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Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

wallstreetonparade.com

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Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#21

Post by rayiner »

chubot wrote: post #19
rayiner wrote: post #5

Wildly 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…

Now, in the long run, your typical investor is going to get the same return with active management with 2% fees as he does with an index fund at 0.1% fees. How? Are you claiming that active management actually works? You might be able to beat an index fund with active management, but you also might lose big. It's an illusion. Without foresight, you're just as likely to have chosen Warren Buffet as Bernie Madoff to ma…

Corrected. I meant you'll get the same return before paying management fees.

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#22

Post by SapphireSun »

rayiner wrote: post #5

Wildly 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…

So I ran this program:

p = 100000 w = 0 for i in range(50): p = p * 1.07 w = w * 1.07 w = w + (p * 0.02) p = 0.98 * p

print "Year: " + str(i+1) print "\t You: {:.2f}".format(p) print "\tWall St.: {:.2f}".format(w)

And what is remarkable is that around year 35, wall street starts making more money than you do even though you're the one putting the money into it (assuming wall street is earning the same interest you are. If you account for (reasonable) salaries and overhead, It changes the numbers quite a bit.)

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#23

Post by 3825 »

tehwebguy wrote: post #16

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.

For 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.

--

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#24

Post by joe_bleau »

ChuckMcM wrote: post #11
joe_bleau wrote: post #7

Earlier quoted context omitted.

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.

Sadly, 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)…

That'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?

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#25

Post by sootzoo »

rayiner wrote: post #5

Wildly 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…

> But at least in theory what Wall Street is selling you here is better return than what you could make on an index fund.

Often, 401k's offer few, if any, index funds and at drastically higher fees, even if the fees are lower than actively-managed funds.

To take a personal example, I have retirement accounts with Vanguard (Roth IRA), T. Rowe Price (solo 401k) and, through my employer, with MassMutual. All offer an S&P 500 index fund, but Vanguard's fee is 5 basis points (.05%), TRP's is 30 basis points, and MM's is 90(!). Why am I paying almost 20 times as much in fees through my employer?

Sure, you could put this back on my employer and say, "well, they should offer you a 401k with better options/lower fees/with a better vendor," and though I'd agree, it's not as though I have any say in the matter, which is the point that Bogle and Frontline are making.

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#26

Post by kzrdude »

tehwebguy wrote: post #16

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.

0.98^50 is 36.4% yes, but it's ignoring potential growth of the invested capital

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#27

Post by ams6110 »

aliston wrote: post #13
rayiner wrote: post #5

Wildly 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…

"in the long run, your typical investor is going to get the same return with active management with 2% fees as he does with an index fund at 0.1% fees." This point is extremely contentious. Particularly in the long run, there is a lot of data to show that actively managed funds do not beat market indexes. With fees, they come out considerably behind.

True, but one thing a financial advisor can do is counsel you through market volatility. Absent this, many unskilled investors will fall into a "buy high, sell low" pattern and end up FAR worse off.

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#28

Post by rayiner »

SapphireSun wrote: post #22
rayiner wrote: post #5

Wildly 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…

So I ran this program: p = 100000 w = 0 for i in range(50): p = p * 1.07 w = w * 1.07 w = w + (p * 0.02) p = 0.98 * p print "Year: " + str(i+1) print "\t You: {:.2f}".format(p) print "\tWall St.: {:.2f}".format(w) And what is remarkable is that around year 35, wall street starts making more money than you do even though you're the one putting the money into it (assuming wall street is earning the same interest you ar…

This is assuming you can get the same return, pre-fees, as Wall Street can. This is generally true, but what they're selling you is the idea that this isn't true.

Which is my point. It's not some evil Wall Street thing, it's like every other sector of the economy. Ralph Lauren sells jeans made in the same Chinese sweatshop as Levis, but you pay a premium for the illusion that it's different.

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#29

Post by dragontamer »

tehwebguy wrote: post #16

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.

You'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.

Re: Wall Street Is Gobbling Up Two-Thirds of Your 401(k)

#30

Post by unclebucknasty »

conjecTech wrote: post #6

This 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 invest…

The salient point is that if there were no fees, then all of that money would be yours.

Whether Wall Street and/or its employees actually use the cash to "pay their bills" or invest over that same period to fully realize their portion of the return is irrelevant.

For that matter, Wall Street could (and probably would) invest that money elsewhere and may gain an even higher return. But, again, that's not the point. The point is that it's not in your pocket.

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