.9935*0.9935 , or 98.70% each year, and Fidelity gets 1.30%. This seems to be a ridiculously high expense ratio for something that could be synthesized in one hour.
Is there anything wrong with this analysis? If I mention this to him, I have to be correct.
He can chose other funds, to avoid this layering approach, so this problem is not inescapable. He would just need to avoid funds of funds.
Any comments?
Ha
He chose one of their target date retirement funds- I think target 2040. This is a fund of funds. My question is about expenses in this type of fund. It appears to me that an investor in one of these pays fees at 2 levels- the level of the target date fund, and the level of each underlying investment.
I think the Target Date Fund has a ratio of about 0.67%. The underlying funds vary, but for the most part they are higher than this. To make it simple, I assumed that the fee at both levels is 0.65%, meaning that each year, at each level he has 99.35% working for him, and 0.65% working for Fidelity. But it seems to me that these piggyback on one another, so that in total he is only keeping 0.9935*0.9935 , or 98.70% each year, and Fidelity gets 1.30%. This seems to be a ridiculously high expense ratio for something that could be synthesized in one hour.
Is there anything wrong with this analysis? If I mention this to him, I have to be correct.
He can chose other funds, to avoid this layering approach, so this problem is not inescapable. He would just need to avoid funds of funds.
Any comments?
Ha