But worry not — index funds are not second-tier investments. In fact, index funds routinely outperform actively managed mutual funds despite costing a lot more. Now one thing you should know is that 401(k)s generally offer a mix of actively managed mutual funds and index funds. The difference between the two is that index funds are passively managed — they don’t employ fund managers to hand-pick investments, and as such, they don’t have to pay the high salaries that such experts generally command. As such, index funds charge very low investment fees (which are called expense ratios), whereas actively managed mutual funds charge a lot more because you’re getting access to experts who are choosing your investments for you.
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