Rip Offs

I’ve shared with people that I talk to for years that I thought that the typical 401(K) plan was a rip-off, a path to mediocrity.  One important key to investing is to monitor your investment expenses and if you begin to look into your 401 (K) holdings that would be an excellent place to start.  For most of you that don’t know that not only are 401 (K)’s predominantly mutual funds, but that mutual funds normally offer two types of shares and they are Institutional and Retail shares.  The main differences between the two are the fees.  In the event you make the wrong choice on which ones to purchase you can say goodbye to huge amounts of your money. 

   There is a case going on at the Supreme Court in Washington that involves $3.8 billion in assets and some 20,000 folk that would like to retire.  The goal of the court is to decide whether the plan’s sponsor, EDISON INTERNATIONAL (NYSE: EIX), is at fault for purposely putting its employees in high-free retail shares in order to slash the company’s administrative costs by $8 million.

   Why is the Supreme Court interested in this case you ask?  Mainly because what has happened at Edison, happens across the financial world daily.  Unsuspecting investors subsidize the wealth of the well-informed.  The uneducated investors believe that the “institutional” shares sound like something that only the likes of a Goldman Sachs or a Berkshire Hathaway have access to, however that idea is completely false.  In the case for many funds, the only qualifying factor is the minimum investment.  There are some retail shares that may have a minimum investment as low as $500, however, if you have $10,000 to invest (and sometimes less), you can get the so-called institutional shares.  The shares and the management of the shares are the same but the differences in the fees are huge.  The Oxford Club uncovered one that had a low 0.05% in annual fee for its institutional shares but the ones that purchased the retail shares were hit with a 0.17% in management fees.  As you see over the course of your investing towards retirement the compounded difference is tens of thousands of dollars.

   The writers of the Oxford Club were given access recently to an eye opening report prepared by some of the nation’s top financial scholars.  Professors Ian Ayres of Yale Law School and Quinn Curtis of University of Virginia just released a paper called “Beyond Diversification: The pervasive Problem of Excessive Fees and Dominated Funds in 401 (K) plans.”  A full 16% of the plans the duo studied had fees so high that “young investors would be better off forgoing tax benefit and investing in stand-alone funds.”  This is what we at Suburban Trader suggest then set up a Trust Fund.  Even worse, they saw that several plans offer mutual funds with negative guaranteed interest rates.  It is amazing what a little research can turn up, so many people have 401 (K)’s that have fees that are so exorbitant that the supposed tax savings are destroyed.  Fees are so high that the only person getting rich from the plans are the folks selling the mutual funds.  If you like your 401 (K) fine, but do some research of your own and look at some low cost options.

Great Investing.

Disclaimer:  Suburban Trader is a publisher of financial news and opinions and NOT a securities broker/dealer or an investment adviser.  You are responsible for your own investment decisions.  All information contained in our newsletters or on our web site(s) should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence.