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.