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No match
About a quarter of US companies have eliminated or are considering the elimination of matching 401k contributions. That's according to a new online survey conducted for Charles Schwab. On Marketplace Morning Report, Jeremy Hobson pointed out that 87 percent of respondents listed matching contributions as the most important aspect of their 401(k)'s.
More from the Schwab survey:
According to the study, nearly nine in 10 (88%) of executives report that employees within five years of retirement are very concerned about the adequacy of their retirement planning and more than half of respondents (58%) believe that employees losing confidence in the 401(k) plan is one of the most significant challenges their company will face in the coming year relative to retirement planning.
This was a survey of larger companies, but another recent survey found that about half of small businesses were considering reducing or eliminating their matches.
I highly recommend the PBS Frontline documentary, Can You Afford to Retire?
There are some great interviews. Here, Brooks Hamilton, who designs 401(k) plans, talks about the hundreds of billions companies have already saved by going with 401(k)s instead of pensions:
The Department of Labor pointed out that when ERISA went on the books, of all contributions that were being made to 401(k) plans, the worker put in 11 percent; the company put in 89 percent. That was in 1974. Fast-forward to 2000, and the same source of data, the Department of Labor, the same said that of all contributions being made, workers are putting in 51 percent, companies 49 percent. The contributions have also gone down. We're not putting in 6 and 8 percent of payroll anymore; we're putting in far less, maybe half of that, most of it by the worker. So the companies are putting in 1 or 2 percent of payroll, as a general statement, to a 401(k) plan.
John Bogle, founder of Vanguard, points out how the fee structure of 401(k) plans is a killer:
The example I use in my book is an individual who is 20 years old today starting to accumulate for retirement. That person has about 45 years to go before retirement -- 20 to 65 -- and then, if you believe the actuarial tables, another 20 years to go before death mercifully brings his or her life to a close. So that's 65 years of investing. If you invest $1,000 at the beginning of that time and earn 8 percent, that $1,000 will grow in that 65-year period to around $140,000.
Now, the financial system -- the mutual fund system in this case -- will take about two and a half percentage points out of that return, so you will have a gross return of 8 percent, a net return of 5.5 percent, and your $1,000 will grow to approximately $30,000. One hundred ten thousand dollars goes to the financial system and $30,000 to you, the investor. Think about that. That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return, and you, the investor in this long time period, an investment lifetime, put up 100 percent of the capital, took 100 percent of the risk, and got only a little bit over 20 percent of the return. That is a financial system that is failing investors because of those costs of financial advice and brokerage, some hidden, some out in plain sight, that investors face today. So the system has to be fixed.
Yes, I believe I've heard that line before.
But I'm interested in hearing your approach. Have you changed your thinking about retirement in the last few months? Your strategy? If so, how?
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Stay away from mutual funds. Stick with index or target date funds with low expense ratios (less than .25%) and low turnover. You don't need to pay fund managers a pretty penny (for the rest of your life) when you can spend a couple hours researching your options and make the most of your investments.
You can find low fee target date funds (Fidelity has one with .49% expense ratio and 33% turnover). For the lazy investor or someone just starting out I think target date is a good start. It also doesn't help with the limitations to most peoples' 401k options.
With the bigger companies like Fidelity, Vanguard, and T. Rowe Price you only pay one fee (expense ratio). That expense ratio is made up of the fees the underlying funds charge. Now some due charge a management fee on top of that, but not all. There are plenty of target date funds with lower expense ratios than index funds which thus means lower fees.
Scott, great blog, I read it everyday. As the 20-something individual investing in the mutual fund system, I'm a little confused over John Bogle's structure of the mutual fund. How does one end up with only 20% of the return and the financial system gets almost 80% return when my net return is still 5.5% over a lifetime? I don't have a financial background but it doesn't make sense to me. Thanks for any clarification!
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