Of 401ks, fund fees, and cheap bicycles

It is hard to read story from legendary sales guru Zig Ziglar and not break out in a smile. His homespun wisdom and folksy way of telling his stories endeared him to his audience. One of my favorite stories focuses on Zig trying to buy a bicycle for his son.

When Zig’s son was six years old, he visited a bicycle shop to buy him a bike. After finding out that the price was more than he was willing to spend, he ventured to the local discount store, where he found a bike almost half the price, and felt great about it. His son was only six, so this cheaper one would be fine.

Fast forward a few. months and the?handlebars needed a replacement. Then a few months later it was the entire sprocket apparatus, including the brakes. Another few months or so the bearings in the front wheel gave up, and so on and so on…

Eventually, Zig admitted defeat and bought the more expensive bicycle that his son rode for about 10 years without any repairs needed.

Zig’s message was to understand the difference between price and cost. The price of the second bicycle was considerably more than the discount bicycle. Yet the cost of the discount bicycle became significantly higher as time went on. In fact, when Zig worked out what he paid per month and year, he paid more per month?on the cheaper bike than he did per year?on the expensive bike.

The bicycle story came to mind as I read about Vanguard's move to lower its mutual fund investment fees. Effective Feb. 1, Vanguard is reducing expense ratios on 87 funds and 168 share classes. Vanguard states that the move will save investors about $350 million in fees in 2025.

While 48 of the funds in question are institutional share classes (ie, available to wealthy individuals and institutions), certain equity and bond funds found in some defined contribution (DC) plan menus will also have lower fees. All things being equal, lower fees can improve performance.

But much like Zig said, it is important to look at price versus cost. Just because an investment may have low fees does not make it "right" for you. Does the fund fit into your portfolio? Does it match your risk comfort level? How does it reflect your time horizon for this portfolio?

Going beyond the obvious financial numbers, you might also look at an investment in terms of potential climate risk. What is the mutual fund in question investing in? Are those holdings exposed to climate change risk? In light of the recent hurricanes and fires across the US, these factors could weigh into your decision.

The Department of Labor (DOL) has never asked for a 401k to have the lowest fee funds. The DOL does not ask that the 401k have the best performing funds. What the DOL does ask of plan sponsors and advisors is that the investments be selected by a defendable and repeatable process. The investments must be chosen in keeping with the fiduciary Duty of Loyalty and by following the Prudent Person rule.

Cost is one thing. Price is another. Do your research to find what could work for you.