401k plan

Who’s Crushing Your 401k Plan?

A 401k plan bombshell was dropped by Frontline’s Martin Smith on the PBS program, The Retirement Gamble aired in April 2013.

 If you are concerned about your retirement and you are invested in a 401k plan, this captioned documentary is a must watch:

401k planFor a quick synopsis, Wall Street on Parade’s Pamela Martens wrote an article summarizing Martin Smith’s program. Below are some of the highlights from her article. Read her full article here.

So, what’s the 401k plan bombshell?

“If you work for 50 years and receive the typical long-term return of 7% on your 401k plan and your fees are 2%, almost two-thirds of your account will go to Wall Street.

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] one of the most highly respected men in finance and graduated magna cum laude from Princeton University with a degree in Economics.

This is a portion of the transcript from the program:

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.

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

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% of the risk and you get 30% of the return?

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

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%, leaving you with just a little over $36,000.

Check It Out For Yourself
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% for 50 years. That gives you a return of $ 3,278,041.36. Now change the calculation to a 5% 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% reduction in value that Smith’s example showed.

Presently, 70% of Americans who have any kind of retirement plan at their place of employment have a 401k plan. Not everyone is paying 2% fees… But, historically, Wall Street has preyed on the least informed and the least educated, which tends to be the poor and middle class.

Federal Trade Commission Testimony

Consider the testimony of Gail Kubiniec, a former Assistant Manager at CitiFinancial, a unit of mega Wall Street firm Citigroup, to the Federal Trade Commission in 2001 concerning the premise on which she loaded on extra charges to loans:

‘I and other employees would often determine how much insurance could be sold to a borrower based on the borrower’s occupation, race, age, and education level. If someone appeared uneducated, inarticulate, was a minority, or was particularly old or young, I would try to include all the coverages CitiFinancial offered. The more gullible the consumer appeared, the more coverages I would try to include in the loan…’ ”


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I am an independent affiliate and not a financial planner or investment advisor. The information on this site is for educational purposes and not intended to give financial, investment, legal, or tax advice. The postings on my blog are my personal opinions and do not represent the positions, strategies and opinions of any company.

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