PBS Frontline: Wall Street eats 2/3rd of your 401(k)

[Midpack]

Originally Posted by hnsq

This really couldn't be farther from the truth. Comprehensive, diversified managed plans allocated across the various risk sectors always outperform indices. You would have to be fairly stupid to pick a single fund and hope it beats the market just because it is 'managed'. Funds have a set goal, and only beat the market under those conditions.

Since you're so much smarter than the rest of us, maybe you'll kindly explain how a "comprehensive, diversified managed plan" (aka asset allocation?) of funds "across the various risk sectors" (aka asset classes?) that don't beat their benchmarks "95%" of the time (your claim), can somehow beat whatever benchmark you are referring to in red above. Surely you're not suggesting 401k novices attempt to buy/sell time their holdings to anticipate sector rotation and/or "certain economic and political conditions" to outperform broad indexes, most pros can't do it consistently (and the very few who can certainly aren't working with 401k account holders).

Or if it would be easier, give us an example of a comprehensive, diversified managed plan widely available to 401k participants given they're the audience for the PBS episode and the subject of this thread.

Arrogant indeed?

[michiganmoon]

Originally Posted by Goodnight

The example may not have pertained to all, it was meant to get your attention. Yes there are funds that have lower fees, there are also some that have higher fees, cash out fees, etc, he didn't indicate this was the norm.

Grab your attention with an extremely unlikely 401K situation?

Don't step out of your apartment building! A piano might fall down on you!

Originally Posted by Goodnight

So do you want to give up 1/3 of your returns in 10 years, 50% in 30 years. You can go to the Vanguard site and see the impact of different fees and time periods, the point is this fees take their toll on your returns.

Even that 1/3rd example I gave was with a below average return and above average fees on your 401K over the long haul.

Plus, we must expect the management company to make a profit - now at times it can be unreasonable, but we must expect to lose some of it for the services provided.

Originally Posted by Goodnight

Many of the state pension funds charge 2% fees, that is one more reason why pension funds are in lousy shape. They are corrupt, the NY State Comptroller Hevesi was convicted of accepting kickbacks from the pension managers, it is an area that is ripe for abuse. Start a new thread if you want, no one indicated that we should accept their failures.

But we do accept failures. You are wrong. Democrats and the Unions fight tooth and nail to keep the pension system as is. They fought tooth and nail to prevent lowering the expectations of return on investment by 0.25%. Because of management fees that are taken out the Michigan Teacher's pension - the pension investments need to basically average 10% a year to fulfill the promises made to teachers...unrealistic fantasy world is what that is - especially with much of the investments made in bonds well below the 10% so the stocks have to be averaging in excess of 15% a year to fulfill the promises to the teachers - it won't happen. Half the country is fine with the sinking ship.

Additionally, Social Security has higher fees than my 401K. Where is the outrage there?

Perhaps the government should mandate financial education classes for graduation of High School. Americans are making poor choices and perhaps would make better choices with education. We mandate 4 credits of Literature and Writing but zero personal finance classes at my school!

In the second half of the PBS special...the men they interview about 401Ks made poor choices. Both started investing late in their careers, which takes away from the power of compounding interest. The 2nd guy rolled his out and paid taxes on it in higher brackets to pay off other debts he had made -- probably from other poor choices. He was investing in extremely risky funds if his total 401K dropped by close to 70% and didn't even recover to half of its initial values... The guy made poor choice after poor choice.

[texdav]

Waht theft. It reminds me of those who signed false income statemtns then balmed the leders for their being cheated. Even the documantray showed that one has a chocie and that most fees are not that high for the service .Mine shows every monthly statemnt;not some hiden secret.

[TrapperJohn]

Dang, it cost me $50 to get the oil changed. If they hasn't paid the rent and salaries I bet they could have done it for $5.

Maybe an NPR special on how they gouge the car owners next.

[WilliamSmyth]

Originally Posted by TrapperJohn

Dang, it cost me $50 to get the oil changed. If they hasn't paid the rent and salaries I bet they could have done it for $5.

Maybe an NPR special on how they gouge the car owners next.

Although I didn't like the tone of the Frontline program, the issues raised are real. Most people wouldn't pay $500 for an oil change. There are plenty of financial advisers and firms more than willing to sell you the equivalent of a $500 oil change. Unfortunately some of those firms have managed to sell their services to companies for 401k plans, leaving employees who participate in those plans with only high priced options. In some cases, the plans are so bad it would be better not to participate.

[michiganmoon]

Originally Posted by WilliamSmyth

Although I didn't like the tone of the Frontline program, the issues raised are real. Most people wouldn't pay $500 for an oil change. There are plenty of financial advisers and firms more than willing to sell you the equivalent of a $500 oil change. Unfortunately some of those firms have managed to sell their services to companies for 401k plans, leaving employees who participate in those plans with only high priced options. In some cases, the plans are so bad it would be better not to participate.

The odds are that even if your plan has high fees - mathematically it would still be wise to participate up to your employer's one for one match limit. In example, if your employer matches up to 5% then put in 5%.


If you avoid your 401K due to high fees -- so in an IRA perhaps you sock away $150 a month into a S&P 500 Index Fund with a cheap 0.1% expense ratio...and after 40 years and a 9% return you would have $592,000. Not too bad and you avoided those high fees.

However, had you put into your 401K which has a 1 for 1 employer match and your $150 turns into $300 a month into a S&P 500 Index Fund with an extremely horrifically high expense ratio for an index fund of 1%...after 40 years and the same 9% return you would have $933,000.


Despite the awful fee -- the match - "free money" still put you ahead by $341,000.

[NHartphotog]

Originally Posted by dreamofmonterey

And yet, some want Wall Street to get its hooks into SSA and Medicare.

Oh no--Wall Street eating 2/3 of our 401(K) funds! But what exactly is the information being presented with such an inflammatory headline? That an average annual expense rate of 2%--when expenses have to amount to SOME portion the total pot of money--turns out to be a LOT of money when compounded over a long period of time?

The flip side of this coin is that simply investing your money and getting a mere 2% return will compound your money the EXACT SAME AMOUNT over the same period of time. The article has (re-)discovered...the magic of compound interest! The magic of compounding interest is the first thing you are supposed to learn when you become an adult and put aside money to invest for retirement. The earlier you put money aside, the larger the early amounts, and the higher your rate of return after expenses, the better off you will be.

So is the fund with the lowest expense rate the best investment? No. Assuming two funds with the same risk level, the fund with the highest net rate of return is. In other words, the one with the highest returns after the expenses are deducted.

So is 2% is an unreasonable amount to pay for accounting and bookkeeping, regulatory compliance, employees to decide which stocks to buy and sell, and other costs associated with investments? Not necessarily. Higher expenses generally mean more "active" management, which may (with a great Manager who is very good at guessing which stocks will rise and which will fall) get you net returns that beat the average. So some people might buy a fund with expense rates of 5% or higher, because you might get total returns of 20% (or net return rate of 15%).


And here we must address the post above, regarding Social Security. Which is better, (1) paying into the Social Security system and getting "guaranteed" SS benefits, or (2) investing in a balanced portfolio of stocks, bonds or mutual funds and taking the "hit" of an average of 2% a year on investment returns, while risking getting caught in crashes like 2008?

Point #1: You actually "own" (have a legal investment) in stocks, bonds or mutual funds you buy. You can sell them, and you own the returns they generate. When investing for retirement, we are talking investing over the long term (30-45 years), and EVEN TAKING INTO ACCOUNT THE CRASH of 2008, the Stock Market has never failed to generate returns of less than 7.9%--on top of preserving 100% of principle investment. And that is AFTER paying the expenses of 2% or even more. Without exception in U.S. history, you will retire VERY comfortably as long as you invest early and let it grow.

In contrast, Government has absolutely NO legal requirement to pay you a single penny of your "promised" SS benefits. in 1960 the U.S. Supreme Court ruled (Flemming v. Nestor) that you don't own your promised benefits, you have no right to them, and politicians can change at any time the amount you expect or currently receive. Today even politicians acknowledge that promised benefits will have to be reduced significantly again (even more than 1983 reductions for those born after 1960), and/or SS taxes raised significantly, to keep the program solvent in the future. In other words, if you are not 55 and older already, you WILL see significant decreases in what you currently expect.

Point #2: Rate of Return. The Stock Market, even with the collapse of 2008, has returned an average of 7.9% over the last 20 years, 10.5% over the last 30 years, 9.8% over the last 40. Retirees would have the money from those returns to live off of, on top of the value of the portfolio--which could be then be sold or left to the next generation.

For example, say someone saves nothing towards retirement during the first 10 years of adult life, but goes through advanced education and earns a decent income averaging $100,000 over 30 years after he has achieved professional stability. Say this person invests the $473 every 2 weeks that he would have sent to Washington in SS taxes. After 30 years of investing (retiring at 63), he'd have over $2,342,000 at the START of retirement. This investment portfolio then generates about $117,100 a year (at 5% interest, very low risk) to live on. That retiree and his spouse can live VERY well for the rest of his life, no matter how long, and when he dies he can leave the entire $2,342,000 to his children.

Compare that to Social Security for anyone not yet retired: the most anyone can expect to get from SS is what is currently promised (and chances of getting that much are almost nil for those of us 55 and under). But say somehow the federal government finds a magic way to keep the system afloat...what is the "rate of return" on the money sent to Washington? It depends on how old you are, how much you paid in SS taxes, and how long you live.

According to the SS Administration, the highest possible rate of return is 6.52% for single-earning couples born in 1920--and at age 93, there aren't many of those left. So let's look at what the best possible future holds: if there are absolutely NO reductions in SS benefits until 2029 (a fiscal impossibility), a single income couple born after 1985 can expect a 4.2% rate of return. What's your rate of return on Social Security? | Reuters That's not so bad, even though the stock market investor got 7.9% in the "worst case" scenario, right?

WRONG!

--The investor retired at age 63 after working only 30 years. The SS recipient had to work 44 years before retiring at age 67. The SS recipient has 4 less years of retirement to enjoy and had to work an extra 14 years to earn them.

--If the SS recipient dies before retiring at age 67, he will collect ABSOLUTELY NOTHING in return for his SS contributions--a loss of 100%. The only time a 100% loss could happen with the Stock Market is if the investor made 100% risky investments, retired at the exact time of the crash, every single company in his investment portfolio went bankrupt, and the U.S. Government collapsed at the same time. In that case, the SS recipient ALSO loses 100%, so he'd be no better off.

--The investor owns a $2.342 million investment portfolio, that can be sold or inherited (to send multiple grandchildren through college or medical school, for instance). The SS recipient has ABSOLUTELY NOTHING to sell or leave to his children.

--The investor enjoys a VERY high standard of living from his portfolio income, even if he never touches it. The SS recipient certainly does NOT receive enough from SS to provide any more than a basic, near-poverty level standard of living.

--The investor can count on his income to continue to flow, and his portfolio to be worth a significant amount of money, with plenty of buffer even if the stock market experiences more crashes or periods of low growth. The legal system protects his investments from being stolen, and insurance and regulations protect his interests no matter what happens.

The Social Security recipient has absolutely NO legal claim to the Social Security benefits he was "promised" by Government. The U.S. Government has the absolute right to reduce SS benefits by ANY amount, or to refuse to pay them entirely--no matter how much the SS taxpayer has paid in SS taxes. In other words, after sending vast amounts of money to Washington, the SS taxpayer is reduced to the status of a beggar, competing with countless other Special Interest groups for the limited pool of government money.


SO WOULD YOU RATHER SEND HUNDREDS OF THOUSANDS OF DOLLARS TO WASHINGTON, WAIT TO RETIRE UNTIL AGE 67, LIVE LIKE A PAUPER AT BEST (MORE LIKELY, EAT DOG FOOD AND GO WITHOUT MEDICATIONS), HAVE NO ASSURANCE YOU WON'T GET EVEN LESS (OR NOTHING) NEXT YEAR, BE A BURDEN ON FUTURE TAXPAYERS, AND HAVE NOTHING TO LEAVE YOUR CHILDREN AND GRANDCHILDREN?

Or would you rather retire early, have a ton of money to spend and enjoy life with (even after 2% expenses), not have to rely on begging taxpayers for the return of your money, and either leave a fortune to your children or live like a king and be able to afford THE BEST POSSIBLE health care and living assistance no matter what the cost?

[WilliamSmyth]

Originally Posted by michiganmoon

The odds are that even if your plan has high fees - mathematically it would still be wise to participate up to your employer's one for one match limit. In example, if your employer matches up to 5% then put in 5%.


If you avoid your 401K due to high fees -- so in an IRA perhaps you sock away $150 a month into a S&P 500 Index Fund with a cheap 0.1% expense ratio...and after 40 years and a 9% return you would have $592,000. Not too bad and you avoided those high fees.

However, had you put into your 401K which has a 1 for 1 employer match and your $150 turns into $300 a month into a S&P 500 Index Fund with an extremely horrifically high expense ratio for an index fund of 1%...after 40 years and the same 9% return you would have $933,000.


Despite the awful fee -- the match - "free money" still put you ahead by $341,000.

The Frontline show did mention that it would likely be a good idea to participate up to the company match. However, I have heard cases of some pretty bad plans. What if you don't have an index fund available. What if your only options are high fee funds that additionally have also historically performed poorly even in good times. I'm constantly surprised how some funds inside or outside 401k plans manage to attract investors.

[GregW]

My investment company has managed to multiply my initial investment many times without high fees. I am quite happy with the results.

[Think4Yourself]

Originally Posted by TrapperJohn

Dang, it cost me $50 to get the oil changed. If they hasn't paid the rent and salaries I bet they could have done it for $5.

Maybe an NPR special on how they gouge the car owners next.

I get mine done for $15 and we both live in California so you need to both learn to shop around and learn how to make a salient point because not only was the article not from NPR but it is not the type of reporting you'd get from PBS either.