5 ms·

Little 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 suppos

Little 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 14y ago
I 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 14y 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 14y ago
    Alternative: sane defaults.
    - hkmurakami 14y ago
      I have zero faith in that ever happening so I'd rather preach an attainable alternative
jcdavis 14y ago
The problem is with 401(k)s is that most plans don't have that many options, and its common for all of them to be expensive (compared to what you can get elsewhere). And not putting your money in 401(k)s is even worse due to the extra taxes.
- sopooneo 14y ago
  I am very ignorant here. Do you know if putting your 401K money into passively managed index funds typically results in higher fees than if you invested in similar accounts outside your 401K? That is, can you escape having extra fees inside your 401K?
  - hkmurakami 14y ago
    I saw a few (2?) passively managed index tracking funds in my former employer's 401k plan. IIRC their fees were something like 0.15%/year, which is higher than the <0.1%/year fee of the large index tracking funds with market caps greater than $40BB, but still reasonable compared to the actively managed funds that are offered.
  - jcdavis 14y ago
    Most funds available in your 401k could also be bought in a taxable account with the same fees, but it almost never makes sense to do so because there are so much superior alternatives (ie pretty much anything from Vanguard).
  - idunno246 14y ago
    Yes. Most 401k plans pass on additional management fees on top of the fund's fees. In my current plan, a passive sp500 index would cost 1.6%, 0.6% for the funds expense ratio, and 1% to the plan administrator. Outside the 401k you'd pay 0.6% for the same fund. The vanguard plan that matches a similar index costs 0.17%(admiral is 0.05% with 10k balance) Unless you work at a large company. At one, I had access to the vanguard institutional funds, which were even cheaper than the admiral
wheaties 14y ago
Exactly. ETFs, Index Funds, etc. Besides, how did they get 2/3 anyways? If I make 7% and 2% goes to someone else, I'm still left with 5%. 5% > 2%. So how does that 2% translate into 66.7%?
- jimbobob 14y ago
  The 2% compounds over time. There is a far greater opportunity cost to losing 2% of earnings in year 1, as that amount reinvested at 7% over a 20 or 30-year period is quite significant.
- EricDeb 14y ago
  I'm going to take a quick stab and say it might be due to the compounding gains lost by forfeiting 2% year over year. To elaborate, when you lose 2% of 7% the very first year you invest, that 2% could have compounded over your entire working career.
- greedo 14y ago
  If you follow the link to the financial calculator mentioned in the article, it's pretty simple. http://www.math.com/students/calculators/source/compound.htm http://www.math.com/students/calculators/source/compound.htm For example, if you invest $100 for 50 years at 7%, at the end of the 50 years you have $3278.04. If you invest into a fund that nominally returns 7%, but charges a 2% fee, your net increase is 5%. If you invest $100 for 50 years at 7%, at the end of the 50 years you have $1211.93. 1211.94/3278.04 = 36.97% Not quite 1/3rd, but close enough for government work. So for the average person who blindly shotguns their 401K selections without considering expense ratios, there are many fund managers living in the Hamptons.
msmith 14y ago
I've watched the Frontline piece that this article is based on. It's not quite as hysterical, but it does make the case that the high-cost actively managed funds offered by most 401k plans underperform low-cost index funds, which are not available in many 401k plans. So, you're stuck paying the high fees or losing out on the tax-advantages of the 401k.
- hkmurakami 14y ago
  >high-cost actively managed funds offered by most 401k plans underperform low-cost index funds The keywords are "offered by most 401k plans". Within the universe of funds out there, it was utterly shocking to me how bad the funds offered in your typical 401k plan were. I honestly think they just stick random kids 3 years out of college to run them.
  - msmith 14y ago
    I occasionally read about people's 401K options on the Bogleheads forum [1]. You're right, many of them are shockingly bad. Startups and small companies are especially likely to have poor options. The solution is for employees to become better educated and demand better plans. This Frontline program does a pretty good job of getting the message out. [1] http://www.bogleheads.org/forum/viewforum.php?f=1 http://www.bogleheads.org/forum/viewforum.php?f=1
    - hkmurakami 14y ago
      I'm starting to see a striking similarity between the financial products industry and the social gaming industry. Both sectors (at least traditionally) have a large fraction of their business derived from unsophisticated, unaware customers, whether it be 401k users or social gaming "whales". "Business" in general seems to be bimodal in making money from (a) providing value to sophisticated players, or (b) gouging the unsophisticated players (long tailing it) with a shitty product.
      - rayiner 14y ago

mjn 14y ago

I 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 14y 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 14y ago
  Alternative: sane defaults.
  - hkmurakami 14y ago
    I have zero faith in that ever happening so I'd rather preach an attainable alternative

jcdavis 14y ago

The problem is with 401(k)s is that most plans don't have that many options, and its common for all of them to be expensive (compared to what you can get elsewhere). And not putting your money in 401(k)s is even worse due to the extra taxes.

sopooneo 14y ago
I am very ignorant here. Do you know if putting your 401K money into passively managed index funds typically results in higher fees than if you invested in similar accounts outside your 401K? That is, can you escape having extra fees inside your 401K?
- hkmurakami 14y ago
  I saw a few (2?) passively managed index tracking funds in my former employer's 401k plan. IIRC their fees were something like 0.15%/year, which is higher than the <0.1%/year fee of the large index tracking funds with market caps greater than $40BB, but still reasonable compared to the actively managed funds that are offered.
- jcdavis 14y ago
  Most funds available in your 401k could also be bought in a taxable account with the same fees, but it almost never makes sense to do so because there are so much superior alternatives (ie pretty much anything from Vanguard).
- idunno246 14y ago
  Yes. Most 401k plans pass on additional management fees on top of the fund's fees. In my current plan, a passive sp500 index would cost 1.6%, 0.6% for the funds expense ratio, and 1% to the plan administrator. Outside the 401k you'd pay 0.6% for the same fund. The vanguard plan that matches a similar index costs 0.17%(admiral is 0.05% with 10k balance) Unless you work at a large company. At one, I had access to the vanguard institutional funds, which were even cheaper than the admiral

wheaties 14y ago

Exactly. ETFs, Index Funds, etc. Besides, how did they get 2/3 anyways? If I make 7% and 2% goes to someone else, I'm still left with 5%. 5% > 2%. So how does that 2% translate into 66.7%?

jimbobob 14y ago
The 2% compounds over time. There is a far greater opportunity cost to losing 2% of earnings in year 1, as that amount reinvested at 7% over a 20 or 30-year period is quite significant.
EricDeb 14y ago
I'm going to take a quick stab and say it might be due to the compounding gains lost by forfeiting 2% year over year. To elaborate, when you lose 2% of 7% the very first year you invest, that 2% could have compounded over your entire working career.
greedo 14y ago
If you follow the link to the financial calculator mentioned in the article, it's pretty simple. http://www.math.com/students/calculators/source/compound.htm http://www.math.com/students/calculators/source/compound.htm For example, if you invest $100 for 50 years at 7%, at the end of the 50 years you have $3278.04. If you invest into a fund that nominally returns 7%, but charges a 2% fee, your net increase is 5%. If you invest $100 for 50 years at 7%, at the end of the 50 years you have $1211.93. 1211.94/3278.04 = 36.97% Not quite 1/3rd, but close enough for government work. So for the average person who blindly shotguns their 401K selections without considering expense ratios, there are many fund managers living in the Hamptons.

msmith 14y ago

I've watched the Frontline piece that this article is based on. It's not quite as hysterical, but it does make the case that the high-cost actively managed funds offered by most 401k plans underperform low-cost index funds, which are not available in many 401k plans. So, you're stuck paying the high fees or losing out on the tax-advantages of the 401k.

hkmurakami 14y ago
>high-cost actively managed funds offered by most 401k plans underperform low-cost index funds The keywords are "offered by most 401k plans". Within the universe of funds out there, it was utterly shocking to me how bad the funds offered in your typical 401k plan were. I honestly think they just stick random kids 3 years out of college to run them.
- msmith 14y ago
  I occasionally read about people's 401K options on the Bogleheads forum [1]. You're right, many of them are shockingly bad. Startups and small companies are especially likely to have poor options. The solution is for employees to become better educated and demand better plans. This Frontline program does a pretty good job of getting the message out. [1] http://www.bogleheads.org/forum/viewforum.php?f=1 http://www.bogleheads.org/forum/viewforum.php?f=1
  - hkmurakami 14y ago
    I'm starting to see a striking similarity between the financial products industry and the social gaming industry. Both sectors (at least traditionally) have a large fraction of their business derived from unsophisticated, unaware customers, whether it be 401k users or social gaming "whales". "Business" in general seems to be bimodal in making money from (a) providing value to sophisticated players, or (b) gouging the unsophisticated players (long tailing it) with a shitty product.
    - rayiner 14y ago