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       Investor's Insight - August 18, 2006           
          "A Digest of Investment Opinion From the 
             World's Leading Financial Advisers"


by Scott Burns

Which would you rather be: a government employee or a 

Yes, this is a trick question. It came to mind as I read 
a recent Investment News article announcing a new mutual 

Here's the story.

Given the choice, most people would choose to be surgeons 
because surgeons make a lot more money than government 
employees. Even better, few patients chide their surgeons 
by saying, "I'm a taxpayer ... and I pay your salary."

But government employees are better off than the rest of 
us when it comes to retirement investing. They have the 
TSP, the federal employee Thrift Savings Plan. This plan 
now offers diversified index portfolios at a cost of about 
5 basis points a year. 

Yes, you read that right -- five one-hundredths of 1 per-

This minuscule cost, as you will soon see, can mean a 
government employee may retire and have nearly $1.5 million 
more than a surgeon who saved the same amount over the same 
period of time.

That's a lot of money, even for surgeons.


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Surgeons, until recently, were on their own, ready victims. 
Because they make more money than most people, surgeons get
unrelenting attention from the investment industry sales 

Now the American College of Surgeons is offering a poss-
ible remedy, the Surgeons Diversified Investment Fund. The 
new fund will be available to U.S. citizens who are members 
of the group, their families and employees. It will also be 
available to affiliated retirement plans and physician 
practice plans.

According to the prospectus, the new fund will invest up 
to 100 percent of its assets in exchange-traded funds. The 
ETFs will be selected by its sub-adviser, Northern Trust 
Co. The fund intends to keep about 70 percent of its assets 
in a variety of domestic and foreign equity ETFs and 30 
percent in fixed-income ETFs. 

Sounds pretty interesting, doesn't it?

Too bad about the expenses. The fund will pay a hefty 1 
percent a year in management fees. Another 0.25 percent a 
year is a 12b-1 charge for distribution fees. And, finally, 
an estimated 0.67 percent a year goes for "other expenses."

That's a total, excluding ETF expenses, of 1.92 percent. 
Recognizing that this is a new fund and that the expenses 
are high, management has agreed to an expense waiver of 
0.57 percent a year. So fund expenses will not exceed 1.35 
percent a year -- plus the 0.30 percent cost of the under-
lying ETFs.

In a telephone interview, Savi Pai, chief operating officer 
of the management company, pointed out that the average 
managed fund costs 1.4 percent a year. She hoped rising 
assets would eventually reduce costs. "We hope to pro-
vide the lowest-cost trusted source vehicle that we can," 
she said.

That's a noble objective.

The problem is getting there. While the fund may serve 
the surgeons well when its costs are much lower, current 
costs are a problem. 

We can measure the size of the problem by taking an ex-
treme example. Suppose you are one of the few government 
employees who make $100,000 a year, that your income rises 
by 5 percent a year, and that you save 10 percent of your 
salary. If you invested in a similar portfolio through the 
Thrift Savings Plan, you could expect a gross return of 
about 9 percent a year before expenses, or a net return of 
8.95 percent.

Starting at age 30 and retiring at age 67, your annual 
investment would accumulate to a whopping $5,183,000, 
according to my retirement plan accumulation calculator.

A struggling young surgeon who followed an identical in-
vestment plan but did it with the Surgeons Diversified 
Investment Fund could expect a gross return of about 9 
percent a year before expenses, or a net return of 7.35 
percent a year. Following the same investment path, the 
young surgeon would accumulate $3,715,000.

He would have $1,468,000 less than the government employee.


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That's the impact of high expenses.

To be fair, the comparison is extreme -- extraordinary low 
costs are available only to government employees, not the 
general public. Were Surgeons Diversified Investment Fund 
to run at a cost of 80 basis points -- slightly more than 
the largest managed life cycle funds -- our surgeon would 
accumulate $4,423,073 over the same period. That's $759,000 
less than the government employee but a hefty $708,000 more 
than the fund with 1.65 percent in annual expenses.

Expenses count. They always count.

You can discuss this issue or any other topic in the new 
Investor's Insight forum. Check it out here...

Investor's Insight Forum

(Investor's Insight reflects the opinions of experts. It does 
not recommend any specific investments, and no endorsement is 
implied or should be inferred. For more information, contact 
the individual firms cited).



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