The Retirement Gamble Facing Us All (PBS Hawaii)

This evening PBS Hawaii ran an eye-opening FRONTLINE documentary [] that strongly reinforced my long-held position about the ridiculous, exorbitant fees in the 401k/mutual fund business. As an example, you could take two next-door neighbors, living right here on Ala Moana Blvd. and one person is paying 10 times as much to invest in a 401(k) as the other person. Crazy, right? Well, to understand this whole fee business, FRONTLINE correspondent, Martin Smith, talked to my all-time favorite investing guru/financial mentor, Jack Bogle, the founder of Vanguard (and CEO, The Vanguard Group, 1974-96). I don’t represent Vanguard or sell any of their products, but I’ve always known it to be a stellar company. Vanguard offers some of the lowest-fee products on the market and is the pioneer of low-cost index funds. My favorites. Mr. Bogle says that if you want to improve your retirement outcome, make sure to minimize Wall Street’s take. That’s fees to you and me.

Jack Bogle says, “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. The money managers always want more, and that’s natural enough in most businesses, but it’s not right for this business. He goes on to say, “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.”

It’s this simple: Fund fees can erode as much as half or more of your prospective gains. For the sake of dramatizing the point, Bogle, shared a startling example. Assume you are invested in a mutual fund, he says, with a gross return of 7 percent, but that the mutual fund charges you an annual fee of 2 percent. Over a 50-year investing lifetime, that little 2 percent fee will erode 63 percent of what you would have had. As Bogle puts it, “the tyranny of compounding costs” is overwhelming.

In short, fees truly matter, in a BIG way. So what can you do? You aren’t going to find a fund that invests your money for free, but experts say you can come close by buying index funds. Their fees can be a tenth of what the average mutual funds charges. And over time, in bull and bear markets, on average, index funds perform better than their more expensive actively managed fund cousins. This is no secret to anyone who is paying attention.

So why aren’t our trusted financial advisers and those ads telling us to buy index funds? In fact, I have personally asked, why do some 401(k) plans not even offer them on their menus? The answer: Greed! It’s because even though an index fund might be a better option for you and me, a broker operating under a suitability standard has no incentive to sell it to us. He or she will make higher commissions from options that have higher fees.

What to do? Well, start paying attention. It’s your 401k or retirement mutual fund, take stock of it. Check out this FRONTLINE documentary []. I’m in the business and it made me rethink my own 401k and financial future. And as Martin Smith put it, “It just might do the same for you.” -GW

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