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Why Pay 401(k) Fund Managers to Lose Your Retirement Money for You?

In the late 1930’s and 1940’s, pension plans were becoming popular to attract and keep quality employees.  The investment choice for pensions were insurance companies.  They offered the best return for the least amount of risk.  Wall Street and mutual funds hadn’t yet become available to the little guy, so safe insurance companies were used exclusively.
All through the Great Depression and World War II and up to 1974, pension funds were guaranteed and spread out over millions of lives. Workers did not change jobs, so portability was not an issue.  Investment risks for retirement funds were nothing like they are today. Insurance companies spread the investment risk out over millions of people.  Think about this:  No one ever lost any money, not ever! These pensions offered guaranteed, predictable income for life, including a spouse!
But then in the late 1960’s and early 1970’s, traditional pensions started getting too expensive to fund. Enter Wall Street. It got in bed with the U.S. government to help create IRA and 401(k) plans and this really changed the retirement game.  This required the employee to become an “investor” of sorts and play the market, even though the average worker knows nothing about how to go about doing this. To this day, employees think their employer is “in charge of my retirement,” not realizing that it is their responsibility to manage and watch carefully their 401(k) or IRA.  Because Pay yourself firstmost people do not have the time, education, or inclination to play the market such that they can put 401(k) money into riskier investments that will produce a greater rate of return (albeit with a lot greater risk), they tend to put their money in more conservative stocks and mutual funds. Returns on such funds average around 6 percent, which doesn’t even keep up with their debt interest rates, so essentially employees aren’t really making much headway towards saving for retirement, especially if they are in debt.
To help employees feel like they are being taken care of, an employer will often have money managers hold an annual meeting to talk about repositioning money to reduce investment risk, maximize rate-of-return, and blah- blah-blah.  
So how does all this help you? Are you, the employee, learning how to invest?  Are you learning how to save money?  Are you learning about tax savings?  What, if anything, are you learning about managing your own money?  Remember this is your money, your retirement, your need-to-know. Certainly you are the person who needs to be handling your money, not your employer!  But Wall Street will say, “Leave it to us because we know best and we are the money managers.  We have been trained, and we are licensed… so you cannot sue us when we screw up and lose your money.”
Did you know, Wall Street charges fees of 1 to 3.5% on average to do this marvelous investing for you?  What that means is that you have to earn 1 to 3.5% before you get any growth.  So when you post 5% growth one year, it means you actually earned 8.5%, and paid 3.5% in management fees. In 2008, when the market took a dive of 43 percent, Wall Street still charged the 1 to 3.5% for the right to lose your money.  And what if you are lucky enough to Salespersongrow your 401(k) to a $400,000 balance? The management fee of 1 to 3.5% is still placed on that total, each and every year.  This adds up to a ton of money!  And come on, how hard is it, really, to manage $150 billion?  Certain parameters need to be chosen by the person in charge, but once done, the computer groups the money, then spreads it out, orders are executed and it goes quick.  So why do they charge this 1 to 3.5% each year?  To me these fees seem excessive, even if certainly they do have costs involved in managing your money.  In the coming months and years I think you will see the U.S. Department of Labor establish new regulations that seriously change how fund managers get compensated and held responsible as a fiduciary.
Remember Sadly, in the 401(k) and IRA game, you are your own investment adviser — you, without any training, without research data, and without any assistance — you are it.  And you get to pay large fees every year to someone else for this privilege of “not know what you are doing.”
Thankfully there are wonderful alternatives!  I urge you to learn about them.  Email me at www.peter@moneymastery.com or call 801-292-1099.

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