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Wall Street Is Gobbling Up Two-Thirds of Your 401(k) (wallstreetonparade.com)
83 points by house9-2 on Apr 28, 2013 | hide | past | web | favorite | 103 comments



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.


>as you get a chance you immediately transfer your 401k into a self managed IRA account

Another reason to do this is that you can buy "anything" in your IRA account, including stock market ETFs, leveraged bond fund ETFs (which can be a nice diversification option since you don't pay the full income tax on the dividends that you otherwise would need to outside of a 401(k)/IRA), anything that your brokerage account has access to.

On the other hand, your typical 401(k) plan only has access to crappy financial products and shitty fund managers. My former employer offered a bare bones 401(k) plan with no employer match. I went through and looked at all ~20 of the funds available. There were 2 passively managed index funds, 17 active managers who had underperformed the market net fees, and 1 who had done decently well, maybe matched the Russell 2000 after fees (it was a mid cap fund). I looked further and found, exactly to my expectations, that every single one of the 17 bad funds were run by inexperienced, most likely young, managers. The one fund that did decently had two guys who had been running it for over a decade.

Not all money managers are bad. Some do actually provide some legitimate values, even after fees. But (a) most of the ones available to you in a 401(k) plan suck really really badly, and (b) even the good ones will break you with fees.

It is probably not that well known, but "The wealthy" combat (b) by negotiating fees that are significantly lower than the starting fee by saying, "I am bringing $N million to your account. What fee can you offer me? I am shopping you vs other banks."


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.


I wish. My crappy 401k plan has exactly one (1) passively managed index fund (S&P 500), but the fee is still 0.5%. Every other option is 1%+ (except some treasury bond funds, but who wants that at the moment). I'm seriously considering quitting my current job just so that I can roll over the money that's trapped there.


Which you should do, then every penny over that you want to invest in retirement goes into your personally managed IRA.


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) 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.


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?


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.


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.


Some 401k programs do allow for "in-service" rollovers which would allow you to move the funds to an IRA before you leave your job. Those that allow this aren't all that common, but it is worth checking into.


There's no such thing as a 'qualifying event' for a rollover. See for yourself: 'http://www.irs.gov/taxtopics/tc413.html

Don't confuse the "plan documents" (aka the terms of service written by the bankers with their hands in your pocket) with the IRS regs. Some plans do allow in-service rollovers, and to be sure, you should make a request in writing.

When rolling over money, have the money sent directly to the other retirement account. If the check comes to you first, then the payer has to withhold 20%, which you won't get back until after you file your taxes and prove the funds were in fact rolled over. And, of course, you would need to 'front' that 20% in order to get the whole amount rolled!


>There's no such thing as a 'qualifying event' for a rollover.

Publication 560 defines when distributions from 401(k) plans can be taken (page 18): http://www.irs.gov/pub/irs-pdf/p560.pdf

A rollover is nothing but a distribution and re-deposit into a qualifying account.


Having done this four times, in each case the people managing the 401k sent me the check made out to my IRA's bank, with the notation FBO me, aka "For The Benefit Of" and each case my bank cashes the check and transfers the proceeds into my IRA.


You can roll over a 401(k) into an IRA only after you leave your current employer. The company where you open your IRA account should be able to provide you with the proper forms.


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. (?!?!)


Well, I thought the point was that even an S&P-500 fund will suck some money away from you through fees. I wonder at which point it makes most sense to dump the fund and do just SPDR ETFs instead.


ETFs charge fees too - Vanguard's Admiral Total Stock Market Fund charges a 0.05% fee, which is going to be smaller or comparable than almost any ETF (their comparable ETF also has a 0.05% fee), and certainly far lower than the index funds available in most 401(k) plans


>I wonder at which point it makes most sense to dump the fund and do just SPDR ETFs instead.

At any given point in time, an ETF will have the lowest fees compared to other options (mutual fund, professional money management fund, etc). There is no "breaking point" in which it makes sense to switch. If given your parameters, investment objectives and desired sector exposure tell you that an ETF and another option are possible, then at least from a "fee" perspective, it always makes sense to go with the ETF.


Yeah... I've been following a sector-balanced mutual fund approach (10-12 funds from different sectors), rebalancing quarterly. Upon checking my funds (Fidelity funds, fidelity member), while no-load, they seem to each be around 1% in total in fees. There are enough ETFs that I bet I could probably swap them all out for ETFs that are in the same sectors and maybe make an extra percent a year.


spdr has etfs for all sectors. xlk, xle, xlf, spy, etc.


ETFs are different, not strictly better. Given an ETF and mutual fund with the same expense ratio, the choice is simply a matter of preference.

An ETF allows you to buy/sell at any time throughout the day, while a mutual fund lets you buy fractional shares, and make atomic transfers to other funds. ETFs have a bid/ask spread, while mutual funds trade at the day's closing price.

If you do frequent trading, then ETFs are the obvious choice (but frequent trading is generally a good way to lose money.)


It may depend on the funds, but for both the fidelity and vanguard index funds, there are no transaction fees to buy (at least in an IRA in their respective accounts). If I were to make the same periodic investments via ETF, then I'd be paying a commission on each purchase.


the wells Fargo PMA account gives you 85 trades/yr for free (min acct balance of $35k) so that is enough trades for most people


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.


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?...

This article does mention Bogle, but really just reading something by Bogle directly would be better than this piece.


>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.


Alternative: sane defaults.


I have zero faith in that ever happening so I'd rather preach an attainable alternative


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?


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.


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).


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


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


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.


> "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.

This is much of the consumer products/services industry these days. See, e.g., Applebee's.


What does the sophisticated Applebee's customer buy?


I'm not sure what is left these days. The casual family dining places have all redone their menus for the worse. Longhorns used to have shaved Parmesan on their salads, but last time I went, it was Parmesan powder from a bottle! Applebee's went downhill majorly since the early 2000's as well after their menu redesign.


They order from Applebee's secret menu, which is centered around obscure cuts of locally raised meats that are prepared slowly using sous-vide and finished with pan-searing.


True facts: all Chipotle pork is cooked sous vide, and (last I checked) in Chicago.


The wife and I love Chipotle. I had no idea they cooked the pork and barbacoa in Chicago.


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.


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.


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.


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.


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.


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...


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.


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.


"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.


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.


> 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.


If you can't pick a winning stock portfolio, what makes you think you can pick a winning stock manager? (And vice-versa)

Actively management mutual funds are pure snake oil. Anyone with a whiff of the ability to generate alpha goes to the hedge funds, where you get the pleasure of paying 2 and 20 for it. Even there, there are no guarantees (though SAC with it's all insider trading, all the time, comes close.)


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.)


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.


I get your point but paying more for financial services is very different than paying more for a retail product.

If you pay more, you can buy jeans made in the USA from both Ralph Lauren and Levi. The fabric may be from a Cone Denim factory in China instead of the White Oak Cone Denim factory in the US, but my impression of the denim mills is that it's far from your stereotypical sweatshop.

Further, there are brands that are entirely made in the US from mill to assembly, from the affordable brands like Gusset to high end like Raleigh Denim.


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 manage your money :)


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


Okay, since we're not linking to any studies backing up our statements, I decided to look at the historical performance of the funds offered by my company. There are currently 40 funds available. The best performing index fund is returning around 11%, with a 0.15% expense ratio. This 11% return is beating 37 of the 40 funds. When you factor in expense ratios, it's beating all of the competing 39 funds, many by a wide, wide margin.

Now obviously, this is a small sample. There are many funds out there that might be doing better. And yes, my timeframe is short; evaluating returns on a single year (especially a bull year like 2013) is foolish. But so is making generalizations about fund performance.

And here are some links to support the notion that relying on actively managed funds is counterproductive:

http://money.usnews.com/money/personal-finance/mutual-funds/...

http://business.time.com/2012/02/24/index-funds-win-again-th...

http://us.spindices.com/resource-center/thought-leadership/s...


I'm not disagreeing with you. I'm saying that for the typical investor, the actively managed funds don't outperform the indices above the line, so they lose substantially after you take out management fees.


And these days, .1% is even a bit high for an index fund. I think Vanguard recently lowered total stock fund to .05%


"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.


agree 100%, and that mitigates 'dip 2' as it were, but few rank and file employees get to tell the bank managing the company's 401K which funds to use, they also don't get to negotiate the fees that the managing bank is charging either.


Any recommendations for who my employer should be using that would allow us to invest in low fee funds? We're really small, so most people have told me we just don't have the leverage to negotiate a better plan.


The company I worked use to use ADP's 401k, which wasn't very good. We've switched to The Hartford, which is decent, but I've only heard good things about Vanguard.


There are options for small employers. I think SIMPLE is one of them, but that's off the top of my head.


"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.


"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.


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.


Yep in the UK my personal pension is sub 1% charge


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.


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.


> 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.

Worth my while, true, but maybe not worth theirs. More flexibility comes at a higher price from the 401k vendor, a crucial part of the scam here. Employers can offer "a 401k" as a benefit but might not view this as a tax-sheltering vehicle through profit sharing or discretionary matching--they could simply see it as yet another benefit expense. As with all employers offering benefits, some are more generous than others. Most employees don't know/care to pressure their employer to offer better investment options, or would prefer to have other benefits improved instead.


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.


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.


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


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.


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.


Yes, we would all be richer if everything was free, financial services included. If Vanguard can provide cheaper options, so be it, but in that case, they shouldn't need fallacious claims feeding on the public's current hatred of the financial industry to sell them.


I'm not sure who's arguing it should be free. Straw man?

In any event, there's nothing fallacious about pointing out the impact of those absurdly high fees on retirement savings over time. The money doesn't just evaporate from savings. It is specifically lost to those fees.

It's actually your argument regarding how the money might be used by Wall Street, etc., that is fallacious. It's a red herring.

And, of course they should feed on the public's hatred of the financial industry. People don't hate the financial industry because it consists of evil gnomes who steal their peanut butter while they sleep. They hate the industry because it attempts to financially rape them at every turn. So, that hatred is relevant here.

Good old free market competition.

>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.

If you think it's worth it to pay these fees, then so be it, but no need to use fallacious arguments to veil their impact.


>If you think it's worth it to pay these fees, then so be it, but no need to use fallacious arguments to veil their impact.

You've yet to really address any of my original statements. I never claimed that paying someone a percentage of your returns as a management fee means you receive less. I fundamentally disagreed with Vanguard insinuating that Wall Street received the equivalent of 2/3s of your potential portfolio value, which indeed is not the case. I don't know what fallacious arguments you are talking about.


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


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


  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.


future = principal * (1 + interest) ^ periods

So some basic math to show how much a 2% yearly fee costs you:

  In[2]:= 100000 * (1 + 0.07)^50
  
  Out[2]= 2.9457*10^6
  
  In[3]:= 100000 * (1 + 0.05) ^50
  
  Out[3]= 1.14674*10^6
  
  In[4]:= Out[2] - Out[3]
  
  Out[4]= 1.79896*10^6
  
  In[5]:= Out[4] / Out[2]
  
  Out[5]= 0.610707
So you lose 61.07% of your 401k balance to these yearly fees reducing your effective interest rate.

The 100k example isn't accurate, it's just trying to give people a sense of how much they'd be losing..

However - this article doesn't really do the full benefit calculation of company matching, effective interest rates of other types of accounts, etc.


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.

--


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


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


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.


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


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 .


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.


Arithmetic is a "bombshell"?


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.




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