Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
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Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
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Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#2The entire episode in question is available online here: 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.
Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#3"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.
Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#4Which 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.
Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#5Wildly 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.
Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#6This 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.
Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#7Which 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…
How 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.
Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#8Wildly 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…
"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.
Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#9Wildly 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…
"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.
Who doesn't have the option to invest in low fee funds? That's really your employers fault.
Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)
#10Wildly 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…
"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."
Even if I have to pay 2% to the management company, I'm still coming out ahead by putting money into my 401(k) because:
1. I can't put nearly as much money into a tax-deferred account on my own (the yearly limits on IRAs are much lower than on 401(k)s).
2. My employer doesn't match a percentage of my contribution if I invest the money on my own.