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

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.

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This is not so much a gamble as a certainty: under a 2 percent 401(k) fee structure, almost two-thirds of your working life will go toward paying obscene compensation to Wall Street; a little over one-third will benefit your family – and that’s before paying taxes on withdrawals to Uncle Sam.

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To put it another way – you work for Wall Street. You are their slave, their lackey and as long as their toadies dominate in Congress, nothing is going to change on the legislative front to stop the looting.

Wall Street is busy asset stripping the retirement plans of the working class in America while President Obama proposes to cut Social Security benefits through a discredited calculation called Chained CPI – conveniently causing people to save more in their 401(k) plans to make up for the potential loss. But the more you save, the more Wall Street asset strips.

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, who served as its Chairman and CEO from 1974 to 1996. Bogle is no slouch. He’s one of the most highly respected men in finance and graduated magna cum laude from Princeton University with a degree in Economics.

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This is the relevant portion of the transcript from the program:

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Bogle: Costs are a crucial part of the equation. It doesn’t take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get. The money managers always want more, and that’s natural enough in most businesses, but it’s not right for this business.

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Smith: Bogle gave me an example. Assume you’re invested in a fund that is earning a gross annual return of 7 percent. They charge you a 2 percent annual fee. Over 50 years, the difference between your net of 5 percent — the red line — and what you would have made without fees — the green line — is staggering. Bogle says you’ve lost almost two thirds of what you would have had.

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Bogle: What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact. There’s no getting around it. The fact that we don’t look at it— too bad for us.

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Smith: What I have a hard time understanding is that 2 percent fee that I might pay to an actively managed mutual fund is going to really have a great impact on my future retirement savings.

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Bogle: Well, you have to rely on somebody to get out a compound interest table and look at the impact over an investment lifetime. Do you really want to invest in a system where you put up 100 percent of the capital, you the mutual fund shareholder, you take 100 percent of the risk and you get 30 percent of the return?

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Smith takes Bogle’s advice and pulls up a compounding calculator on his laptop. On air, he shows the viewer the results:

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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.

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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.

http://wallstreetonparade.com/2013/...treet-is-gobbling-up-two-thirds-of-your-401k/
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It isn't that black and white.

I found a compounding calculator. I entered starting balance of $0. Monthly contribution of $200. For 50 years. At 7%, the final balance is $1.09M. At 5%, the final balance is $534K. Not 2/3 as the article claims, but something around 48%.

Next fallacy is that you have to pay fees if you want your money managed by a professional. It's a sort of tax.

Speaking of tax, the 2% is of the balance. The balance is what you paid in, some fraction of your income. Imagine if you could squirrel away the 15% of your income the govt. TAKES for FICA.

Next, the fees aren't compounded. The manager has to eat and pay his rent.

Next, I don't know where the 2% figure comes from.
http://www.401kfeesandexpenses.com/401k-average-costs.html

The more realistic figure is .78 or even less for most people by far. If the entire company's 401K has less than $1M in it, then it's a really new 401K, or a company so small it shouldn't be offering a 401K (Roth or other retirement plan).

 

The article is nothing but "what if?" What if you could save 100% of your salary and pay no taxes or fees?

Just wow! We're all losing like 99% of our retirement, no?

 

You only like some taxes, eh? When the money goes to the government and is wasted, no biggie. When the money goes to a fund manager, it's horrible?

Good luck finding a 7% or 5% return on anything these days. If a fund manager is getting you that kind of return, he's kicking ass.