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Subject:  Re: Roth vs. 403B Date:  5/23/2002  3:46 AM
Author:  brwhiz Number:  34590 of 88063

Be sure to check expenses. Many 403(b) providers are expensive, so compare the expenses of your 403(b) (both "investment advisory fees" and "M&E expenses" if they are annuity products, or "expense ratios" if they are mutual funds). TIAA-CREF and Vanguard are well-known for low expenses (the Vanguard Total Stock Market Fund and Vanguard 500 Fund have a lower expense ratio than TIAA-CREF, but TIAA-CREF Equity Index is great if you don't have Vanguard).

Be careful with the term "expense ratio". What is actually germane are transaction fees and management expenses taken by the offering company or load fees (commissions) taken by the fund. What most people seem to miss is that money represented by the expense ratio is subtracted out of gross proceeds BEFORE computing a fund's yield. A fund which has a long term yield of 12% and an expense ratio of 3% is definitely a better bet than one with a yield of 11% and an expense ratio of 0.5%. The first has an actual yield 1% greater than the second; the expense ratio has no direct effect.

Expense ratio has an indirect effect, however. It does represent money that is taken out of the gross proceeds in order to pay for all the management which takes care of the fund, leaving less to split up amoungst the holders of the fund shares. But a company having a high expense ratio may be spending this money efficiently on research or other factors which are creating greater gross proceeds for the fund. There are some statistical studies that show a MODERATE correlation between expense ratios and fund yield over long periods of time, but it is definitely not the rule that you will ALWAYS do better in a fund with a lower expense ratio. One classic example is Schroder Ultra Inv (SMCFX) which has an expense ratio of 3.0% but a 3 year CAGR of 100%. Yes, it has doubled in value EVERY year for the past 3 years, with no appreciable hiccups anywhere on its growth curve. I'd pay 15% in commissions and wouldn't care if the expense ratio were 10% if I could get hold of a fund that performed like that!!! (Unfortunately this fund is now closed to new investors).

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