lawgator1
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This thread is aimed at you financial gurus, droski and the like.
A 401k offers its members a list options for buying into managed funds. Typically, they charge 1.5 to 2.5 percent of your fund balance every year to manage your money. On top of that, there can be a variety of hidden expenses, such as advertising 12b1 costs and the expenses of turning over the stocks within the fund every year. From what I read, the average cost to an investor through his 401k is about 3.5 % a year.
An index fund buys a peice of every stock in the index. You can, for example, buy every stock in the Dow, or in the S&P 500. And then you just hang onto it. You buy more as time goes on. And hang onto it. The point is, the value of your holding is not managed and so there is no fee for researching stocks, commissions, trading fees, etc. The cost of such a fund is just operating expenses, and it is typically on the order of 0.19 % a year. Far less than the 3.5 percent you pay for management of your money in a 401k.
From what I am reading, only a tiny percentage of fund managers can beat the market over a ten year period. While they might have a good year this year, next year they will be behind the martket. And if you tack it over a long period of time, the average return for a managed money market trails the stock market by exactly what you would expect --- 3.5 %.
Ove the course of ten years this has a substanital effect on your resturns because, while 3.5 % may not sound like a lot, if you account for that over the course of ten years and the compound nature of having that money back in there, it can be huge.
Now, I also have checked into this and there was a proposal in Congress a few years back to require 401k companies to offer index funds. They not surprisingly fought it. Why? Because they make no money off an index fund. They only make money by convincing us that we need them to pick our stocks for us. The reality is we don't. In fact, we'd be way better off if they didn't.
Financial gurus, some questions:
1) Are there 401k companies that offer pure index funds?
2) Should there be? Should it be mandated?
3) Are there retirement vehicles with the same tax advantages as 401k's that do offer index funds?
4) If there are no such options, is it better to forego the tax advantages of a 401k and take the after-tax dollars and put them into an index fund?
5) Why don't people understand the simple and inevitable math of this issue?
Bottom line: This is an example of an industry that has basically created itself as a pure transaction cost on consumer/investors and had itself written into law. They give you enough of a tax break to make it worth paying for their services even though their services by and large totally suck and exist purely to generate profit for them at our expense.
A 401k offers its members a list options for buying into managed funds. Typically, they charge 1.5 to 2.5 percent of your fund balance every year to manage your money. On top of that, there can be a variety of hidden expenses, such as advertising 12b1 costs and the expenses of turning over the stocks within the fund every year. From what I read, the average cost to an investor through his 401k is about 3.5 % a year.
An index fund buys a peice of every stock in the index. You can, for example, buy every stock in the Dow, or in the S&P 500. And then you just hang onto it. You buy more as time goes on. And hang onto it. The point is, the value of your holding is not managed and so there is no fee for researching stocks, commissions, trading fees, etc. The cost of such a fund is just operating expenses, and it is typically on the order of 0.19 % a year. Far less than the 3.5 percent you pay for management of your money in a 401k.
From what I am reading, only a tiny percentage of fund managers can beat the market over a ten year period. While they might have a good year this year, next year they will be behind the martket. And if you tack it over a long period of time, the average return for a managed money market trails the stock market by exactly what you would expect --- 3.5 %.
Ove the course of ten years this has a substanital effect on your resturns because, while 3.5 % may not sound like a lot, if you account for that over the course of ten years and the compound nature of having that money back in there, it can be huge.
Now, I also have checked into this and there was a proposal in Congress a few years back to require 401k companies to offer index funds. They not surprisingly fought it. Why? Because they make no money off an index fund. They only make money by convincing us that we need them to pick our stocks for us. The reality is we don't. In fact, we'd be way better off if they didn't.
Financial gurus, some questions:
1) Are there 401k companies that offer pure index funds?
2) Should there be? Should it be mandated?
3) Are there retirement vehicles with the same tax advantages as 401k's that do offer index funds?
4) If there are no such options, is it better to forego the tax advantages of a 401k and take the after-tax dollars and put them into an index fund?
5) Why don't people understand the simple and inevitable math of this issue?
Bottom line: This is an example of an industry that has basically created itself as a pure transaction cost on consumer/investors and had itself written into law. They give you enough of a tax break to make it worth paying for their services even though their services by and large totally suck and exist purely to generate profit for them at our expense.
