Oh dear readers, as I mentioned last week we are going to Peru for a week and a half. Now is as good a time as any for a blog break. The next post probably won’t be until mid-April. SAD FACE! But it will be our first Ridinkulous Quarterly Expense Report! Exciting! In the meantime, I hope this topic gets your blood boiling like it did mine. I’m going to need the next few weeks to recuperate.
“Max out your 401(k)!”
So goes the typical Early Retirement maxim. Save every penny and “make mine tax-deferred, please!” Sounds good in theory, but after some recent discoveries, I see the flaw in this advice. Sometimes, you really, really shouldn’t max out your 401(k)!
Marge was finally able to start contributing to her company’s 401(k) retirement plan recently. Through some absurd reasoning, common at many private companies, I believe, you have to work at least one year before you can put your own money into their retirement account. It’s nonsense how companies hold out on benefits! But I have to admit, once she was finally eligible, I was excited to look at our new investment options!
There it is! The newest “It’s Your Story” retirement fund guide! I felt like I’ve waited so long! The first bunch of pages, as usual, are for all the investment dummies out there. They make sure to hammer home how important saving for your retirement is, and give you quizzes to find out your risk tolerance.
But we know all that. We want the good stuff. Show me the investment fund choices! What was there going to be inside? Target date retirement funds? Large cap stock indexes? International? Bonds?? Emerging markets!?? The suspense was killing me, and I tore into that prospectus!
You know how we do: We invest in broadly diversified index funds to reduce our risks and keep the fees to a minimum, so I was all keyed up to find what this 401(k) company had to offer…
WHAT! YOU’VE GOT TO BE SHITTING ME, MAN! LOOK AT THOSE FEES!!
I CURSE THE HEAVENS ABOVE! WHY?? WHY GOD DO YOU ALLOW THIS TO EXIST! Oh Saint Bogle, deliver us from fees!!
I tell you, Ridinkuloids, I could not believe my eyes looking down the list of investment options. My eyes were literally burning! You’re gonna pay two percent for virtually any of them! SEE THE RAGE IN MY EYES AND FEEL MY WRATH!
I guess it’s been a while since I’ve looked at one of these 401(k) guides. Is this the norm now?? I’m lucky enough that my work’s plan offers a variety of low cost investment options. Half of them are even with Vanguard! So through my work, I am very accustomed to paying somewhere between 0.02% and 0.15% in annual fees.
So what’s the deal? Surely, if they’re charging so much, these funds must be better! Let’s have a look at them!
For whatever reason, this guide is from December 31, 2011. For comparison’s sake, let’s see who beats Vanguard’s Total Stock Market Index Fund (VTSAX), a very boring, very broadly invested fund that provides exposure to the entire stock market, and is not actively managed. In other words, no one is really in charge. This fund is a central part of our retirement portfolio.
For the five years ending 12/31/11, VTSAX returned 3.13%. After a 0.05% fee, that is 3.08%. It was not a great five years for the stock market. But these funds are actively managed by investment professionals. This is what they do for a living! Surely, they must’ve all beaten boring VTSAX, where no one is managing anything.
OK, zoom in on that listing there and see. Alright… so scanning the 13 stock funds they have on offer, I see one that beat the Total Stock Market Index. One… ONE. Invesco Small Companies Fund. Five others had returns that did beat VTSAX, but their exorbitant fees destroyed any benefit gained! As for the other seven funds that did worse than the index fund, I have no excuse for them. They bit the big fucking boner.
Look at Invesco’s Global Real Estate Fund. Even spread over a generous five years, their annualized return was -6.58%! You really have to try to bomb that hard!
Yes, on that listing, you might see all of the hash marks I made, instantly ruling out funds all over the place. They are just awful. But there is one fund I reserve a certain special level of stomach-burning bile for: Oppenheimer Cash Reserves.
YOU’VE GOT TO BE SHITTING ME! WHAT THE FUCK WHAT THE FUCK WHAT THE FUUUUUUCK!
If anyone finds me dead of a heart attack, please go break down the doors at Oppenheimer headquarters and demand justice, because they’re responsible for my death!
There are no words!! No words for the highway robbery they are committing! Why hasn’t anyone been thrown in prison! Why hasn’t a mob burned the building down!
You put your money in a “cash reserve” basically as a safe haven. It is free of any market fluctuations. It’s supposed to be a good place to save for short-term expenses. The fund simply invests in government securities and high-quality debt instruments. As such, the past five years have meant basically zero growth. The equivalent at Vanguard again is the Prime Money Market Mutual Fund.
But the difference is that Vanguard can leave your money alone for a 0.16% expense fee. Oppenheimer, doing the exact same thing, demands as 1.52% fee!! Not only are you paying them to do nothing, in the current environment, you are ensuring that you will lose money! $10,000 in the first year will turn into $9,848 in the second year, $9,698 in the next year, and $9,551 year after that. Three years in, you’d have lost almost $500. Some safe haven!
Irresponsible 401(k) Operators: Destroyers of Retirement
What the hell is this 401(k) company thinking? What the fuck does Oppenheimer think they’re doing by ensuring a negative return and raping your retirement funds with fees. This is somebody’s retirement you’re screwing around with!
Not only are the fees outrageous, but the types of funds on offer are nothing that should be offered in your run-of-the-mill retirement plan. I would say these funds are even irresponsible to offer! The average worker doesn’t know the difference between a growth and a value fund, but here’s a 401(k) operator offering goddamn junk bonds and natural resources?
How is anybody supposed to make a respectably diversified plan out of shit like this? By asking for help. They are basically setting you up to be locked into needing their advice! Unless you feel comfortable dealing with these esoteric investments (I don’t) this is one huge bad idea wrapped in a stinky old diaper.
On the bright side, this whole mess with the investment fees got me thinking in a broader sense about retirement accounts. How many different types there are, the pros and cons of each, and I came to realize, hmmmm, for the past few years, Marge and I had entered the 25% federal tax bracket. Maybe it was time to start thinking about tax deferred accounts?
Previously, I hadn’t paid this subject much mind, because we didn’t have much money to deal with. Well, now that the tax man is taking an additional 10% from us, maybe it’s a good time to visit this topic. So I am working on an analysis ranking all of the types of retirement accounts based on some variables. (And you might be surprised that a rape-based 401(k) plan like this is not always the worst choice!) Stay tuned for The Retirement Account Decision Tree!