1. Do you know the hidden fees inside your 401k and mutual funds?
A Twitter White Paper.
So, here is the deal. Recently, I posted a thread showing the difference between a 401k and a properly structured life insurance policy.
You can read that here:
A Twitter White Paper.
So, here is the deal. Recently, I posted a thread showing the difference between a 401k and a properly structured life insurance policy.
You can read that here:
2. However, what I didn't realize at the time was everyone would focus on ONE part of the thread: that I used a 1.5% fee on the 401k, and the actual fees of the life insurance account.
And, I got a ton of " WeLl, AcKshuALy, I oNLy PaY .00007 PErCeNt.
sO yUor cAncELed."
And, I got a ton of " WeLl, AcKshuALy, I oNLy PaY .00007 PErCeNt.
sO yUor cAncELed."
3. By the way, no body brought up the HUNDREDS OF THOUSANDS OF DOLLARS IN TAXES that the client would have paid if she used a 401k.
Nope. They wanted to argue that a gagillion dollar investment company is basically paying THEM to invest money with them.
So....
Nope. They wanted to argue that a gagillion dollar investment company is basically paying THEM to invest money with them.
So....
4. Since it appears even people that claim to be wealth managers dont' understand how fees REALLY work, I'm about to explain it to you.
This is going to be a long thread, but you're going to know more about this than most CFP's and CPA's by the time you're done.
This is going to be a long thread, but you're going to know more about this than most CFP's and CPA's by the time you're done.
5. Before I get started, let me also add one other thing: I am an agnostic financial advisor. Meaning, I like whatever product or products are best for my clients.
And I bust my ass to be the single smartest person they know when it comes to ALL areas of personal finance.
And I bust my ass to be the single smartest person they know when it comes to ALL areas of personal finance.
6. If you're unfamiliar with me, then I recommend you go read my pinned tweet to see what I'm all about, and then come back to this thread:
7. So, I handle money under management.
I actually have a really good manager that won Lipper awards (they're like the Oscars, but for money, and much harder to get) because he helped his clients avoid massive losses in 2008 and 2009.
And the losses are what kill you
I actually have a really good manager that won Lipper awards (they're like the Oscars, but for money, and much harder to get) because he helped his clients avoid massive losses in 2008 and 2009.
And the losses are what kill you
8. Sometimes I recommend mutual funds. Sometimes properly structured life insurance.
Sometimes asset backed pensions, also known as annuities.
And, I've extensively studied the Social Security system, so I help my clients maximize that too.
And, I help them pay less taxes.
Sometimes asset backed pensions, also known as annuities.
And, I've extensively studied the Social Security system, so I help my clients maximize that too.
And, I help them pay less taxes.
9. I say this, only so you know that the original example was to show the effects of taxes and fees, and how non-conventional thinking could pay off.
Now, on to those pesky fees that you need to know about, so you can at least accurately calculate what you're really paying:
Now, on to those pesky fees that you need to know about, so you can at least accurately calculate what you're really paying:
10. So, here is what you're really paying inside a 401k or mutual fund.
We'll use the example of the Fidelity Contrafund, since it is the single most popular managed fund inside 401ks.
Yes, Index funds are cheaper. They should be, because you're not paying anyone to watch it.
We'll use the example of the Fidelity Contrafund, since it is the single most popular managed fund inside 401ks.
Yes, Index funds are cheaper. They should be, because you're not paying anyone to watch it.
11. And if you're OK possibly losing 40 or 50% of your money like has happened 2x in the last 20 years, so you can save a little on fees, well, bless your heart.
Be my guest.
But, you may spend years just trying to get back to break even the next time that happens.
Be my guest.
But, you may spend years just trying to get back to break even the next time that happens.
12. Back to the fees. According to Morningstar, the Fidelity Contrafund has a .83% expense ratio.
And that's what many we're quoting me,
But, that is only part of the story...
And that's what many we're quoting me,
But, that is only part of the story...
13. You see, those numbers leave out one *VERY* important expenditure: TRADING COSTS
Here is what Kiplinger’s Personal Finance says about trading costs:
Here is what Kiplinger’s Personal Finance says about trading costs:
14. 'UC Davis professor Roger Edelen and his co-researchers from the University of Virginia analyzed portfolio holdings and transaction data for 1,758 mutual funds from 1995 through 2006....
15. ...'Edelen found that transaction costs, or costs for trading securities within a fund, can be higher than the expense ratio.
The fees can vary by asset class....
The fees can vary by asset class....
16. ...'. For example, investors in small-cap growth funds pay an average of 3.17% in transaction costs, and large-cap value funds pay 0.84% per year.'
They are not the only one who says this.
Note what Economist Dan Egan wrote in 'The Hidden Costs Inside Mutual Funds':
They are not the only one who says this.
Note what Economist Dan Egan wrote in 'The Hidden Costs Inside Mutual Funds':
17. 'A fund’s TER (RC NOTE: Total Expense Ratio) includes the expense incurred when investors buy or sell fund shares, but it doesn’t account for trading costs incurred by the fund itself, such as brokerage commissions (for the fund’s active trading)...
18. ...' the bid-ask spread (the gap between what the seller of a security receives and the higher price that the buyer pays), and market impact.
That’s the term applied to the fact that a big order can move a stock’s or bond’s price disadvantageously...
That’s the term applied to the fact that a big order can move a stock’s or bond’s price disadvantageously...
19. ...' buyers may have to pay more than prevailing market prices to find enough shares to fill their orders, and sellers may have to accept lower prices to dispose of all of their shares....
20. ...'When you add up all these costs, well, they add up.
A study by the think tank Demos highlighted research indicating that a fund’s trading costs can exceed its TER, MORE THAN DOUBLING THE TRADING COST.'
A study by the think tank Demos highlighted research indicating that a fund’s trading costs can exceed its TER, MORE THAN DOUBLING THE TRADING COST.'
21. @Demos_Org , a public policy organization mentioned in the above article writes this in their article The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s:
'The median expense ratio of mutual funds in 401(k) plans was 1.27 percent in 2010....
'The median expense ratio of mutual funds in 401(k) plans was 1.27 percent in 2010....
22. ...'Trading costs vary from year to year, but have been estimated to average approximately 1.2 percent a year as well....
23 ..In the long run, the average mutual fund earns a 7 percent return, before fees, matching the average return of the overall stock market.
However, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned.'
However, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned.'
24. So, if you take Fidelity Contrafund as an example, even though the expense ratio is .83%, at a bare minimum, you would have to add the .84% in TER to that amount,
...giving you a 'real' cost of 1.67%;
Which, of course, is higher than the number I used in my example.
...giving you a 'real' cost of 1.67%;
Which, of course, is higher than the number I used in my example.
25. And, if any of you are investing in small cap funds, that TER number is going to much higher. Remember, the research showed it was over 3% ON TOP OF THE EXPENSE RATIO.
But I'm not done yet. It gets worse.
But I'm not done yet. It gets worse.
26. We've only been discussing mutual fund fees.
Now we've got to add in 401k fees as well.
Now we've got to add in 401k fees as well.
27. @MarketWatch reports 'the Obama Administration argued retirement savers lose $17 billion a year to conflicted advice and unnecessary retirement account fees.'
That was the reason for the DOL Fiduciary Rule a few years ago.
That was the reason for the DOL Fiduciary Rule a few years ago.
28. On top of the fees I've already explained, here are a couple more that are unique to retirement plans and 401ks in particular:
Administrative fees: These fees are for general management of the 401(k) and can be referred to as recordkeeping or legal and trustee services.
Administrative fees: These fees are for general management of the 401(k) and can be referred to as recordkeeping or legal and trustee services.
29. Service charges: These are associated with features or plan options the plan sponsor offers, and they vary.
And, of course, finding this information may not always be easy, and that is likely deliberate.
However, you may ask for a 404a-5 disclosure, which should list this.
And, of course, finding this information may not always be easy, and that is likely deliberate.
However, you may ask for a 404a-5 disclosure, which should list this.
30. So, in summary: There are many hidden fees inside your mutual funds and 401ks.
And, as I expressed in the thread that started this discussion, using a 1.5% expense ratio for the 401k was, in my opinion, a very fair comparison.
And, as I expressed in the thread that started this discussion, using a 1.5% expense ratio for the 401k was, in my opinion, a very fair comparison.
31. To those of you who disagreed, either respectfully or not, let's see your plan that's better. If not, in the future, just sit out discussions that are above your intellectual level.
Only @TPJansen stepped up, backed his stuff with math, and I'll comment on that tonight.
Only @TPJansen stepped up, backed his stuff with math, and I'll comment on that tonight.
@TPJansen 32. Oh, one last comment worth mentioning: I'm not trying to slam these companies for what they charge.
Obviously, you don't want Vanguard going out of business if they have you're money.
The whole point was, it's actually costing you more than you think,
Obviously, you don't want Vanguard going out of business if they have you're money.
The whole point was, it's actually costing you more than you think,
33. The whole point was, it's actually costing you more than you think, so when you're running your spreadsheets and math planning, you have a clearer picture of what is really going on.
Wait till you see my next thread on the diff between average and actual rates of return!
Wait till you see my next thread on the diff between average and actual rates of return!
