Almost Two-Thirds of Your 401(k) Will Wind Up in Wall Street’s Pockets

We’ve discussed many times before how the 401(k) retirement system is a scam, but, if you don’t believe me, how about some basic arithmetic for ya–it’s the ‘management fees’ that fleece you (boldface mine):

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.

While passively managed funds such as index funds (e.g., Vanguard) charge much lower fees, many employees don’t have that option (I don’t), and are placed into high fee accounts. As always, those who need the most help in retirement–less sophisticated investors–are more likely to get suckered into high fee plans.

John Bogle, founder of the Vanguard Group, describes the system like so (boldface mine):

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….

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?

I really don’t. I can’t help but think how much better off most of us would have been if we had simply been allowed to supplement our Social Security retirement accounts–especially those, who by being born at the wrong time, ‘mistimed’ the stock market.

And the congregation responds: this is yet another reason why we can’t have nice things.

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6 Responses to Almost Two-Thirds of Your 401(k) Will Wind Up in Wall Street’s Pockets

  1. Eric riley says:

    I’m trying to think up a term for ‘not-benefits’; things that employers offer that they call ‘benefits’, but do not really offer any benefit to the employee. The first I noticed were ‘flexible spending accounts’, which I though meant an account I could use for office supplies or travel expenses, but turns out to be an account into which I can place my own money – but without the advantage of a regular bank account in that – at the end of the year – the holding company gets to keep any money still in the account. And – without the flexibility of a bank account, since I cannot spend it on anything, just on specific things (health care and child care, mainly). The ‘advantage’? Savings are pre-tax (so, at most I save a little on taxes for the risk of having money taken by a company and the disadvantage of not being able to spend it how I like).

    PTO is another one – evidently the standard is 2-weeks of PTO, use it instead of sick leave (which no longer exists)!

    Now I guess 401Ks should be added to that list.

    • Industry Scientist says:

      Actually I find the FSA very useful – our day care is so expensive, we’ve already requested to be reimbursed for the entire amount by August!

      No sick leave does suck, but it is nice when they give you the week between Christmas and New Year’s off. Does help it go a little bit farther.

      • albanaeon says:

        Wow! Really? A whole extra week, mainly because the bosses are already off?

        PHHTT! Our whole employment system is a crock right now. We’ve sacrificed leave, health, and pay to the alter of corporate profits and all they give us is scraps to fight over. Such as being grateful that you get a measly extra week.

        • Industry Scientist says:

          I got that week on top of three-and-a-half to start, plus ample holidays. That was double what I was allowed to take as a postdoc.

          I don’t deny there’s much about our employment system which is out of whack, but there are some companies which try to take care of their employees within the current system.

  2. Min says:

    The easy way to find the ballpark figure is to find (1 – 0.02)^50. That is, the manager takes 2% of what he manages each year for 50 years. You can see the effect without assuming any particular rate of return. What is left after 50 years is 0.364. Management fees have consumed 63.4%.

    Frankly, I was shocked by the 2% figure, which is not what everybody pays for the management of a 401(k). Even the 0.5% fee means a take of 22.2% over 50 years, which seems high.

  3. Keith Lancaster says:

    I think that the current construct of FSA’s is a rip off. The government has created another industry that takes our healthcare dollars and does nothing to improve the quality of our healthcare – like insurance companies, claim scrubbers and plan administrators. They have forced us into utilizing these “services” with their confiscation of excess funds clauses and ever changing rules, not for our benefit, but for the employer’s and FSA administrator’s benefit. Industry Scientist, you should have been allowed to simply deduct the money from your tax “bill” w/o all a FSA admin being involved. and with the added benefit of not having to fear losing unused sums. Yes, I get the benefit you received by front loading your expenses, but a system that allowed to deduct the total costs at the end of the year – when you know the total – would have allowed you to net more for the year.

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