Nest egg: from ostrich to hummingbird
June 9, 2012 12:00 PM   Subscribe

401(k) fees could reduce average nest egg by 30%, study says. 'The average U.S. couple could pay nearly $155,000 in fees for their 401(k) plans over their careers, according to the analysis by Demos, a nonpartisan research organization. Rather than the hypothetical $510,000 that a dual-earner couple could have at retirement with no fees, they would be left with only $355,000. The fees include explicit charges and indirect expenses, such as the cost that mutual funds incur to trade stocks.'

'The mutual fund industry and some independent experts disputed the findings of the study, saying it overstated the costs that most Americans incur.

"There's a problem — I'm not quite sure the problem is as large as stated," said Mike Alfred, chief executive of BrightScope Inc., a San Diego company that analyzes retirement plans.

Still, the report pointed a spotlight at what many experts say is an enduring problem — high fees that drain the retirement prospects of millions of Americans.'
posted by VikingSword (86 comments total) 21 users marked this as a favorite
 
Solution: index funds. Vanguard 500 admiral, for example has an expense ratio of 0.05%, about 1/30th the average according to that Demos article.
posted by justkevin at 12:08 PM on June 9, 2012 [12 favorites]


Makes stuffed mattresses seem downright practical.
posted by whimsicalnymph at 12:09 PM on June 9, 2012 [2 favorites]


Investment companies are just filling in the gaps left as social insurance programs slowly get dismantled by investment company lobbyists and the two political parties they bought off.
posted by Blazecock Pileon at 12:14 PM on June 9, 2012 [7 favorites]


Well the headline is misleading.., are the fees for maintenance of 401(k)s regardless of what funds/stocks/bonds you have in them or are the losses due to the fees of each individual MF you own inside your 401(k)? If the former than switching to index funds is useless if you want to maintain the tax benefits of a 401(k).
posted by spicynuts at 12:16 PM on June 9, 2012


Americans have been put asleep via promises: 1) of delivering an elixir that will return us to a no-worries demeanor of some mythical past; 2) fear that is so overwhelming that the only escape is slumber.

We are living in a transactional culture that has been eschewing the idea of a relationship culture for so long, that we don't even remember what the latter was like.

So many social institutions have been gutted that all we seem to have left is nutcase Tea Party types and hopeless, feckless Occupiers.

I keep wondering what it will take to get private money out of the political sphere; I keep wondering how long Americans will continue to accept being abused by power, without resorting to demagogic solutions.

The pot is stirring...
posted by Vibrissae at 12:22 PM on June 9, 2012 [5 favorites]


The ability of employers to pick 401(k) providers can really force people into shitty decisions when it comes to mutual funds. One of my previous employers went from J.P. Hancock, with a wide selection of funds that included many passively managed, low-fee funds, to Fidelity, and then to someone else I don't even remember anymore. With each switch the cost to the business went down, but the number of low-fee funds available for the employees to invest in diminished.
posted by jsturgill at 12:24 PM on June 9, 2012 [4 favorites]


Sooo... they expect people to retire on half a million or less with the very real prospect of no social security to back that up, and inflation erasing most of the gains you're not guaranteed to get? Oh, also, we're saving even less because of credit card debt and massive student loans that we can't get out of? How are the majority of my generation not going to be totally screwed at retirement? How many are going to be able to retire at all?
posted by fnerg at 12:24 PM on June 9, 2012


Solution: index funds. Vanguard 500 admiral

Isn't the reason most people contribute to a retirement fund for the tax benefits?
posted by bradbane at 12:25 PM on June 9, 2012 [2 favorites]


401ks have always been a scam.
posted by vibrotronica at 12:27 PM on June 9, 2012 [7 favorites]


Actually, I guess that's why the tea partiers want to dismantle medicare, and keep health care out of reach of all but the richest, to bring average life expectancy down, so more people die before they hit retirement age, and we don't have to worry about legions of homeless old people.
posted by fnerg at 12:27 PM on June 9, 2012 [3 favorites]


Solution: index funds. Vanguard 500 admiral

Isn't the reason most people contribute to a retirement fund for the tax benefits?


yes, but a good 401k plan should have a bunch of index funds as options, and really that is all you should be using.

But fund costs aren't the only issue - admin fees especially for small plans run by unsavvy sponsors can be criminal.

Realistically if your employers plan isn't with one of the 500 pound gorillas (who have tons of scale and can service the business very cheaply) you are probably being ripped off. Even if you are with one of the big providers you should pay attention to the price you are being charged. The most interesting stat is the what the big plans pay (.43%) vs what the median is.
posted by JPD at 12:37 PM on June 9, 2012 [2 favorites]


It's really all about company match. If you have one, then you might as well take that money and invest up to the match, although if the only options are funds with a front or back end load you really should complain to your benefits guy as that's ridiculous.

If you don't have a match, just invest yourself in a Roth or traditional IRA. You can get the same (or a different, possibly better with the Roth) tax advantage, plus you can pick whatever you want.

Ideally our employers would be taking care of us, but we're so far from that in the US that it's comical. If they are giving you free money, take it. Otherwise, tell them they can stuff their plan.
posted by selfnoise at 12:45 PM on June 9, 2012 [3 favorites]


yes, but a good 401k plan should have a bunch of index funds as options, and really that is all you should be using.
Many 401k providers provide mutual funds that are slightly different versions of the same funds you might get on the open market, except with higher fees (that are usually buried so they just look like lower yields). Employers typically just look at the cost of administering the plan from the broker and ignore the fact that the low fees are being offset by overcharging their employees. Even on index funds, you'll see worse yields than you would have on the corresponding ETFs and certainly worse than the equivalent Vanguard funds.

Its a racket, but you are foolish if you don't play because of the tax advantages and the matching function. Yet another way that Wall Street skims off the top.
posted by Lame_username at 12:49 PM on June 9, 2012 [5 favorites]


If only shit was free! No brokerage commissions, no costs for systems to track who owns what, so settling and clearing, or custodial fees. Plus wouldn't it be great if everyone wouldn't work for free too. Its not really very complicated to manage/sell/administer a retirement plan.

Some people and writers should seriously stay away from giving investment advice and opining on the investment process. This breathless article is idiotic. Money that you are not entitled to, generated to the 'system' by investment returns of your dollars is not yours, so it doesn't cost you anything.

Yes, fees are a drag on returns, manage them as you will. Yeah, there is waste for sure. Whether the tax benefits of deferral make sense for you is a matter really best left to individuals to analyse, but I can save you a bit of math; yes it is, most likely. Its really pretty irresponsible to attempt to generalize when people are poised for under-funded retirement as it is. Index funds are one approach, I think its not the panacea that it was positioned as a number of years ago, so caveat emptor.

JMHO
posted by sfts2 at 12:58 PM on June 9, 2012 [1 favorite]


Wait! The financial sector created and lobbied for a financial structure and they're making money on it hand over fist? Stop the presses!

I think of 401(k)s as less of a scam, more of a pyramid scheme myself. Just hope you're not holding the bag when legislation changes and the biweekly money infusion into the stock market stops.
posted by fshgrl at 1:00 PM on June 9, 2012 [3 favorites]


By the way, the author's alternative? Its the author's opinion that state-funded pensions are good!
posted by sfts2 at 1:00 PM on June 9, 2012


nutcase Tea Party types and hopeless, feckless Occupiers.

Maybe we're hopeless and feckless, but at least we aren't sitting on our asses like the vast majority of respectable middle-class sheep being willingly led to slaughter by bullshit like this. Call OWS names all you want, but how's that electoral politics thing working out for you?
posted by spitbull at 1:06 PM on June 9, 2012 [9 favorites]


If only shit was free! No brokerage commissions, no costs for systems to track who owns what, so settling and clearing, or custodial fees. Plus wouldn't it be great if everyone wouldn't work for free too. Its not really very complicated to manage/sell/administer a retirement plan.

Coming at this as a partial foreigner here, so happy to be corrected, but isn't the main point that the fund managers, over the long term, compared to index funds, add nothing? Shit should be free if it's not adding any value.
posted by oliverburkeman at 1:07 PM on June 9, 2012 [7 favorites]


Wait! The financial sector created and lobbied for a financial structure and they're making money on it hand over fist? Stop the presses!


This sounds like a good line and all, but in reality DC plans are generally run a lot more cheaply and efficiently than DB plans are/were run. Especially in fees paid to the managers. You just didn't see it because it was more opaque to you.

Coming at this as a partial foreigner here, so happy to be corrected, but isn't the main point that the fund managers, over the long term, compared to index funds, add nothing? Shit should be free if it's not adding any value.

I think the point is that a non-trivial slug of the fees are not to pay the manager - they are going to pay for the admin side of the business. Also I don't know if you guys know this - but most passive managers don't make money off of the fees you pay them - much of their profits come from securities lending. Managing money isn't costless. Even passively.
posted by JPD at 1:11 PM on June 9, 2012 [2 favorites]


On Point recently did a great show on 401ks recently. The guest suggested a "Social Security Plus" program. Mandatory contributions would go to a fund managed in the same way that pension programs for government workers are managed. Because resources would be pooled into a very large group, the fund would be able to operate with very low fees.

Basically, it would be a defined-contribution pension plan, using the power of government to negotiate very low investment fees.
posted by heathkit at 1:12 PM on June 9, 2012 [5 favorites]


That's what the Australian's do. But believe me there are plenty of plans out there that already have the mass and scale to get the cheapest prices out there. I don't think it would make things much cheaper.
posted by JPD at 1:16 PM on June 9, 2012


Today, for most Americans, pensions are history and the 401(k) is the main event, after Social Security. And 401(k)s are failing.

Millions of Americans are barreling toward 65-plus with very little in the sugar bowl. The stock market has tanked and tanked again and looks shaky right now. Most human nature may not be cut out for sophisticated investing. Is there a better way?


I know! I know! Don't have a large swath of your cash tied up in stocks when you turn 55!

I dunno. I'm Australian so most of my life I've only known superannuation with a government safety net. My first thought when I saw the 401(k) system was "they still give you social security payments even if you have a healthy 401(k)? What a fucking rort!"
posted by Talez at 1:18 PM on June 9, 2012


It's really all about company match. If you have one, then you might as well take that money and invest up to the match, although if the only options are funds with a front or back end load you really should complain to your benefits guy as that's ridiculous.

If you don't have a match, just invest yourself in a Roth or traditional IRA. You can get the same (or a different, possibly better with the Roth) tax advantage, plus you can pick whatever you want.


I've seen this advice a lot, and it doesn't seem to offer anything for someone like me. My employer doesn't do any matching. I expect to be ineligible to contribute to a Roth IRA within a few years if my salary increases as I expect (I'm single). I'm not interested in a traditional IRA because it's tax-deferred, which seems like the worst possible way to treat my money, since I expect both my income and tax rates to increase in the future. I'd rather keep everything in a mattress or, more realistically, a basic savings account.

I've looked at several books about retirement investing and none of them seem to address my situation except to say: hey, at least you can enjoy your high income! That's almost as unhelpful as saying "First World Problems!" anytime someone has a computer problem. Just because my income is slightly above average, does that mean I should forget about retirement investing? The idea that if you're over the income limit for Roth IRAs, you must be so fabulously wealthy that you don't even have to worry about this stuff, is ridiculous, especially for someone living in a city with a very high cost of living (as I do).
posted by John Cohen at 1:20 PM on June 9, 2012


Makes stuffed mattresses seem downright practical.
--whimsicalnymph


If the mattress in question were stuffed with honest money, it would be a vast improvement over anything available to the 99%.
posted by MikeWarot at 1:23 PM on June 9, 2012 [2 favorites]


To clarify, I expect my personal income to increase, and I expect tax rates in general to increase by the time I'm 65 (I'm 31 now). U.S. tax rates are way too low right now, so I assume they will skyrocket at some point in the next few decades to keep up with the constant increases in government spending that we see with every administration, Democratic and Republican. So tax-deferred investing makes no sense to me.
posted by John Cohen at 1:23 PM on June 9, 2012 [3 favorites]


To clarify, I expect my personal income to increase, and I expect tax rates in general to increase by the time I'm 65 (I'm 31 now). U.S. tax rates are way too low right now, so I assume they will skyrocket at some point in the next few decades to keep up with the constant increases in government spending that we see with every administration, Democratic and Republican. So tax-deferred investing makes no sense to me.

Work through the math on that one again. Especially since you don't know when tax rates will increase.
posted by JPD at 1:26 PM on June 9, 2012 [1 favorite]


"Just because my income is slightly above average, does that mean I should forget about retirement investing? "

You might consider tax free bonds.
posted by MikeMc at 1:34 PM on June 9, 2012 [1 favorite]


That's what the Australian's do.

What? We have a government funded safety net and choice of super fund. If you're wiped out with your super for whatever reason (or just plain underfunded because you haven't worked or have decided to contribute only the bare minimum) you can eke out a meager living on the aged pension.

The superannuation industry is pretty much free competition with regulation by the APRA. The government has no negotiating power on fees except with certain industry funds (i.e. the Western Australian government started GESB) that may be owned or operated as government enterprises. Pensions come out of general revenue not out of a social security tax.
posted by Talez at 1:37 PM on June 9, 2012 [1 favorite]


How are the majority of my generation not going to be totally screwed at retirement? How many are going to be able to retire at all?

Few, if any are going to be able to retire. Think of your 401k as a savings fund for your old-age medical care, because Medicare will also be gone by then.
posted by dirigibleman at 1:43 PM on June 9, 2012 [1 favorite]


Fortunately, as I understand it every time you change jobs you can roll over into an IRA now and take advantage of lower-cost options. If (like a lot of the professional class now) you change companies pretty regularly you are only stuck with the 401k admin for a few years.
posted by a robot made out of meat at 1:50 PM on June 9, 2012


So tax-deferred investing makes no sense to me.

If you are ineligible for Roth IRA contributions, consider the loop-hole called the backdoor Roth. But unless you plan on earning large amounts of income after 65, a regular IRA should be just fine. You should check your math and make sure you understand how tax brackets work.
posted by Durin's Bane at 1:52 PM on June 9, 2012 [4 favorites]


My first thought when I saw the 401(k) system was "they still give you social security payments even if you have a healthy 401(k)? What a fucking rort!"

"They" aren't giving us anything. I've paid into social security all my life. My 401K is a voluntary chunk of my money*, just tax-deferred so that if I'm of a qualifying age when I withdraw it, I pay taxes on the disbursal. In no sense is anybody giving me anything. Quite apart from the fact that if social security goes bust before I get it, I will have essentially been systematically robbed for my entire career.

* Sometimes employer matched, but that's also compensation aka my money; i.e. 401k matching just translates to lower salary in the end.
posted by George_Spiggott at 1:52 PM on June 9, 2012 [4 favorites]


What? We have a government funded safety net and choice of super fund.
I meant state mandated contributions to a retirement program above and beyond the basic social safety net
posted by JPD at 1:59 PM on June 9, 2012


"They" aren't giving us anything. I've paid into social security all my life. My 401K is a voluntary chunk of my money*, just tax-deferred so that if I'm of a qualifying age when I withdraw it, I pay taxes on the disbursal. In no sense is anybody giving me anything. Quite apart from the fact that if social security goes bust before I get it, I will have essentially been systematically robbed for my entire career.

This is what I don't get about Americans and Social Security in general.

Social Security is "their" money? Which is different from general taxation? Because it goes into a separate trust fund? Do we take this to its logical conclusion? Every dollar of tax revenue must be reallocated to the person that gave it? What about kids? Do they start with a tax debt to the country after graduating from high school? Should we make a reality show for the amusement of the 1% so they can decide who can drive on the Interstate that morning seeing as the underclass and middle class that sure as hell can't afford the $10 million/mile?
posted by Talez at 2:12 PM on June 9, 2012 [1 favorite]


As The Economist and others have noted (example and example), history shows that neither individual investors nor mutual fund managers can beat the index year after year. If you're saving for retirement, put your money in the lowest-fee index fund you can find, end of story. I personally went with Vanguard.
posted by Triplanetary at 2:16 PM on June 9, 2012 [1 favorite]


Talez, it's important that you not tax people for a stated purpose, then use the money for a different purpose.
posted by fnerg at 2:18 PM on June 9, 2012


Every dollar of tax revenue must be reallocated to the person that gave it?

No, but this is an amusing idea given that it's the red staters who'd lose if this happened.

I actually get a statement from the social security administration indicating what I've paid in and how my projected benefits are shaping up. I don't get one saying how many miles of road I'm entitled to. It is quite a different thing from taxation.
posted by George_Spiggott at 2:19 PM on June 9, 2012 [2 favorites]


I'm not interested in a traditional IRA because it's tax-deferred, which seems like the worst possible way to treat my money, since I expect both my income and tax rates to increase in the future.

The thought is that you will not draw upon it until after you are retired, at which point you will presumably be in a lower tax bracket.
posted by triggerfinger at 2:22 PM on June 9, 2012 [2 favorites]


Talez, it's important that you not tax people for a stated purpose, then use the money for a different purpose.

It could still be used for the purpose. It could be exclusively used to pay for a means tested "social security" safety net. Whether everyone explicitly needs the safety net should also be questioned.
posted by Talez at 2:23 PM on June 9, 2012 [2 favorites]


If you are ineligible for Roth IRA contributions, consider the loop-hole called the backdoor Roth.

Whoa. I hadn't thought about that. That's pretty sweet. Looks like someone fucked up their legislatin'.
posted by mr_roboto at 2:33 PM on June 9, 2012


Man, I sure am glad that I don't have any money in a 401(k)! Or at all!
posted by tzikeh at 2:34 PM on June 9, 2012


Americans Paid $29.5 Billion on Overdraft Fees Last Year
posted by 2manyusernames at 2:35 PM on June 9, 2012


justkevin: "Solution: index funds. Vanguard 500 admiral, for example has an expense ratio of 0.05%, about 1/30th the average according to that Demos article."

Uh, Merrill shows that particular fund at 0.34%.
posted by wierdo at 2:38 PM on June 9, 2012


Where does the idea that "Social Security is going to die" come from? The only way it can die is if the voters let it die. The government can print the money it needs for social security we can raise taxes to fund it. If the majority
of Americans are counting on it I can't see how it goes away. One of these days people are going to wake up to the fact that while Republicans have been defending family values and keeping marriage safe from "teh Gays" they have been slacking on the finances of our country. They are not patriots they are "individuals" who feel entitled to all the money they can accumulate. I mean it isn't as if the money they are accumulating is only worth what the country behind it is. The solution is pretty simple really, we need to put Americans to work building American products. American workers making a living wage pay taxes and don't rely on government largess.

I can't imagine how people put up with exorbitant fees from their 401k plans. There should be a fixed limit on the load imposed on retirement funds.
posted by pdxpogo at 2:39 PM on June 9, 2012 [1 favorite]


I can't imagine how people put up with exorbitant fees from their 401k plans. There should be a fixed limit on the load imposed on retirement funds.

No. You need to allow choice of 401(k) provider. Employers just go for the lowest fees and let the employees get screwed.

If you want to pay 5% of your 401(k) to have Warren Buffet himself manage it you should have that right.
posted by Talez at 2:43 PM on June 9, 2012 [1 favorite]


fnerg: "Sooo... they expect people to retire on half a million or less with the very real prospect of no social security to back that up, and inflation erasing most of the gains you're not guaranteed to get? Oh, also, we're saving even less because of credit card debt and massive student loans that we can't get out of? How are the majority of my generation not going to be totally screwed at retirement? How many are going to be able to retire at all?"

Yes, people can retire on a half million or less. You great-grandparents made it through the Great Depression by living frugally and putting off luxuries until they could afford them--which sometimes meant going without entirely. They learned about rationing and budgeting because they pretty much had to, as they also lived through WWII and had to go without a lot of stuff we take for granted.

It will be tougher for young people to do that today because many don't realize what they're getting into, but it can be done. You will have to make tough choices: go for a job that is based on financial stability other than creative fulfillment, avoid debt of any kind, etc.

Saving less because of credit card debt? Don't use credit cards to pay for things you can't afford to pay off when that credit card bill comes at the end of the month. If you don't pay them off every month. Whatever you do, don't get overdrawn on your accounts, or the fees will kill you.

As far as massive student loans, I'm a huge proponent of education, but if you are looking at college education and your grades aren't high enough to qualify for scholarships going in, either opt for a state university, or consider other options, like certification for healthcare jobs, which takes only a couple years to earn, thus halving your debt. Healthcare offers stability (people are always getting sick!), and while the pay isn't as good as the STEM vocations, it's a reasonable choice for people who don't excel in science or math. No one should be taking on "massive" debt in this economy, and young people need to be realistic about their futures or they will be in a world of hurt long before retirement rolls around.

Old age is where the "renting is cheaper than owning" talk that has become so popular now falls through, too. If you own a house before you're ready to retire, you have no mortgage to pay, only property taxes. You have the security of a comfortable home, with none of the uncertainty of rising rent, and in extreme cases a reverse mortgage from the bank can be used to defray medical expenses in the case of catastrophic illness (healthcare is the biggest expense most retirees have to worry about).

I know this isn't what you want to hear. It's much easier to rail against the current lousy economy than go without, and you shouldn't have to go without anyway, it's not fair. You're right. Even if you do make the smart choices, there are no guarantees. You could get laid off. You could suffer from a chronic illness in a country that fails at healthcare.

I'm sorry. Life IS unfair.
posted by misha at 3:30 PM on June 9, 2012 [4 favorites]


Means testing social security is very far from a new idea. But politicians who propose it tend to do poorly in state and national elections, because A) well-off older people are a very politically powerful group, and B) younger working people find it only too easy to believe they'll be negatively impacted themselves by the time they reach retirement.
posted by George_Spiggott at 3:33 PM on June 9, 2012


Uh, Merrill shows that particular fund at 0.34%.

Are you sure you looked at the Vanguard 500 index Admiral? If you take a gander at the Morningstar profile for VFIAX, it confirms the administrative expenses are 0.05%. Long story short, Vanguard plays the same games as everyone else and charges different fees for different "share classes" of the same mutual fund. It just happens that they're still on the low end most of the time.
posted by Joey Buttafoucault at 3:38 PM on June 9, 2012


I've pretty much had it with market-based capitalism, which is basically a system designed to fuck you in every way possible, whether you're paying attention or not and not even stopping at the legal limits but only at the actuarially analyzed aggregate point of "will this kind and amount of fucking result in too much squealing to make it profitable?" It's so wearing having to be absolutely and constantly on-your-guard financially, and of course there's no way to know exactly all the ways, and exactly how much, one is personally being fucked because there are so MANY companies doing the fucking in so MANY varied and mysterious ways.

We are living in a room where every surface, soft or hard, horizontal or vertical, has holes in it (like in Yellow Submarine) except that no matter where you stand or sit or lie down there are going to be cocks thrusting out of those holes at you trying to fuck you forever and it is just so tiring.

So, yeah, go ahead: a room made of cocks trying to fuck you forever.
posted by seanmpuckett at 3:38 PM on June 9, 2012 [14 favorites]


The Admiral class at Vanguard has a lower expense ratio because the minimum investment into it is 10K. I imagine the other classes of that fund have lower requirements and a higher ratio.
posted by selfnoise at 3:50 PM on June 9, 2012


I know this isn't what you want to hear. It's much easier to rail against the current lousy economy than go without, and you shouldn't have to go without anyway, it's not fair. You're right

A note here, I have no student loans or credit card debt, I've never borrowed a cent from my parents, and I have gitten by on $8000 a year. I currently make more than average. I'm still never going to be able to retire.

If I'm never going to be able to retire, and I don't have huge debts, then half the country is ridiculously, comedically screwed.
posted by fnerg at 3:58 PM on June 9, 2012 [4 favorites]


I imagine the other classes of that fund have lower requirements and a higher ratio.

Yes, it's 0.18%. I work for a small company which uses Paychex for the 401k and payroll. While we only have around 15 people or so within our 401k plan, we benefit from the mass of participants of all Paychex clients since we can access the Vanguard Signal Funds which typically have as low or lower rates than the Admiral funds, even if we only contribute a small amount. (The Signal 500 Index is 0.05% for instance.)
posted by NailsTheCat at 3:59 PM on June 9, 2012


Also, the original social security act was in 1935, meaning that all the depression era scrimpers and savers had some help to look forward to.

We don't have such a rosy future.
posted by fnerg at 4:03 PM on June 9, 2012


If you own a house before you're ready to retire, you have no mortgage to pay, only property taxes.

If you own a house before you're ready to retire, it means you could afford to save the 20% down payment while you were young.

Where does the idea that "Social Security is going to die" come from?

It comes from the fact that the only party that gets its way is actively trying to kill it for anyone under 50 (under the guise of "saving" it).

It could be exclusively used to pay for a means tested "social security" safety net.

Means testing Social Security turns it from "gandma and grandpa getting back the money they paid in" to "dirty old lazy leeches stealing my tax money for their vacations and fancy gold-plated wheelchairs" (or basically what my mom says about retired school teachers). The fastest way to kill of SS is probably to make it means-tested first.
posted by dirigibleman at 4:04 PM on June 9, 2012 [1 favorite]


John Cohen: My employer doesn't do any matching. I expect to be ineligible to contribute to a Roth IRA within a few years if my salary increases as I expect (I'm single). I'm not interested in a traditional IRA because it's tax-deferred, which seems like the worst possible way to treat my money, since I expect both my income and tax rates to increase in the future.

Actually, if you're making anywhere near enough money to be ineligible to contribute to a Roth, you would probably derive a greater benefit taking the tax deduction from contributing to a Traditional IRA. There are a couple of corner cases where a Roth makes sense, such as:
  • Having very little income but still able to contribute the max per annum to an IRA
  • Rolling over funds from Traditional accounts during a year of low income (you're in between jobs, for example)
  • About to be filthy stinking rich as the owner of a dotcom about to go public and you want to legally avoid paying basically any tax whatsoever
As others have mentioned already, the tax-deferral is not as bad a deal as you make it out to be, since you will be in a lower tax bracket during retirement for a whole bunch of reasons (e.g., no more kids to support or put through college, house and car paid off, etc.).
posted by indubitable at 5:11 PM on June 9, 2012 [2 favorites]


If only shit was free! No brokerage commissions, no costs for systems to track who owns what, so settling and clearing, or custodial fees.

Uh, hi. Shit is free. I get 100+ free trades/year from my broker and never come close to using them up, I pay no custodial fees or anything else like that, and I own funds that have some of the lowest expense ratios you can get anywhere. In my personal accounts, that is. The 401(k) that my employer chose charges 1% in fees even though my employer already pays all of the administrative costs. That's pure profit right there, and they can do that because, hey, what are we going to do? The 401(k) is still ever so slightly better than just putting things in a taxable account.
posted by indubitable at 5:17 PM on June 9, 2012 [2 favorites]


My money market account appears to be making a little bit of money, but compared to the rate of inflation I'm actually losing it, bit by bit. It's time to pull it out and invest in... what, Euros? The Yen? It is completely insane that a society has deluded itself into thinking that investment income is this magical self-perpetuating machine. Luckily my investments are small enough that the penalties are miniscule and I won't have to keep pumping money into it in some vain hope that things will ever recover. The truth is that they shouldn't recover! I'm pretty sure the investment culture is tied to credit culture and both are poisoning any hope my generation has of retiring. I'm going to have to fix people's spyware and printer problems until I die.
posted by tmt at 5:31 PM on June 9, 2012


My money market account appears to be making a little bit of money, but compared to the rate of inflation I'm actually losing it, bit by bit. It's time to pull it out and invest in... what, Euros? The Yen? It is completely insane that a society has deluded itself into thinking that investment income is this magical self-perpetuating machine

I know! You put your money in the second safest place you can put it and it doesn't make you shit!

You'd think there was some kind of risk vs reward thing going on.
posted by Talez at 5:48 PM on June 9, 2012 [3 favorites]


I'm surprised everyone is suggesting a traditional IRA over a Roth. I've done the math, and I always come out better with a Roth. I'm actually planning to wait until I inevitable spend a couple years involuntarily unemployed and convert my traditional accounts to Roth.

I'm currently in the 28% tax bracket, and expect to be in whatever the equivalent of the 25% bracket is when I retire. is that not reasonable?
posted by heathkit at 5:52 PM on June 9, 2012


Uh, hi. Shit is free. I get 100+ free trades/year from my broker and never come close to using them up, I pay no custodial fees or anything else like that, and I own funds that have some of the lowest expense ratios you can get anywhere. In my personal accounts, that is.

Wait, how does this work? How does your broker get paid?
posted by heathkit at 5:53 PM on June 9, 2012


You'd think there was some kind of risk vs reward thing going on.

Which brings us back to the point of the article, which is that there are a bunch of hidden costs and fees that are eating into the rewards that we're risking our retirements for.
posted by fnerg at 5:55 PM on June 9, 2012


Also, for what it's worth, I'm using the calulator here.
posted by heathkit at 5:56 PM on June 9, 2012


I know this isn't what you want to hear. It's much easier to rail against the current lousy economy than go without....You could get laid off. You could suffer from a chronic illness in a country that fails at healthcare.--misha

That's a false duality, misha. People can scrimp and save and follow all your advice, and they can complain about the economy...

because the economy, and the politics, tax laws, and financial players behind it, sucks rotten eggs.

Is your life perfect? And if it isn't perfect, don't you complain about those things that aren't? If enough people, on a mass scale, complain, then maybe others will join in and maybe we can actually do something about it.

Telling people to stop complaining is counterproductive.
posted by eye of newt at 6:42 PM on June 9, 2012 [3 favorites]


fnerg: "Sooo... they expect people to retire on half a million or less with the very real prospect of no social security to back that up"

Fortunately no, because the worst case projects leave SS solvent when payments are reduced to 75 percent of their current obligation. I cannot fathom what chain of events would lead the nation to declare "Well, 75 percent is worse than nothing at all, so I guess that's the end of Social Security!"

On the subject of 401k fees it's hardly surprising. Banks have been lobbying for some time for different "default options" than cash accounts. So you get lifecycle funds instead with absurd management fees and indirect fees. And while you can find better options out there, they're usually only made available to large investors; you need between 10 and 50k to qualify for Admiral shares. Doesn't sound like much until you realize your money is split between IRAs, 401ks and such, and between different investments inside each of those.
posted by pwnguin at 7:25 PM on June 9, 2012 [3 favorites]


At some point in every con, the marks wake up to it. Modern Republicanism has been going forty years or so, and the illusion is wearing thin. The time is long gone when supply-side low-tax economics could be seen be an honest objective observer as viable, and what keeps it going now is marks in denial, marks conning other marks (eg, raising their children as Republicans), and marks defending the sunk costs by sinking in more and more intellectual, financial and social capital.

Their side of the boat is on fire, and they are desperately trying to drown it in oil and smother it in firewood.
posted by aeschenkarnos at 7:31 PM on June 9, 2012 [1 favorite]


Eye of newt: Telling people to stop complaining is counterproductive.

Yeah, that's why I didn't DO that, and why I ALSO point out that there are no guarantees even if they they try to do everything right. But feel fre to take just a few words, excerpt them from my comment, and then use them out of context.
posted by misha at 9:01 PM on June 9, 2012


It's much easier to rail against the current lousy economy than go without.--misha
People can decide for themselves whether or not there's an implied criticism of complaining here.

posted by eye of newt at 9:27 PM on June 9, 2012


But feel fre to take just a few words, excerpt them from my comment, and then use them out of context

Nah, I think I'll just toss the whole thing because it's utterly unhelpful and I can't even fathom why you posted it.
posted by adamdschneider at 9:38 PM on June 9, 2012


Just a couple of points.

The tax deferral thing should be understood, so if you don't get it, get thee to thy Google.

It seems the question is whether fees and expenses take too much out of the return. Perfectly reasonable question. I haven't seen anyone bring up any facts to really to support that assertion. Or even distinguish between fund managers and plan administrators. There are hundreds of discrete businesses which contribute to the investment decision, the execution, the ongoing management of dividends and splits or bond shit, the sending of statements on and on ad nauseum. Its late, so I'll go with some anecdata for an example of the types of things these fees pay for. I just finished a 4 year project to sell and install a market data distribution system for a major fund company. Revenue to my company was 10-15m ongoing round numbers, there were about 150 of the client's people involved in this max - figure half time on average. These people were paid much more than I was, figure 200k annually fully loaded. There hundreds of applications to be modified, tested and released. Who do you think paid for this? I do believe at least at this customer there was huge waste and inefficiency, which we did a great job reducing so if you are a customer of this fund...you're welcome :-) Obviously bad news was they eliminated over 70 jobs :-( So keep that in mind, all my friends will be unemployed if we really do a good job reducing fees...

Institutions pay something like an average .01 a share commission, and I'm NOT going to get into how this works...

indubitable, you seem like you ought to know the difference between retail and institutional business. You are provided retail brokerage service. You are paying for it via the system, maybe account fees and certainly margin and stock lending is a profitable biz. Depending on who you have accounts with, I'd make sure that I knew the broker well. If you are getting only free trades, that broker is doing it for a reason, right? Also, that broker is probably getting paid for order flow, and there is such a thing as a spread, very complex world here.

Managers chase 'alpha' which is return greater than their benchmark - the index. Very very few beat the index consistently over time, HOWEVER, depending on time horizon, managers can hit home runs, and have good returns over some arbitrary time period. This is how they market themselves. You have to be careful what question you are asking. If I invest 10k in Y1 and get following returns Y1=10%, Y2=17%, Y3=2%, Y4=6%, Y5=7%, with a benchmark return of 7%, I can critique my manager for his performance over the last 3 years, but overall he's beaten the benchmark. You really have to understand the value and make a judgement.

If your point is that you can invest your own funds via a broker, then sure. Just buy a good no load mutual fund, passive or active management, or select your own portfolio. Use an ETF if you want. Plenty of good equity sector ones, gold, interest rate, foreign, whatever you want. There are thing which eat return in that space too. Nothing is free. If you choose to select your own stocks, well, others can opine on that. I do that, using ETFs now and sector funds before, which suck from a performance standpoint, and its only personal inertia which has stopped me from selling and changing. Its a lot of work to select stocks with any hope of even making a good choice. I seem to be able to. I've been around and in this business for 25 years. Lucky? Quite possibly. If you are reading this, chances are you won't be able to. I only even try with limited funds.
posted by sfts2 at 11:07 PM on June 9, 2012 [2 favorites]


So now workers are having to complain about crumbs being pilfered from crusts of bread our employers have thrown at us. If only we were losing smaller crumbs!

Back when aspects of our economy were more civilized, when employers had more of a sense of responsibility to the employees that made organizations possible, there were defined-benefit pensions that actually provided substantial retirement security.

The replacement of traditional pensions with 401(k)s has served employers, not us workers. They've lessened their liabilities and ravaged our retirement, and held our wages stagnant while fattening their profits.

It's absurd to simply complain about whether this fee is too high or that fee is acceptable when the very system itself is an attack on us.
posted by univac at 11:23 PM on June 9, 2012 [3 favorites]


No. You need to allow choice of 401(k) provider. Employers just go for the lowest fees and let the employees get screwed.


My understanding is that employers are under no obligation offer 401k plans at all.
posted by mrhappy at 11:57 PM on June 9, 2012


All I know is we have Fidelity and I was doing fantastic with tier III choices. Work must have caught wind because they took away all tier III choices.

Jerks.
posted by stormpooper at 6:54 AM on June 10, 2012


Heh. Cute. People that actually have a 401k are lightyears head of me, and they're being screwed. Something to look forward to, if I ever actually have any money.
posted by lazaruslong at 11:41 AM on June 10, 2012 [1 favorite]


Very very few beat the index consistently over time, HOWEVER, depending on time horizon, managers can hit home runs, and have good returns over some arbitrary time period.

This is still totally consistent with random performance centered around the index.
posted by en forme de poire at 6:35 PM on June 10, 2012 [1 favorite]


spicynuts: "Well the headline is misleading.., are the fees for maintenance of 401(k)s regardless of what funds/stocks/bonds you have in them or are the losses due to the fees of each individual MF you own inside your 401(k)? If the former than switching to index funds is useless if you want to maintain the tax benefits of a 401(k)."

Absolutely misleading. Any fees "for high trading ratios" are just high fees; the high trading ratios are the excuse for charging them.

It's like hiring a guy to fix something for you, and agreeing to pay him by the hour, regardless of how long it takes. Your repair is going to take a loooooong time, but the bill isn't high because it takes so long; it's high because you gave him permission to overcharge you.
posted by IAmBroom at 8:06 PM on June 10, 2012


vibrotronica: "401ks have always been a scam."

Says a man who never depended on a pension for his retirement, that was raided by the company as it sank underwater...

... and doesn't appreciate the free money offered in company matching; nor the ability to choose whether to pay taxes upon retirement (401k) or now (Roth); nor the ability to pick investments that you believe in, rather than the stipend your company has planned out for you.

Honestly, you sound like a 10-year-old complaining "everything sucks, anyway." Explain exactly why it's a scam. Use examples. Discuss; instead of threadshitting.
posted by IAmBroom at 8:19 PM on June 10, 2012 [1 favorite]


wierdo: "justkevin: "Solution: index funds. Vanguard 500 admiral, for example has an expense ratio of 0.05%, about 1/30th the average according to that Demos article."

Uh, Merrill shows that particular fund at 0.34%.
"

Merrill doesn't own it, so I don't know why you checked them. If they really claim that, they're lying. It's 0.05%.
posted by IAmBroom at 8:19 PM on June 10, 2012


dirigibleman: "If you own a house before you're ready to retire, it means you could afford to save the 20% down payment while you were young."

It hasn't been 20% for a long time now. It should be. The Crash of 2008 might not have happened if it still was. But it isn't.
posted by IAmBroom at 8:23 PM on June 10, 2012


Honestly, you sound like a 10-year-old complaining "everything sucks, anyway."

The whole concept of an employer-run retirement plan (401k) is kind of silly to begin with. The obvious solution to this fee problem is do away with the 401k and just increase the IRA contribution limits. Gets rid of all the overhead for the company (and changing their matches to higher salary is simple) and most importantly allows the free market to compete for people's funds - the American way! It's just unfortunate that these financial companies have Congress bought and paid for.
posted by Durin's Bane at 8:30 PM on June 10, 2012


indubitable: "Rolling over funds from Traditional accounts during a year of low income (you're in between jobs, for example)"

SON. OF. A. BITCH.

Wait, is this real? (Checks....JEEZUS!)

So, if I decide to quit a job, or have a tip on impending layoffs, I could transfer my 401k into a Roth, pay taxes on my part-year income, and essentially retire tax-free?
posted by IAmBroom at 8:48 PM on June 10, 2012 [1 favorite]


The whole concept of an employer-run retirement plan (401k) is kind of silly to begin with. The obvious solution to this fee problem is do away with the 401k and just increase the IRA contribution limits. Gets rid of all the overhead for the company (and changing their matches to higher salary is simple) and most importantly allows the free market to compete for people's funds - the American way! It's just unfortunate that these financial companies have Congress bought and paid for.
posted by Durin's Bane at 10:30 PM on June 10


I don't know. If I received the match as a higher salary, I'd probably spend that money now, because I am a secretary making a secretary's salary and the extra $1700/yr I'd make if I got salary instead of a 5% match would be real easy to spend on things I need now. But if I don't have a retirement fund of some kind, I don't get that money at all, so I have this incentive to save, even though I can only kind of afford it. I don't think I am at all unique in this regard.
posted by joannemerriam at 11:28 AM on June 11, 2012


IAmBroom: "indubitable: "Rolling over funds from Traditional accounts during a year of low income (you're in between jobs, for example)"
...

So, if I decide to quit a job, or have a tip on impending layoffs, I could transfer my 401k into a Roth, pay taxes on my part-year income, and essentially retire tax-free?
"

Checked my numbers and the facts, now that I'm not sleep-deprived. If I had known this in 2008 when I was expecting to be laid off (and was), I could have saved over 10% of my nest egg in taxes. It has a catch (of course): the taxes on the entire rollover have to be paid the next year, without withdrawing money from the 401k/Roth nest egg (or else that is counted as taxable income, moving you up to a higher bracket and defeating the purpose). But I could have done that then.
posted by IAmBroom at 11:50 AM on June 11, 2012


Says a man who never depended on a pension for his retirement, that was raided by the company as it sank underwater...

The first time I was ever given the option of "investing" in a 401k, the company I was working for went under and the owners stole all the 401k money. The owners ultimately went to prison, and the former employees got back pennies on the dollar, years later. But by all means, tell me why my experience couldn't have happened, and how 401ks are not just a way to pump working people's money into the stock market and generate fees.
posted by vibrotronica at 1:30 PM on June 11, 2012 [1 favorite]


More fee transparency is needed here. I work with a firm that administers retirement plans and we aren't egregious in our fees, but there is a troubling trend to shift fees from the corporation who sponsors the retirement plan toward the employee participants in the plan.
posted by dgran at 1:53 PM on June 14, 2012


The first time I was ever given the option of "investing" in a 401k, the company I was working for went under and the owners stole all the 401k money. The owners ultimately went to prison, and the former employees got back pennies on the dollar, years later. But by all means, tell me why my experience couldn't have happened, and how 401ks are not just a way to pump working people's money into the stock market and generate fees.

While we're at it let's ban cell phones because AT&T decided to overcharge people. It's all a fucking scam anyway, right?
posted by Talez at 9:40 AM on June 15, 2012


It's not a scam, but 401ks are a huge handout to the financial services industry. Every publication, seminar, or pamphlet sent out to employees includes prominent information such as Morningstar ratings and performance compared to the market for the past five years. But they don't have huge bold letters on every page reminding employees that fees kill performance, active management does not tend to add value, and in the long run, the vast majority of mutual funds wind up tracking the market (only they perform worse than the market because of fees).

Employees with no background in finances very predictably chase past performance (*past performance is not an indication of future results) and diversify into different segments (mid-cap value health industy + small cap growth energy + large cap blend...) without every having someone sit down with them and explain why the 1.3% fee (or 2.6% or 3% fee) of every single non-indexed mutual fund every created should read like a slap in the face.

Most people who invest in 401ks are being charged money to support financial parasites who have managed to make themselves a fundamental and non-negotiable part of every responsible citizen's financial planning and long-term financial security. It's OK to be upset about that, I think.
posted by jsturgill at 10:14 AM on June 15, 2012 [1 favorite]


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