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Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
- rscale 13y agoThe entire episode in question is available online here: http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/ http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/ It delves into a few issues worth understanding beyond fees, such as the difference between a typical Series 7 advisor and an RIA.
- myth_drannon 13y ago"The revelation of the two-thirds wealth transfer machinery was delivered by none other than John Bogle, the legendary founder of The Vanguard Group, a low-load mutual fund firm, ..." Of course John Bogle will try to sell his low fee index funds. With new products like ETF's and low index mutual funds very few people pay 2% fee. 0.1% to 1% is more realistic.
- dragontamer 13y agoIndeed. On the other hand, John Bogle / Vanguard does offer very good products, so it isn't that bad that he is willing to puff out his chest a bit on this issue. The important bit here is to look at the fees that you are paying with your 401k plan, and make sure they are acceptable.
- walshemj 13y agoYep in the UK my personal pension is sub 1% charge
- deleted 13y ago[deleted]
- ChuckMcM 13y agoWhich is why as soon as you get a chance you immediately transfer your 401k into a self managed IRA account, which if you did nothing but put all the money into an S&P 500 index fund you would do better than having these guys pilfer your account over time. Not a big issue for you young folks but it does add up. What is worse is that there is a lot of double dipping that goes on, for example BigBank1 manages the 401k and gets 2% per year for that, and they offer you an investment in XYZ Fund which gets its own 2% management fee on that part of it. An interesting (but impossible) structure would be 20% of the return which is to say if the overall account went up by 7% then 5.6% goes into the account and 1.4% to the manager, if the account loses value the manager is on the hook for 10% of the loss reducing the account loss. The current system is the bank always makes money every year on your account the only question is how much. Which isn't good for you.
- joe_bleau 13y agoHow do you transfer from a 401k to an IRA? I work for a very small company, so my 401k investment choices are limited and expensive. I'd love to have a cheap index fund option.
- ChuckMcM 13y agoSadly, you can only roll it over during a 'qualifying event' which is either you leave the company, the company drops the 401k, or reach the minimum age for disbursement. The most common case is people leaving the company. I've known too many people who change jobs and just leave the 401k they had in their previous job with the company that is still managing the 401k for the old company. There can be (and often are) different rules for former employees that can be (and sometimes are) much more advantageous to the bank. When I left Sun the 401k moved all of the funds into a 'guaranteed interest' fund (aka a bond fund) with a 3% management fee. It was pretty egregious.
- joe_bleau 13y agoThat's what I thought. My current strategy is to keep an eye on the total size of our account, hoping it gets big enough to add some better options, or big enough to be worth moving to a cheaper provider. I wonder what it would take to add a brokerage window (self-directed) option?
- cdjk 13y agoAll you can really do is pressure the company into picking a better 401k provider (Vanguard is a good bet). A self-directed option in a 401k isn't really possible as far as I'm aware, since you're limited to mutual funds. They don't want people "gambling" with their 401k money by betting on individual stocks. Still, given the tax advantages, you're likely to come out ahead in the long run in a 401k compared to a taxable brokerage account. Just pick the funds with the lowest fees.
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- rayiner 13y agoWildly inaccurate. What the article is doing is comparing the 40 year return at 7% to a 40 year return at 7% minus 2% management fees, and noting that your total return in the second case is about half as much as your total return in the second case. Of course all that tells you is that it's stupid to pay 2% management fees if you can get the same return with lower management fees. That's obvious. Whether you can get the same return by yourself is a separate issue. Now, in the long run, your typical investor is going to get the same return (pre-fees) with active management with 2% fees as he does with an index fund at 0.1% fees, hence he's going to come out ahead using an index fund. But at least in theory what Wall Street is selling you here is better return than what you could make on an index fund. In a way, it's the same as every other product that drives the modern economy. They're selling you an idea (in this case, that active management will yield higher returns). In reality, its the same cheap Chinese crap everyone else is selling.
- ChuckMcM 13y ago"Of course all that tells you is that it's stupid to pay 2% management fees if you can get the same return with lower management fees." It is a bit more nuanced than that, basically it's saying you don't have any control over what sort of fee structure your 401k has in place, and goes on to suggest that banks abuse that lack of control. So yes, if you can, you need to reduce your management fees.
- rayiner 13y agoWho doesn't have the option to invest in low fee funds? That's really your employers fault.
- conjecTech 13y agoThis is fundamentally wrong. The statement assumes the whole of the management fees is being reinvested at 7%, when in reality it is being used by those who have jobs in the financial sector to pay their bills. That is quite literally like taking the price you pay for anything and multiplying it by (1.07)*50 (which is ~30) and claiming that is what they are actually charging you, since you could have otherwise invested that money at 7% and had that much in 50 years. This completely ignores the time value of money. It is equating the value of money today with the value of money fully invested for 50 years. The more important lesson here is opportunity cost. If you are willing to go out and take the time to invest your money on your own, there are potentially some enormous benefits down the road, but you pay the cost in terms of time spent not working on your day job, not spending time with your kids, etc. I do a lot in rental housing, which has a fair return, but I can tell you right now, there are a lot of days I wish I just accepted whatever return I could get from someone else willing to manage my investments for me and focus on other things.
- dragontamer 13y agoSo... why not buy a Vanguard index fund, which is currently charging 0.07% for a management fee? The difference between a 2% management fee and a 0.05% management fee from Vanguard's Total Stock Market Index... or 0.09% fee from SPY ETFs (+$7/trade from your typical broker). Run the math, if you are paying 2% fees, you are getting straight up robbed. If your employer doesn't offer low-fee index funds, it would be worth your while to make sure that they get some onto your 401k portfolio.
- sootzoo 13y ago> Run the math, if you are paying 2% fees, you are getting straight up robbed. If your employer doesn't offer low-fee index funds, it would be worth your while to make sure that they get some onto your 401k portfolio. Worth my while, true, but maybe not worth theirs. More flexibility comes at a higher price from the 401k vendor, a crucial part of the scam here. Employers can offer "a 401k" as a benefit but might not view this as a tax-sheltering vehicle through profit sharing or discretionary matching--they could simply see it as yet another benefit expense. As with all employers offering benefits, some are more generous than others. Most employees don't know/care to pressure their employer to offer better investment options, or would prefer to have other benefits improved instead.
- tehwebguy 13y agoSmith: Take an account with a $100,000 balance and reduce it by 2 percent a year. At the end of 50 years, that 2 percent annual charge would subtract $63,000 from your account, a loss of 63 percent, leaving you with just a little over $36,000. Is this math right? It doesn't seem like this is how the calculation would be done.
- 3825 13y agoFor people on smartphones, here is what tehwebguy wrote: -- Smith: Take an account with a $100,000 balance and reduce it by 2 percent a year. At the end of 50 years, that 2 percent annual charge would subtract $63,000 from your account, a loss of 63 percent, leaving you with just a little over $36,000. Is this math right? It doesn't seem like this is how the calculation would be done. --
- kzrdude 13y ago0.98^50 is 36.4% yes, but it's ignoring potential growth of the invested capital
- dragontamer 13y agoYou'd also lose an additional 3% each year to inflation, so the practical worth of your money would be much much less. Most funds gain some money in the long run, but there is no guarantee that you'll net money in the long run (it has just been historically the norm). The main thing however, is that the typical fee is closer to 1.1% or so. They are grossly exaggerating what the typical investor would pay. Nonetheless, compounding returns forces you to think about these things. As I've stated in my other posts, you can get a Vanguard fund with 0.05% fees, or the typical SPY index ETF, which is currently at ~0.09%/year expense ratio. Focus on low-fee funds, and read the fine print on your 401k plans.
- jmspring 13y ago2% seems high, but you need to be careful. During bubble-1, the startup I was working ended up soliciting feedback on the option proposed by our payroll company (I believe). Most of the "management fees" on the funds were in the 1-2.5% range. I went to the morning star website and showed what poor ratings this batch of funds got as well as pointed to some fidelity/vanguard funds that were in the < 0.5% range for fees, yet in the same class. In the end, we ended up with better options. You need to pay attention to these things.
- DanielBMarkham 13y agoLittle too hysterical for me. Yes, you pay a fee to have your funds managed. No, that does not mean "you work for Wall Street", whatever the heck that's supposed to mean. This is like dropping into the middle of a demented rant. There's no disagreement on the facts here, but there's a lot of smoke and heat, and not much fire. If you don't like paying to have your funds managed, you have plenty of other options. Use one. I'm not sure this constitutes the end of civilization as we know it.
- mjn 13y agoI agree on the tone. A calmer (but still pretty negative) version of the rant has been given repeatedly for some decades now by John Bogle, who argued that surprisingly large portions of unsophisticated investors' funds were going to paying the management fees of financial products, when in many cases the managers' primary virtues lay in being good at marketing said products to said unsophisticated investors. This is one of the more recent iterations of his spiel: http://www.amazon.com/gp/product/047064396X/ref=as_li_ss_tl?ie=UTF8&camp=1789&creative=390957&creativeASIN=047064396X&linkCode=as2&tag=kmjn-20 http://www.amazon.com/gp/product/047064396X/ref=as_li_ss_tl?... This article does mention Bogle, but really just reading something by Bogle directly would be better than this piece.
- hkmurakami 13y ago>who argued that surprisingly large portions of unsophisticated investors' funds were going to paying the management fees of financial products IMHO, the situation cannot improve unless the "unsophisticated investors" are educated to have at least some semblance of investment savvy. You don't need any quant stuff at all. Even just some basic understanding of why a balanced portfolio makes sense, the power of compound returns, the impact of fees, the effect of taxes on your returns, the tax exposure nature of various securities, and a sense for what "financial products/funds" even exist in the financial universe would do.
- jaibot 13y agoAlternative: sane defaults.
- davehod 13y agoCan't rollover your 401k ? Become a "qualified investor" and manage it yourself. Buy ETF index funds and pay < 0.3% in fees
- durkie 13y agocan you elaborate on this? most of the links i'm finding for self-directed 401ks are spammy.
- timsally 13y agoThis is why checking the fees of the products you buy when you invest is so important. I'm lucky enough to have index fund options at 0.04% and bond fund options at 0.07% in my 401k. That doesn't matter if you don't use them though! I work with some pretty smart people that used to put their 401ks in target funds with fees in excess of 2.0% until I sat them down and worked out the math with them. If you want to quickly eyeball how your 401k stacks up, Brightscope (http://www.brightscope.com/ http://www.brightscope.com/) is pretty useful.
- thebear 13y agoOne aspect that people stubbornly ignore in discussions of this kind is that nobody, in particular no 401k investor, has all his or her money at the beginning of the 50 year or so investment period. People start with a small amount, then add to that over the years. So each year, the principal grows via compounding and via addition of a certain amount. I am not going to bloat this thread with more math; it's not hard to do it right, and the fact remains that by and large, Wall Street fees are outrageous. I just want to remind everybody that all performance considerations must take into account that a real-life investor's account is subject to deposits (and eventually, withdrawals as well). Ok, self-praise is no recommendation, but I think I have all this pretty much figured out: check out greaterthanzero.com .
- dmourati 13y agoOn the eve of their IPO, Google held lectures advising the soon-to-be minted millionaires how to avoid the mutual fund management fees. They brought in experts who one after the other advised low fee index funds: http://www.tradersnarrative.com/the-best-investment-advice-youll-never-get-1550.html http://www.tradersnarrative.com/the-best-investment-advice-y...
- Matt_Cutts 13y agoGoogle did a good job of educating their employees. It's amazing to me how many people are being ripped off by high fees, active management that sucks compared to passive index funds, etc.
- johnobrien321 13y agoBogle has been pushing this for 20 years. While a valid point, it is hardly a scandal nor even news. Its like someone from Expedia pushing a Frontline piece on how much you could save using their service versus a travel agent.
- herdrick 13y agoArithmetic is a "bombshell"?