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Low-Cost, Low-Fee Investing Could Be Really Bad for Retirees

By Alex Padalka January 18, 2018

Prices for investment management have plunged in the past four decades but non-fee costs could undermine price savings for retirement savers in the long run, according to a recent report from United Income.

Retail investment management fees fell more than 50% over the past 35 years, the authors write. Nonetheless, the benefits of lower-priced products often erode as a result of non-fee costs such as higher taxes, lower investment returns and reduced money from public benefits such as Social Security and Medicare, according to the report, which analyzed 62 retirement solutions currently available and pitted them against 26,000 possible combinations of potential market returns.

While 75% of the analyzed retirement solutions have low relative prices, around 96% of them don’t attempt to minimize some or all of the non-fee costs, the authors write.

Reductions in such non-fee costs equate to seven times more savings in retirement than a 1% reduction in investment management fees, the report claims. These gains in wealth are achieved by maximizing tax savings through better use of the tax code, a better equity premium achieved through more accurate client risk management, and better planning for a variety of future outcomes, such as health spending increases that are likely to occur during retirement, according to the report.

And retirement solutions with lower non-fee costs are 42% more likely to result in enough money for the typical retiree compared to products that merely have a low relative price, the authors write.

These gains are achieved thanks to better use of public policies, such as Social Security benefits and lower taxes, better investment returns due to more accurate risk management, and other strategies to cut down on inaccuracies, according to the report. A typical retiree can amass 124% more savings for retirement when using strategies minimizing non-fee costs compared to those that only have a low relative price, the authors claim.