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Invest in an index fund and you'll do ~1/3rd better on average than any actively managed fund simply because of the massive fees including the hidden fees in most mutual funds.
First of all, 2% is an outrageous fee and not representative of a typical 401(k) management fee. Second, even at 2%, I'd like to see how the math works out that this would equate to siphoning off 2/3rds of your account. Third, do people think defined benefit funds are managed for free?
It's right in the article, you need to consider the impact of compound interest, not just the difference of 5% (7-2%):
Yes there are plenty of investmend funds that charge over 2%
No one is saying they should work for free but managing your money for a 2% fee when you take all the risk is absurd, many are just uneducated and unable to understand. Bogle is one of the most respected managers around. Just imagine someone asking for 2% of your money to invest in a S&P 500 Index, ludicrous.
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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.
There’s another way to prove the point. Pull up a compounding calculator on line. Take an account with a $100,000 balance and compound it at 7 percent for 50 years. That gives you a return of $ 3,278,041.36. Now change the calculation to a 5 percent return (reduced by the 2 percent annual fee) for the same $100,000 over the same 50 years. That delivers a return of $1,211,938.32. That’s a difference of $2,066,103.04 – the same 63 percent reduction in value that Smith’s example showed
What a stupid analysis. Do you know anyone on Earth who has ever just dropped $100K in a 401(k) account and then left it for 50 years? If that's how you invest, why bother with an actively managed fund?
Anyone can find an index fund that has a total cost of 1% and no additional fees but with a bit more effort and capital you can easily find a 0.5% equal weight index fund. You'll do no better or worse than the market average but you'll literally beat 98% of the mutual funds per year while only paying 1/3rd the costs on average. I call that being a smart investor so ditch your mutual fund and invest directly into an index fund. If you really have to gamble then buy stocks direct and avoid the whole mutual fund stealing 2/3rds of your money thing.
by my count, the Feds steal more of my money than wallstreet does. At least with wallstreet I have a SAY with whom I spend my money. The Feds take it and what they do with it I have NO idea, and I don't think they really do either.
According to the federal government who tracks this stuff the average 401(k) incurs fees of 91 basis points.
New regulations now require complete disclosure to participants on fees, and trustees can be liable for not providing cost-effective choices. The result: plans will offer less risky options in lieu of cheaper and safer options which will actually result in lower overall balances at retirement for millions of Americans.
Additionally, ROI calculations are always expressed net of fees (APR). It's wrong to present a scenario where one earned 7% and had 3% siphoned off. The 7% is the APR and already includes the fees.
Just another example of the facade of social mobility in the US. All the laws on the books are written to protect the uber rich and Wall Street banks due to the fact the government is impregnated from top to bottom with friends of Wall Street. How are the regulators supposed to regulate when there's a revolving door of employees between government regulators and Wall Street? Then when Wall Street's gambling blows up, tax payers have to bail them out so our entire way of life doesn't collapse due to financial armegeddon. Yeah, America is "the land of the free" alright. NOT.
"If you work for 50 years and receive the typical long-term return of 7 percent on your 401(k) plan and your fees are 2 percent, almost two-thirds of your account will go to Wall Street. This was the bombshell dropped by Frontline’s Martin Smith in this Tuesday evening’s PBS program, The Retirement Gamble."
2% is a high fee to pay when you can get funds that charge less than .75%.
There are plenty of index funds with fees in the 0.10-0.20% range...
What a stupid analysis. Do you know anyone on Earth who has ever just dropped $100K in a 401(k) account and then left it for 50 years? If that's how you invest, why bother with an actively managed fund?
You seem to not understand what he was showing. He was illustrating the effects of compound interest when it comes to fees. Yes, someone here isn't very bright but sadly it wasn't the guy on PBS.
Who the hell pays a 2% fee on a 401k? And if you pay too much in fees, why wouldn't you move your funds to someone with a better fee structure?
Anyone who doesn't beat the market net of fees for an investing firm would be fired quicker than you can blink. I have seen it many times.
My former employer had funds in their 401k with fees as high as 1.5%, and I don't doubt there are other employer 401k plans that were higher. My former employer had only one index fund, and S&P 500 index with fees of 0.5%, that's highway robbery for an index. The other funds were all actively managed no-name funds.
Though fees were clearly shown on the 1-page summaries available to all employees, I am sure some didn't notice or even realize what they were. Some undoubtedly ignored everything, even what asset (sub)class, except reported returns.
I don't think the show was intended for knowledgeable 401k investors, and sadly there are probably more naive investors out there, blissfully unaware of 'what they don't know they don't know.'
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