
Wall Street Is Gobbling Up Two-Thirds of Your 401(k) - house9-2
http://wallstreetonparade.com/2013/04/pbs-drops-another-bombshell-wall-street-is-gobbling-up-two-thirds-of-your-401k/
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ChuckMcM
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 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
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.

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ChuckMcM
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) 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.

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joe_bleau
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?

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cdjk
All 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.

~~~
djb_hackernews
Self directed options in 401ks are definitely available and if your 401k plan
doesn't offer it you should be raising a stink with hr. I'm coming to the
conclusion that if your plan doesn't offer it then your company either got
screwed by the salesman or are incompetent.

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DanielBMarkham
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.

~~~
wheaties
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%?

~~~
greedo
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.

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jmspring
2% 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.

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timsally
This 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/>) is pretty useful.

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dmourati
On 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-y...](http://www.tradersnarrative.com/the-best-investment-advice-youll-
never-get-1550.html)

~~~
Matt_Cutts
Google 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.

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rayiner
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 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.

~~~
aliston
"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.

~~~
ams6110
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.

~~~
Matt_Cutts
Vanguard does an excellent job of reminding their investors to stay the
course, invest for the long haul, and not try to time the market.

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myth_drannon
"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
Indeed. 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.

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conjecTech
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 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
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 worth your
while to make sure that they get some onto your 401k portfolio.

~~~
twoodfin
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?

~~~
dragontamer
Yeah, I was talking about VTSAX. VTSMX is a newer product that Vanguard
offers. It has a $3000 minimum balance... but a higher expense ratio. If you
can afford the $10,000 initial deposit, you should always go VTSAX over VTSMX.

~~~
twoodfin
Is VTSAX ever available as an option in a 401k plan?

~~~
dragontamer
Its not on my plan either :-p So don't feel bad about it. My plan is closer to
a 0.19% expense ratio.

I hear of people in other jobs who do in fact have VTSAX in their 401k plan,
but its obviously on a case-by-case basis, and highly depends on your
employer's choices.

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davehod
Can't rollover your 401k ? Become a "qualified investor" and manage it
yourself. Buy ETF index funds and pay < 0.3% in fees

~~~
durkie
can you elaborate on this? most of the links i'm finding for self-directed
401ks are spammy.

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tehwebguy

      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.

~~~
3825
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.

\--

~~~
tehwebguy
Thanks, I shouldn't have used the double space!

~~~
3825
You're more than welcome. One of the few good habits I picked up from using
reddit on my phone.

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thebear
One 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 .

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johnobrien321
Bogle 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.

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herdrick
Arithmetic is a "bombshell"?

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rscale
The 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.

