I finally got around to watching my recording of “The Retirement Gamble” on PBS’s Frontline. It confirmed what I already thought about actively managed mutual funds being a rip-off for people like me, and probably most people, who just have no idea how to select which of the sliver of mutual funds will outperform the market indexes.
I’m not even sure there exists a person that can consistently do that. Besides that challenge, even if you are lucky enough to choose the outperforming fund, it has to way-outperform the index to make up for the cumulative expense hit from the fund's operating fees. So why pay exorbitant fees that will erode the value of your investments when you can pay one-tenth the cost and simply match the market?
In any case, the show did a good job of explaining why actively managed mutual funds are a generally a bad deal. Vanguard’s granddaddy, John Bogle has been saying this for years, and he got a chance to make his point loud and clear on this program.
But as the wise Steve Vernon asks in his recent piece for CBS MoneyWatch, while the show did a great job of exposing this issue, the real question is, what will you do about it?
If your answer is to steer clear of Wall Street all together and stash all your retirement funds in the safety of cash, well there’s a name for that. I just heard it last weekend in an investing seminar. It’s called “going broke safely.” Unless your pile of cash is huge, you’re just not going to be able to keep up with inflation’s bite over the long haul.
Even worse than that approach is throwing up your hands and saving nothing in response. Vernon says that the majority of workers who participate in 401(k) plans aren’t even contributing enough to receive the free money of their employer’s match. And that’s just the folks that are participating, what about the workers that aren’t participating at all?
This is the real retirement gamble, as Vernon points out:
This points to a much bigger problem for our collective retirement security: People just aren't saving enough for retirement. Your employer may offer a plan with the best funds in the world, but if you haven't saved enough money, it won't matter because you won't have a secure retirement. On the other hand, if you have enough money even in a crummy 401(k) plan, you have a good shot at a secure retirement. Once you retire from your employer, you can always roll over your accounts to a financial institution that offers investments with low fees and good investment performance history.
Excessive mutual fund fees are just one of the culprits eroding our retirement security. Some people profiled in the show had invested all of their 401(k) in their company’s stock. The show's reporter had dipped into his retirement to fund his kids’ educations. Many of the folks just didn’t feel up to the daunting task of investigating their investment options.
Seems to me, despite the many flaws of our 401(k) system of retirement, we are really our own worst enemy. And that part, we can do something about.
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(Photo details: Wynn/Encore Las Vegas)