PBS Drops Another Bombshell: #WallStreet Is Gobbling Up Two-Thirds of Your 401(k)

[progree]

11. This is pure nonsense (broad-brushing). My 401(k) was mostly invested in Vanguard index funds

where the expense ratio is about 0.10%. And where the employer paid the 401k management fees and provided a match.

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The "it ate up 2/3" is based on a theoretical calculation like so:

Assume that without expenses, a dollar invested 50 years ago would have gained 7%/year:

Ergo, that dollar would have grown without expenses to 1.07^50 = $29.457 in 50 years. (the "^" is exponentiation)

With 2%/year expenses, the after-expense growth rate would be 5%/year ,

so the dollar would have grown with expenses to 1.05^50 = $11.467 in 50 years.

So yes, in this scenario, 29.457 - 11.467 = 17.990 is lost to expenses, which is 17.990/29.457 = 61% or very roughly about 2/3.

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But I very much doubt that most 401ks have anywhere near 2%/year expenses.

And, also, if you do a more realistic calculation, where the worker contributes a certain amount every year, the percentage lost due to expenses is much less than looking at a lump sum made at the beginning of the period. (What worker makes his/her entire lifetime contribution to a 401k all in one year -- his first year on the job?) And even that overstates the problem, in that, due to inflation, workers contribute more in their later years than in the earliest years.

Also the percentage lost to expenses is much less if you look at a shorter period like 20 or 30 years.

And it doesn't include an employer's match to an employee's contribution.

Xcel Energy's plan: 25 choices http://www.myplaniq.com/LTISystem/f401k_view.action?ID=1049

Click on the "Show All Funds and Details" gray button below the bottom right of the table.

Then when the new page appears, Click on the "Show More Fund Parameters & Ratings" blue button just above the table to see the Expense ratios. The index funds are around 0.10% expense ratio. The target date retirement funds are all 0.16% to 0.19%.

If your employer is only offering you choices that all involve 0.20% or higher expense ratio, you need to get your coworkers together, with pitchforks, and raise holy hell, because yes, you are getting screwed. Not by Wall Street but by your employer.