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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)

#61

Post by jcdavis »

sopooneo wrote: post #50
jcdavis wrote: post #47

Earlier quoted context omitted.

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.

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?

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).

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

#62

Post by jimbobob »

wheaties wrote: post #49
DanielBMarkham wrote: post #37

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 o…

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%?

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.

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

#63

Post by msmith »

hkmurakami wrote: post #59
msmith wrote: post #56

Earlier quoted context omitted.

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.

>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.

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

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

#64

Post by EricDeb »

wheaties wrote: post #49
DanielBMarkham wrote: post #37

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 o…

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%?

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.

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

#65

Post by greedo »

wheaties wrote: post #49
DanielBMarkham wrote: post #37

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 o…

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%?

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

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.

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

#66

Post by MichaelSalib »

hkmurakami wrote: post #53
niggler wrote: post #18

Earlier quoted context omitted.

Except for those companies where you must have a 401K in order to collect a company matching contribution, in which case you are net ahead by keeping it in the 401K rather than forgoing the match

Also, even the crappiest 401k plans have a few "passively managed" index'y mutual funds with relatively low fees (in the range of 0.1%/year) that you can choose.

They usually have a some passive funds, but those still have expense rations that are 5x-10x what Vanguard costs for similar passive funds. Which is totally unacceptable.

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

#67

Post by hkmurakami »

mjn wrote: post #42
DanielBMarkham wrote: post #37

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 o…

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…

>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.

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

#68

Post by hkmurakami »

msmith wrote: post #63
hkmurakami wrote: post #59

Earlier quoted context omitted.

>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.

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

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.

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

#69

Post by refurb »

joe_bleau wrote: post #7
ChuckMcM wrote: post #4

Which 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.

Two options for those with bad 401(k) options:

1. Call and ask what funds are eligible to be rolled over in a self-directed IRA. Some funds allow you to, some don't. For some weird reason, my old employer allowed me to rollover my 401k match but I couldn't touch my own money.

2. Most 401k plans off a brokerage account option. You may have a crappy selection of funds offered, but with most brokerage accounts you can invest in most anything (stocks, ETFs, other mutual funds). However, again, it will likely be limited, my own 401k brokerage account doesn't allow me to invest in REITs. (?!?!)

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

#70

Post by msmith »

twoodfin wrote: post #57
dragontamer wrote: post #20

Earlier quoted context omitted.

So... 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 wor…

Hmm. Both Google and my fund options page at Vanguard list the Total Stock Market Index as having a 0.17% expense ratio: https://www.google.com/finance?q=MUTF:VTSMX Are we talking about different things?

He was probably talking about VTSAX. A different class of shares within the same fund, which has a $10,000 investment minimum.
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