Shopping Around

Do you like shopping around to get the best deal before you make a purchase? I certainly do. Maybe not the actual act of shopping around, but I like to feel that I received a fair price on something I purchased – particularly big ticket items.

I’ve recently learned that some spending averse individuals have even turned to extreme couponing. While I personally don’t have the time or patience to participate, I have been known to use an occasional coupon or two.

Extreme couponing basically takes regular coupon use to the nth degree. Apparently some of the best coupon clippers can get hundreds of dollars of groceries for just a few dollars or less. The amount of time, effort and ingenuity it takes to achieve this type of savings is remarkable.

The take away from this is that we, as a culture, are very interested in saving money where possible. If we weren’t, television shows about couponing would never have made it into our living rooms. But what perplexes me more than anything is why we would go out of our way to save fifty cents on ketchup while ignoring major expenses. It takes a lot of ketchup bottles to amount to meaningful savings.

One big-ticket item we all shop around for is cars. Car commercials frequently tout one dealer or another having the best prices in town or offering the most for your trade-in. Cars are usually large expenses and saving a few hundred dollars is not insignificant to us that have a finite amount of money to spend. After all, the savings can go into future car maintenance or gas, or cover other living expenses. In short, saving on purchases is the American way and a popular pastime for most of us.

With that said, most of us are guilty of not shopping around for one of the biggest purchases we are likely to ever make. No, I’m not talking about shopping for a home, and we’ve established that car shopping is in fact price competitive. I’m referring of course to your investment portfolio.

Whether as individuals, responsible only for our own savings or plan sponsors overseeing 401(k) plans for hundreds of employees, we are woefully inactive when it comes to shopping around. Investing comes with a price tag – after all those Wall Street folks don’t work for peanuts. Mutual funds and brokerage platforms have costs associated with them. It is imperative that you know the differences in costs and whether or not they are justified given the service(s) provided.

When investing, one doesn’t need to pick the least expensive options. However, knowing that there is a very significant correlation between higher costs and lower returns should be something you are aware of.

For plan sponsors and 401(k) participants, fees have been more clearly disclosed thanks to recent regulatory advancements. Sadly, they still seem to be either largely ignored or misunderstood. Investment firms (particularly expensive ones) have little incentive to be clear and concise with respect to their true costs.

A quick example:

An investor, age 40, retiring in 25 years, with a $150,000 current balance; assuming a “mere” half percent in higher fees, this participant’s balance at age 65 could be $114,000 less than with lower cost investments!

(The example above assumes a 40 year old participant, retiring in 25 years at age 65. Their current balance is $150,000, with $10,000 annual contributions made at each year end. Gross returns of 7% are assumed annually with “high” fees of 1.25% and “low” fees of 0.75% annually, as a percentage of assets. Actual fees will vary based on numerous factors. For illustrative purposes only.)

What we pay for goods and services matters. If it didn’t, shows about couponing wouldn’t exist and we wouldn’t shop around when buying a new car or house. Why then should we remain content to overpay for investment vehicles, advice and company 401(k) plans? It’s not too late to achieve savings in the investments you control – better late than never.

As for company plans that may be out of your direct influence you can still:

–        Talk to your HR person or whoever is responsible for your firm’s 401(k) plan;

–        Familiarize yourself with the fees you pay (70% of plan participants mistakenly think their plan is free);

–        Compare your plan and investment fees to comparable firms;

–        Educate yourself on what options are available to you;

–        Calculate your cost in forfeited retirement savings;

–        Ask yourself if you could do better.

In far too many cases there is room for improvement without sacrificing quality. Not taking any of these steps may result in delayed retirement and/or lost earnings. Would you rather your investments work for you or for Wall Street?

About the author: Michael Prus is the President and Founder of Scale Investment Group, LLC, a registered investment advisory firm with offices in White Lake and Grand Blanc, Michigan. Scale Investment Group is a leader in providing low-cost institutional investment services, like 401(k) and 403(b) plans, to small and mid-sized organizations and also manages money for private clients. The firm is a champion for small investors promoting low-costs and transparency of the investment advisory industry. For more information visit scaleinv.com or contact Michael directly at mprus@scaleinv.com.