Which would you rather be: a government employee or a surgeon?

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

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 one percent.

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.

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 force.

Now the American College of Surgeons is offering a possible 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 underlying 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 provide 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 extreme 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 investment 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.

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.

On the web:

Prospectus for Surgeons Diversified Investment Fund

Website for the Thrift Savings Plan

Practical ETF Investing: The Online Calculator ---------------------------------------------------------------------------------------------------------------------------

Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.