While perusing the usual periodicals, I came across aninteresting article. It was fairly decent. It was in a well-knownpublication. Normally I’d give you the citation, but, if you readthis missive to the end, you’ll think the author might thank me fornot calling his name.

The story ends with this sentence: “Expenses, contributions andperformance all contribute to long-term returns. And all else beingequal, low fees get you to retirement quicker.”

I shook my head in a double-take and re-read the closing. Icouldn’t believe it. The statement had all the logic bearing of amind-numbed partisan proclamation.

Take a close look at the structure of this supposed syllogism.The author states three components influence long-term returns. OK,I can understand that. But then there’s the “all else being equal”qualifier leading to the conclusion that changing only one – fees –will lead to better long-term returns. This is the same tiredargument made every day by lazy commentators. I can forgive asingle miscalculation, but I must indict the multitude.

Quite simply, this represents more than a lack of rhetoricalskill, it’s really bad math.

Let’s break this down in mathematical terms. It’s quite clear,of course, all things being equal changing any one of the threecontributors more favorably will get you to retirement quicker. Whydoes it have to be just fees? Why can’t we focus instead onperformance?

“Because past performance cannot guarantee future results” Ihear the masses cry. True. But irrelevant. Logic requires one tosee how, keeping fees and contributions the same, betterperformance must lead to better long-term returns.

Hmm, wait a minute here. Aren’t “long-term returns” just anotherway of saying “performance” anyway?

Whoops. It we want to rid ourselves of this circular logic, wemust say “expenses, contributions and performance all contribute to‘getting you to retirement quicker.’” Then it makes sense to say“all things being equal, better performance will get you toretirement quicker.” There. We can all agree on that.

Now let’s try keeping performance and fees equal but increasecontributions. Certainly it goes without saying this will get youto retirement quicker. I don’t see how anyone can disagree withthat. In fact, most sober practitioners will tell you this is themost critical and underappreciated fact in the entire 401kuniverse.

Which leads us to our third mathematical combination. If we keepcontributions and performance the same will lower fees really getyou to retirement quicker? This depends on what the meaning of“fees” is. As we’ve said before, some fees matter and some fees don’t matter. If, like the usual suspects, youclassify a fund’s expense ratio as “fees” then, guess what? You mayfind yourself in a losing battle against Mr. Spock.

Why? Because those “fees” are already incorporated inperformance. Look at it this way. If performance is equal – one ofour necessary assumptions – than, whatever the fees are, theperformance is the same. In this definition of fees, it doesn’treally matter if they’re high or low because your demarcatedprecondition requires the performance to remain the same despitethe fund’s expense ratio.