Timothy B. Lee -- Writer with Ars Technica and the Cato Institute
Farhad Manjoo gives Slate readers advice on "how to stop investing your money like an idiot." He lucidly explains the principles of good investing, but then says that "for people who have extra money but not a lot of time or facility with investing, there has never been a simple way to invest in the rigorous, disciplined way that experts advise." Manjoo is far from the first writer to make this claim (and I'm kind of a broken record on the subject), but this isn't true. Vanguard has had funds that do exactly that since 2003, and they're significantly cheaper than the options Manjoo discusses in his article.
Manjoo reviews three options, and the one option Manjoo ultimately recommends, called Betterment, is pretty good. You tell Betterment how you want to allocate your money between relatively risky assets (like stocks) and relatively safe ones (like Treasury bonds). Betterment then automatically buys a mix of assets that fit your criteria and automatically adjusts them over time.
It's a great service, with one major weakness: the cost. Betterment itself charges between 0.15 percent and 0.35 percent of your money to help you decide which funds to buy, and the underlying funds Betterment buys, called ETFs, cost another 0.19 percent, on average. For example, if you invest $50,000 with Betterment, the annual costs will be around 0.44 percent, or about $220. That's pretty good. Many mutual funds have "expense ratios" around 1 percent, so you can save hundreds of dollars each year in fees--and end up with thousands of dollars more at retirement--by transferring your money from a higher-cost fund to Betterment.
But you can get an even better deal from Vanguard, long considered the lead in low-priced mutual funds. For example, my wife has her IRA invested in Vanguard's Target Retirement 2045 fund, which as the name suggests is for people planning to retire around 2045. Like Betterment, this fund buys a mix of stocks and bonds, automatically keeps its portfolio balanced, and gradually shifts to more conservative assets as you get closer to retirement. But for our hypothetical customer with $50,000 to invest, this fund costs less than half what Betterment does--0.19 percent, or about $95 per year. The $125 you save each year by switching from Betterment to Vanguard will really add up over the course of your career.
Vanguard has two big advantages that allow it to keep its costs much lower than its competitors. First, while most mutual funds are run by commercial firms that expect to earn a profit, Vanguard is owned by its customers. That means there are no conflict of interest between customers and shareholders--customers get every dime of Vanguard's "profits." Second, Vanguard's vast size--$1.8 trillion under management--allows them to take advantage of economies of scale.
I talked to Betterment CEO Jon Stein about how his service compares to Vanguard, and he didn't dispute that Vanguard has him beat on cost. But he argued that Betterment offers more sophisticated tools for fine-tuning your asset allocation. For example, saving for college or a new house might require a different asset allocation than saving for retirement. Vanguard may not offer a fund that meets the needs of these savers. Betterment also offers advanced portfolio customization features for users with more than $100,000 invested.
Stein also touted Betterment's for-profit structure as an advantage, noting that the most innovative companies in America tend to be for-profit firms, not cooperatives like Vanguard. But when it comes to retirement savings, it's not obvious that more innovation is better. After all, innovation typically costs money, and one way or another any money your mutual fund company spends is going to come out of your pocket.
So for the average consumer, smart retirement investing really is as simple as going here and clicking on the link corresponding to your expected retirement date. Betterment's fees are lower than most other mutual fund companies, so it's worth giving them a look if you need their "power user" features. But for most investors Betterment's premium features are overkill; you're better investing in Vanguard's more frugal funds and pocketing the difference.
And for the record, my only conflict of interest is that I'm a satisfied Vanguard customer.
