I don't mean to pile on. I know looking at your 401(k) statement is so painful these days many employees don't bother to open it.
History tells us that markets recover over time. Your 401(k) will increase in value, but it will still be far short of what you will need to retire. Why?
Because of hidden costs that enrich 401(k) providers. These costs are totally unnecessary and could be easily eliminated if only your employer cared enough to do the right thing. Most don't.
There is no end of research indicating that index funds outperform funds that try to "beat the markets." I call these funds "hyperactively managed funds." Index funds are also far less expensive.
While "less expensive" is good for employees, it is bad for brokers and advisors to these plans because it deprives them of excessive fees. The porky pig fees in most 401(k) plans include undisclosed trading costs, the payment of excessive brokerage commissions, the practice of subsidizing record-keeping services with high fund management fees and the payment of marketing fees for selling the high-cost funds in the plan, among many others.
Details concerning these fees and practices are set forth in the testimony of Matthew D. Hutcheson (PDF doc) before the House Education and Labor Committee. Most of these fees are hidden. It would take a fiduciary accountant to ferret them out. Why should you care?
Hutcheson gave the example of a 401(k) done right and one done the "business as usual" way. In each case, two 30 year old employees invested $3,000 annually in their 401(k)s. In 30 years, the "good" plan had $333,463 in it. The "bad" plan had only $251,000. Over longer periods, the difference is much greater.
Fees and costs do matter.
If there ever was a time when employees should be "mad as hell and not going to take it anymore", this is it. You deserve a 401(k) plan that is in your best interest. Congress is (finally!) looking at this issue. Write your representative and demand legislative reform.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books, 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, 2008).
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Reader Comments (Page 1 of 1)
12-14-2008 @ 12:34PM
steve bourg said...
Dan: Hate to say it, but your title doesn't make sense. Your example shows what you mean, which is true. But it means the correct title would be: "You can add 30%, 30 years from now".......which, unfortunately is irrelevant for those of us WAY over age 30. I've had most of my money in low-cost indexes for the last 15 years, they've still plummeted 40%, and I'm switching to individual "recesssion-resistant"-type stocks for the next 4-8 years. I do NOT trust Obama/Pelosi/Reid to do ANYTHING helpful for our economy, which unfortunately is already much less than 100% Capitalism.
12-14-2008 @ 3:39PM
Donald said...
Steve, actually it is you that is confused. Dan Solin is right on the money. Why? Because the added 30% is over an investment time horizon sufficient to generate an expected return. If you react now, you will lose the upside that will certainly come in the future, presuming of course your portfolio is properly structured. It's a shame so few people understand how the markets work. What has happened this year is not the end-all measurement. Those people who bought passive investments like crazy right now will realize that 30% upside Solin is talking about. He's right on. Stop reacting and start learning.
12-14-2008 @ 7:36PM
billp37 said...
"Pensions and retirement accounts are the other main sources of retirement income. Eighty-five percent of our poll respondents said they want those protected from financial institutions going bust. Their concem is valid. Some companies have reduced or suspended their contributions to 401(k) plans, as General Motors did for its salaried workers in October, and some corporate and public pensions look increasingly shaky.
According to an October analysis of the largest 500 companies in the U.S. by ratings agency Standard and Poor's, pensions are "on the way to reporting the largest underfunding in history," worse than the $219 billion in underfunding reported during the last bear market, in 2002. A separate analysis of the same 500 companies by Goldman Sachs in October showed that 18 employers, including General Motors, U.S. Steel, and Boeing, have pension obligations that exceed the value of the companies. ExxonMobil, Johnson & Johnson, and two others were underfunded by at least $1 billion. Some pensions were taking undue risk with their money, with 11 of the largest U.S. companies investing 80 percent or more of their pension plans in stocks, the Goldman Sachs report notes. ..."
http://www.prosefights.org/nmlegal/libel/libel#consumerreports