IS YOUR 401(K) PLAN SECRETLY STEALING YOUR MONEY?

In January my wife started a new job. She gave me her 401(k) plan brochure so that I can discuss her investment options with her. I was pretty upset to find out that her plan offered extremely high-fee actively managed mutual funds (every fund had an expense ratio greater than 1%) and her plan only presented one index fund - an S&P 500 fund that charged a pretty high .60% expense ratio.

An expense ratio of 1% means $1 on every $100 you have in the plan is paid by you to the fund itself. You don't see these fees come out of your account at the end of the quarter, these fees are rolled into the price of the mutual fund. The mutual fund price is known by the acronym NAV (net asset value) - it's like the price of a stock, but for a mutual fund instead. It might not seem like a lot, but it is, and it adds up over time to a lot of lost money on your part. If your plan offers low-cost investment alternatives in the form of index mutual funds you can see that fee drop to maybe 20 cents on $100 or even less.

To put that into prospective would you pay $20 for a gallon of gas or would you go across the street and buy it for $4 a gallon. And the gas is the same; $20 gas isn't 5 times better. And what if your car maker forced you to buy $20 gas and you had no other choice even if you knew there was equally good gas out there for $4?

It's not my wife's fault, and it's not even her company's fault either. Too many companies are unknowingly placed into 401(k) plans with poor investment options because they haven't been shown there's a better way to invest and unfortunately I think at times advisors are someway incentivized or even compensated to set up employers with these inferior plans. Those additional fees are going to somebody.

Check out this great mutual calculator provided by bankrate.com: http://www.bankrate.com/calculators/retirement/mutual-funds-fees-calculator.aspx

Keep these numbers constant: investment amount, rate of return, and holding period (you want to compare apples to apples). Take the expense ratio for your mutual fund, that amount goes into total operating expenses, put in 1%, .5%, .2% and see how that impacts your final balance over time - it's drastic and startling at the same time.

Here's an example: say my wife had $100,000 in the S&P 500 Index fund with the .6% expense ratio. She's got 30 years until retirement (holding period), if she were to get an average annual return of 7% (rate of return), she would have $635,484 in her plan at retirement. This is good, but it can very easily be better. If her plan offered a low-cost S&P 500 Index Fund with say a .15% expense ratio, my wife would have $727,705 in her plan at the end of 30 years - both plans will offer the same return cuz they simply track the same index - they're both the same gallon of gas. That's a difference of over $92,000 just because of the lower operating expenses!

Fees matter!!! Check your 401(k) plan's investment options, are your mutual fund choices loaded with high fees? Look at the expense ratio for the fund, if you can't find it (generally a warning sign right there) punch the fund symbol (it should be 5 letters long and end with an X) into the quote lookup box at yahoo/finance.com. Click on 'profile' and check out the Fees & Expenses box at the bottom. Generally if your fund is not less than .5% you've got a high-fee fund and it is secretly stealing your retirement fund!

The solution: go to your employer and demand low-cost index funds for your 401(k) plan; it will simply save everyone more money for retirement. If enough people speak up, or maybe it just takes one person to alert his/her employer that there are better less expensive options out there, we can all start saving more money for retirement.

WHY YOU SHOULD STOP PICKING STOCKS NOW!

“Good stock picking is controlled by good luck; bad stock picking is controlled by bad luck. Luck determines your stock picking ability.”

There is no evidence proving anyone can consistently pick stocks and outperform the market’s return over time. We all get lucky and we all get unlucky, too. Picking individual stocks is a coin flip, you will be right 50% of the time and you will be wrong 50% of the time.

I don’t like those odds. Some people will get lucky a few years in a row; these people attract the press and get labeled stock pickers or great mutual fund managers. But the truth is these people inevitably underperform the market average over any given length of time – history has proven this. The general consensus is that a stock picker or a fund manager needs at least 20 years of performance to remove luck and chance from their return track record before any conclusions can be drawn.

WHAT CONTROLS STOCK PRICE MOVEMENT?

“The only stock price pattern is randomness; you cannot predict the future price movement of a stock (and no one else can either)”

Stock prices are determined by supply and demand; because prices reflect all known information a mispriced security cannot be known in advance. Take every single investor in the stock market universe; they are all doing technical analysis, fundamental analysis, following the advice of a broker, listening to a friend with a hot stock tip, throwing darts at board with ticker symbols on it, etc. – they are doing anything and everything to form an opinion about a stock.

All of those opinions get priced into each and every stock. So when you pick a stock because you think it is underpriced and it will go up in value more so than the entire market you are wrong and you are fighting an uphill battle. You have to understand you do not know any more than anyone else; you do not know more than the stock picker doing the same analysis or opposite analysis as you. The most accurate price of a stock is what that stock is trading at right now; know that market prices are the best estimates of value, price changes follow random patterns and future news and stock prices are unpredictable.

WHY DO WE INVEST?

We invest to make money. We buy stocks because we want to see the stock price go up. Have you ever met anyone who buys a stock hoping it will go down in price? But we also invest because we want to see our stocks go up more than the stocks we didn’t pick or all of the stocks out there (known as the market).

So we look for something that predicts the future and tells us our stocks will go up more than the stocks we didn’t pick or more than the market itself. No one can predict when a stock will outperform other stocks or the entire market; nothing and no one will ever tell us the future direction of a stock price’s movement. Stock price movement is random and picking stocks is all controlled by luck. However, if we all agree that our goal is to make money then the method that has proven to make us the most money over time becomes The Right Way to Invest.

THE ELECTION AND YOUR RETIREMENT

Have you found yourself saying, “Ugh, I hope that guy doesn’t win!?!” What if “that guy” does win? How does his victory impact your retirement portfolio? Notice I didn’t specify “that guy” is Trump or Biden…because – when it comes to your retirement portfolio – it doesn’t really matter who wins.

“It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But as nearly a century of returns shows, stocks have trended upward across administrations from both parties.” Taken from DFA's article here, and referencing the below graphic, regardless of the party in the charge, stocks go up when given enough time, therefore your retirement portfolio will go up when given enough time, as well. Come November 3rd, you’re welcome to be elated or livid for other reasons, but don’t be for stock market reasons.

how does the stocks market do depending on who's in office?