First post. Thanks to this site (FeeX as well) and the Bogleheads book for opening my eyes to the cost of my investments. Last year I started with a new employer and while trying to figure out what to do with my old 401k I found FeeX and subsequently Bogleheads. I went on my own with Vanguard and got rid of my cringe worthy expenses with the confidence gained from reading you people and also restructured the accounts we have with our new CFP to get them out of expensive and/or load funds and greatly reduced the expenses in those accounts as well. These sites and that book should be required reading for everyone.
I have two questions:
1a. Is there any mechanism anywhere to see the actual transaction in your fund (any fund) that pays out the expenses charged by the fund? I asked my CFP and he suggested the 408(b)(2) from my plan administrator and the form 5500. I have not been able to get the 408(b)(2) yet, but from what I understand this shows what the administrator charges on top of the fund expenses. Sure, I want that too, but that is not what I am looking for. I have been on the web to try and find the 5500, but when I enter my company, I get zero results.
From what I gather the expense ratio and management expenses are backward looking, so they are technically not accurate for predictive costs for even this year, which may be pointless anyway, I don't know. What I find incredible is that I cannot check the transaction I am asking about. They publish the backward looking information and your fund and your statement shows the ups and downs of the market pricing and the purchases of each share lot are clearly accounted for on each statement or on their sites, but the negative effects of the expenses are magically deducted?
1b. Am I wrong? Is the info there?
1c. When I walk into a store and buy a $9 widget with $10, I walk out with my new $9 widget and $1. This is an unimaginably large industry, and I don't think I trust them very far given what I now know about expenses and the magic of the transaction described above and if, as an industry, you fight to not tell me you have fiduciary responsibility to me for my money, well... it doesn't make me trust you. I have thousands of dollars exit my account yearly with no reported transaction? Am I nuts for letting this drive me nuts?
2. When I started my research, I was looking to replicate an aggregated allocation risk from several sources and it ended up not following the tenet in the Boglehead investment book of being simple (e.g. NOT a 4 fund mix.) I am buy and hold, not trying to time the market, and well diversified in index funds (ETFs and MFs.) Probably stupid question: If you are well diversified within more specialized low fee funds and you are not timing the market, you are well diversified - in other words, the chief benefit of being simple is the time it takes to maintain the system, correct? As long as I am maintaining the allocation with re-balancing, I should be as good as the 4 fund guy, right?
Thanks again, for the education.
Transaction Receipts for Expenses / Too Complicated?
Re: Transaction Receipts for Expenses / Too Complicated?
1c Yes, you are nuts to worry about it
2. There are many roads to Dublin. It is certainly possible that a complicated low cost portfolio could outperform a simple three fund portfolio. Or not, no one knows what will outperform in the future. Merrimans buy and hold for example (10 equity funds, then you need to add bonds.
http://paulmerriman.com/ultimate-buy-ho ... gy-2016-3/
This thread discuses a simplified version.
viewtopic.php?t=38374
2. There are many roads to Dublin. It is certainly possible that a complicated low cost portfolio could outperform a simple three fund portfolio. Or not, no one knows what will outperform in the future. Merrimans buy and hold for example (10 equity funds, then you need to add bonds.
http://paulmerriman.com/ultimate-buy-ho ... gy-2016-3/
This thread discuses a simplified version.
viewtopic.php?t=38374
Re: Transaction Receipts for Expenses / Too Complicated?
I would suggest you start by reading the annual report for a fund like VTSAX to get a better understanding of the different costs that the mutual fund company has to run the fund.
Re: Transaction Receipts for Expenses / Too Complicated?
Thanks. I read it again. It definitely accounts for the expenses for the fund as a whole. It does not show the mechanism for how the money exits your account. My original question to my CFP is what exactly do they do when they reduce your account balance? Is the price modified (reduced)? The number of shares are not reduced by the expense, so it is not the sale of shares. What actually happens?Nate79 wrote:I would suggest you start by reading the annual report for a fund like VTSAX to get a better understanding of the different costs that the mutual fund company has to run the fund.
I am not questioning the accuracy of the accounting, although I will be poking around to see the accuracy too. I am not questioning that there are expenses. There are costs to doing business, and I have to pay them if I want to play. Now I have a better understanding and voice my opinion to the CFP that he chose too expensive a fund or I won't buy the more expensive fund myself, so as insignificant as I am I am voting with my wallet. I have to account for every penny I spend at work with a piece of paper against it, so doing a math problem to see the effect of cost, I find annoying. Maybe my question is why is the transaction not reported on your account?
I will readily admit I was unaware of what my funds cost me prior to my job change out of ignorance. I am done kicking myself for that - paying attention. And telling people I know to check their stuff. I believe that I would have had a better understanding of the cost if the transaction was recorded on my statement. The fact is there is a cost, and my account is reduced by a specific amount. No where do I see when at a specific time(s? - I assume charged at end of fiscal year?) this occurs or how (I really did read the annual report for a second time, forgive me if I missed it.) If they can show me on my statement that I bought this many shares for this amount with my paycheck, I bought this many shares for this amount with my employer's match, and two days later a dividend reinvested buying this many shares for that dividend amount, why cannot they show me the reduction in my account statement? Is this too simplistic? I am not an accountant - is there some reason it has to be reported as a backward looking ratio based on last years actual expenses? For potential investors, sure - this is what the fund costs. But why is the reduction not a record event on my statement and only shown on the funds bottom line in the annual report?
If the discussions are true about the cost of funds being a very large part (if not the largest part) of a funds performance, why are the costs reported via a math problem rather than a transaction. Seems to me that most people I have talked to since I started questioning my own finances, don't know what their funds are actually costing them. Is this not a real reason people do not understand the cost?
If this doesn't bother anyone else, maybe I am nuts.
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Re: Transaction Receipts for Expenses / Too Complicated?
This is just a guess. The funds are constantly buying and selling stocks in order to accurately reflect the market share of the stocks. They are going to have an amount of cash that they also use to pay the fund expenses. You will not see the expenses deducted out of your account, they come out of the Net Asset Value of the fund and then reported in the annual report. Since it is not a lot, you will hardly notice it from day to day.
Since you are buying shares of the fund - not the stocks that the fund holds - you are never going to see expenses on your account statement.
Since you are buying shares of the fund - not the stocks that the fund holds - you are never going to see expenses on your account statement.
Re: Transaction Receipts for Expenses / Too Complicated?
Cranzel, congratulations on discovering the tyranny of fees and how to manage a low cost, sensible portfolio!
Often when we move from ignorance to awareness on important topics we tend to want to know everything – full transparency and full knowledge of the nuances and details previously ignored. This can be enlightening with bountiful rewards or it can lead to obsession without commensurate benefits.
I have a few thoughts regarding your questions & comments.
1) You know the Net Expense Ratio so you can reasonably estimate your cost for the operational expenses of running your mutual funds. You also know the turnover ratio (there are estimates of the cost associated with this somewhere in this forum) and can read the summary annual report of additional information (not sure of exact name of report) to peek into the additional expenses of your mutual funds. This is good enough.
2) The industry does not have an obligation to calculate your exact costs for you. According to regulators, the cost to the industry to do this would be too high and the benefit to the consumer would be too low to require this. The expenses of running the fund are not accounted for at the individual level the expenses are at the fund level. Thus the fund level NAV is adjusted for the accrual of expenses. You know how much you invested, your interest & dividends, your number of shares and the NAV – you have all the information you need.
3) There are many examples of non-fiduciary transactions that have significant impact on ones wealth accumulation. For example, none of the following have a fiduciary duty to me: car dealer, realtor, mortgage broker, credit card carrier, HVAC repairman/salesman, mutual fund shop.
You’ve made great improvement in your knowledge and portfolio, again congratulations!
Often when we move from ignorance to awareness on important topics we tend to want to know everything – full transparency and full knowledge of the nuances and details previously ignored. This can be enlightening with bountiful rewards or it can lead to obsession without commensurate benefits.
I have a few thoughts regarding your questions & comments.
1) You know the Net Expense Ratio so you can reasonably estimate your cost for the operational expenses of running your mutual funds. You also know the turnover ratio (there are estimates of the cost associated with this somewhere in this forum) and can read the summary annual report of additional information (not sure of exact name of report) to peek into the additional expenses of your mutual funds. This is good enough.
2) The industry does not have an obligation to calculate your exact costs for you. According to regulators, the cost to the industry to do this would be too high and the benefit to the consumer would be too low to require this. The expenses of running the fund are not accounted for at the individual level the expenses are at the fund level. Thus the fund level NAV is adjusted for the accrual of expenses. You know how much you invested, your interest & dividends, your number of shares and the NAV – you have all the information you need.
3) There are many examples of non-fiduciary transactions that have significant impact on ones wealth accumulation. For example, none of the following have a fiduciary duty to me: car dealer, realtor, mortgage broker, credit card carrier, HVAC repairman/salesman, mutual fund shop.
You’ve made great improvement in your knowledge and portfolio, again congratulations!
Re: Transaction Receipts for Expenses / Too Complicated?
cranzel wrote:Thanks. I read it again. It definitely accounts for the expenses for the fund as a whole. It does not show the mechanism for how the money exits your account. My original question to my CFP is what exactly do they do when they reduce your account balance? Is the price modified (reduced)? The number of shares are not reduced by the expense, so it is not the sale of shares. What actually happens?Nate79 wrote:I would suggest you start by reading the annual report for a fund like VTSAX to get a better understanding of the different costs that the mutual fund company has to run the fund.
I am not questioning the accuracy of the accounting, although I will be poking around to see the accuracy too. I am not questioning that there are expenses. There are costs to doing business, and I have to pay them if I want to play. Now I have a better understanding and voice my opinion to the CFP that he chose too expensive a fund or I won't buy the more expensive fund myself, so as insignificant as I am I am voting with my wallet. I have to account for every penny I spend at work with a piece of paper against it, so doing a math problem to see the effect of cost, I find annoying. Maybe my question is why is the transaction not reported on your account?
I will readily admit I was unaware of what my funds cost me prior to my job change out of ignorance. I am done kicking myself for that - paying attention. And telling people I know to check their stuff. I believe that I would have had a better understanding of the cost if the transaction was recorded on my statement. The fact is there is a cost, and my account is reduced by a specific amount. No where do I see when at a specific time(s? - I assume charged at end of fiscal year?) this occurs or how (I really did read the annual report for a second time, forgive me if I missed it.) If they can show me on my statement that I bought this many shares for this amount with my paycheck, I bought this many shares for this amount with my employer's match, and two days later a dividend reinvested buying this many shares for that dividend amount, why cannot they show me the reduction in my account statement? Is this too simplistic? I am not an accountant - is there some reason it has to be reported as a backward looking ratio based on last years actual expenses? For potential investors, sure - this is what the fund costs. But why is the reduction not a record event on my statement and only shown on the funds bottom line in the annual report?
If the discussions are true about the cost of funds being a very large part (if not the largest part) of a funds performance, why are the costs reported via a math problem rather than a transaction. Seems to me that most people I have talked to since I started questioning my own finances, don't know what their funds are actually costing them. Is this not a real reason people do not understand the cost?
If this doesn't bother anyone else, maybe I am nuts.
I think you do not understand expense ratios and how these costs are paid by the mutual fund company.
The expense ratio is not a fee that you are paying. It is not coming out of your account. The expense ratio is the costs the mutual fund company is incurring on a regular, daily basis to run the fund. They have to pay their employees, marketing, etc. To pay these costs they don't send all shareholders a bill. These expenses are paid out of the fund on a regular basis and is accounted for in the share price/NAV. However, the funds are also making some money off of share lending, so it is not all just expenses.
In the end with an index fund you can see how closely the fund tracks the index which is truly the cost that you are incurring. Whether the fund is paying their manager a big bonus or whether they are incompetent and can't track their index properly I don't really care. All I care about is the performance - how well they track the index. A good low cost index fund will track the index very closely with the difference being the expense ratio. I pay the expense ratio by the fund performing slightly worse than the pure index.
Re: Transaction Receipts for Expenses / Too Complicated?
I had a really long rant typed. Several actually, but I realize that no one responding to me or reading me on this site needs to be ranted at. If any tone or venom exists in this it is not aimed at anyone who is taking the time to volunteer a response to my ignorance, so any irritation felt is not intended.
My quest for the "receipt" and understanding has some background. For all of my working life I am a paycheck to paycheck investor and required to be in my 401k in order to have any hope of retiring not on my daughters' dimes. Prior to about a year ago, I was clueless as to what the expense ratio actually meant to me. This is of course because I did not do enough due diligence and again, I take full responsibility. However, being a paycheck to paycheck saver I have never been in anything else but a 401k. I could not afford to be anywhere else. Not one time in the 23 years I was putting money away did anyone advising me ever indicate that the expense ratios in my 401k(s) are expensive relative to other possible investments (index funds, for example.) So for me, looking at an average ER in my 401k of 1.42 meant nothing to me, I never multiplied the balance against the number to see what it meant. All of my other 401ks at prior employers were also expensive and so is the present iteration so any alarm bells from one to the next were not present. The wake up was when the website told me I was spending $3,500 a year in expenses against a contribution of $5,800. I never did the math representing the outflow, and because the expense is not shown anywhere as a deduction and because the graph of my investment mimicked the stock market (relatively, it was diversified) - in other words, it just went up over time. This is one reason, I believe, I did not realize both the amount of cost per year and the deleterious effects. What I really want is to understand:
1. How the expenses are paid/reported - a "receipt." If this takes a 400 level finance class and as complicated as indicated in the responses with share loans, expenses paid in real time, etc. understanding it is probably punching above my weight. That said, I would like to know how these things are reported (what report, if the annual, please confirm and I will do my best to figure out how to read it better.) And, what is this 5500 form mentioned by my CFP?
2. Who watches the store? What regulatory body watches these "receipts" that I am looking for.
3. Because the 401k is the only vehicle that makes fiscal sense for me to be in, I want to understand why:
a. Some of the shares offered in my 401k are load funds, rather than institutional shares of the same fund.
b. Why the funds offered in my plan are expensive.
c. Why the funds offered in my plan are limited.
4. Fidelity indicated that they do not charge me anything as the entity that holds my 401k. So what I take from this is that they do not charge money for their NetBenefits website (security, RandD, maintenance)? This doesn't pass the smell test to me. They probably charge the plan administrator, who then charges me, or they charge the funds to allow them to be listed with them?
The responses I got here were informative, but also seemed to indicate I should embrace the mystery. I am in low cost index funds where I can be in them. Knowing what I know now, I would have rolled prior 401ks into IRAs rather than my new employer plan, but that is spilt milk. Specific to my responses:
I also take exception to 'Whether the fund is paying their manager a big bonus or whether they are incompetent... all I care about is performance.' As I stated, I am in my 401k out of necessity. I would not be able to replicate the tax advantages of a 401k elsewhere. I would not come out ahead. Someone is getting my money. It is either the tax man, the mutual fund guy, Vanguard or my CFP. I frankly don't care which as long as I end up with the most of mine at the end. If I am only allowed to be in a limited number of expensive funds in my 401k, I certainly care about incompetence, or the bonus-a-plenty and costs-whatever-they-be funds that are potentially my only choices and this is why I want to understand it. Why are my funds in the 401k expensive, limited? Is it onerous reporting requirements of the 401k? Are not these the same transactions that occur in every investment vehicle there is? I still think that if the expense was shown as a dollar figure leaving your account, people like me would be clued in to the actual effect, and change their habits.
My quest for the "receipt" and understanding has some background. For all of my working life I am a paycheck to paycheck investor and required to be in my 401k in order to have any hope of retiring not on my daughters' dimes. Prior to about a year ago, I was clueless as to what the expense ratio actually meant to me. This is of course because I did not do enough due diligence and again, I take full responsibility. However, being a paycheck to paycheck saver I have never been in anything else but a 401k. I could not afford to be anywhere else. Not one time in the 23 years I was putting money away did anyone advising me ever indicate that the expense ratios in my 401k(s) are expensive relative to other possible investments (index funds, for example.) So for me, looking at an average ER in my 401k of 1.42 meant nothing to me, I never multiplied the balance against the number to see what it meant. All of my other 401ks at prior employers were also expensive and so is the present iteration so any alarm bells from one to the next were not present. The wake up was when the website told me I was spending $3,500 a year in expenses against a contribution of $5,800. I never did the math representing the outflow, and because the expense is not shown anywhere as a deduction and because the graph of my investment mimicked the stock market (relatively, it was diversified) - in other words, it just went up over time. This is one reason, I believe, I did not realize both the amount of cost per year and the deleterious effects. What I really want is to understand:
1. How the expenses are paid/reported - a "receipt." If this takes a 400 level finance class and as complicated as indicated in the responses with share loans, expenses paid in real time, etc. understanding it is probably punching above my weight. That said, I would like to know how these things are reported (what report, if the annual, please confirm and I will do my best to figure out how to read it better.) And, what is this 5500 form mentioned by my CFP?
2. Who watches the store? What regulatory body watches these "receipts" that I am looking for.
3. Because the 401k is the only vehicle that makes fiscal sense for me to be in, I want to understand why:
a. Some of the shares offered in my 401k are load funds, rather than institutional shares of the same fund.
b. Why the funds offered in my plan are expensive.
c. Why the funds offered in my plan are limited.
4. Fidelity indicated that they do not charge me anything as the entity that holds my 401k. So what I take from this is that they do not charge money for their NetBenefits website (security, RandD, maintenance)? This doesn't pass the smell test to me. They probably charge the plan administrator, who then charges me, or they charge the funds to allow them to be listed with them?
The responses I got here were informative, but also seemed to indicate I should embrace the mystery. I am in low cost index funds where I can be in them. Knowing what I know now, I would have rolled prior 401ks into IRAs rather than my new employer plan, but that is spilt milk. Specific to my responses:
This is interesting to me and I never thought of it until I read it right here... I am a little, I don't know, scared, disappointed, disgusted? I never would have put the mutual fund guy (or CFP) on this list. No offense intended to any car dealers or contractors, I am in fact employed by as a contractor myself, but one of my favorite jokes is - contractor is four letter word. They are not exactly professions lauded as most trustworthy. The fiduciary responsibility for these guys is to take me for all that they can. And the guy watching my money is on the list with them? Ugh.SoonerD wrote:3) There are many examples of non-fiduciary transactions that have significant impact on ones wealth accumulation. For example, none of the following have a fiduciary duty to me: car dealer, realtor, mortgage broker, credit card carrier, HVAC repairman/salesman, mutual fund shop.
Clearly... I can assure you, I am not alone.Nate79 wrote:I think you do not understand expense ratios and how these costs are paid by the mutual fund company.
I understand this, but it is not my "receipt". It would not hold for a non-index fund, would it?Nate79 wrote:In the end with an index fund you can see how closely the fund tracks the index which is truly the cost that you are incurring. Whether the fund is paying their manager a big bonus or whether they are incompetent and can't track their index properly I don't really care. All I care about is the performance - how well they track the index. A good low cost index fund will track the index very closely with the difference being the expense ratio. I pay the expense ratio by the fund performing slightly worse than the pure index.
I also take exception to 'Whether the fund is paying their manager a big bonus or whether they are incompetent... all I care about is performance.' As I stated, I am in my 401k out of necessity. I would not be able to replicate the tax advantages of a 401k elsewhere. I would not come out ahead. Someone is getting my money. It is either the tax man, the mutual fund guy, Vanguard or my CFP. I frankly don't care which as long as I end up with the most of mine at the end. If I am only allowed to be in a limited number of expensive funds in my 401k, I certainly care about incompetence, or the bonus-a-plenty and costs-whatever-they-be funds that are potentially my only choices and this is why I want to understand it. Why are my funds in the 401k expensive, limited? Is it onerous reporting requirements of the 401k? Are not these the same transactions that occur in every investment vehicle there is? I still think that if the expense was shown as a dollar figure leaving your account, people like me would be clued in to the actual effect, and change their habits.
Re: Transaction Receipts for Expenses / Too Complicated?
Expenses for mutual funds are accrued (charged) against the net asset value (NAV) daily. It makes no difference whether they are index funds or not, both types work the same way. Since the expenses for low-cost funds run less than a cent per day, you will not be able to see this clearly in the larger fluctuations in market value. Basically you have to assume that the auditors and the SEC (as the regulator) are ensuring that the fund is doing this accurately. Of course, for index funds, you can observe the tracking error (if somehow the fund was charging more, then it would underperform the index, especially over longer periods).
You will see, if you read annual reports or prospectuses (at least for Vanguard funds) that expense ratios are projected for the upcoming fiscal year, but Vanguard is generally pretty good with its estimate.
You will see, if you read annual reports or prospectuses (at least for Vanguard funds) that expense ratios are projected for the upcoming fiscal year, but Vanguard is generally pretty good with its estimate.