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Retirement Fees

38thDoe38thDoe lets never be stupid againwait lets always be stupid foreverRegistered User regular
edited September 2016 in Help / Advice Forum
So I watched John Oliver's Investment/Retirement Segment and while I feel like it is informative and funny, I feel like it doesn't really give me enough specifics. My parents have people they use, but I can't find out if they are fiduciaries or not. These people my parents use are selling a product that is managed by another company apparently? So I'm wondering if they are paying two groups of people for the same thing. I'm not sure if that's reasonable or what their fees are or even what reasonable fees are.

I'd like to figure out if these people are on the up and up and selling a good product. If they are I'd probably like to get in on it as well. What I'm looking for is what kind of questions I need to ask these people to determine that. Should I just flat out ask if they are fiduciaries? I tried googling it but came up with nothing. What kind of fees are reasonable? I gather that I don't need a managed plan, just some kind of market index tied to my potential retirement year? Is this something that varies from area to area? Should I shop around before committing? Do people do that?



This is the Last Week Tonight Segment Here:

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  • a5ehrena5ehren AtlantaRegistered User regular
    edited September 2016
    Basically, your parents are paying a fee to the broker/financial person and then the expense ratios for the funds they actually hold on top of that.

    Your parents probably aren't getting "ripped off", but most people are better off with a hands off investment with low costs like a Vanguard Target Retirement fund. Very, very few low-level financial pros beat the market over the long-term, and this number drops to very nearly zero once fees are accounted for.

    This statement obviously doesn't apply to the mega-rich and I-Banks, but they're not playing the same game as people like us.

    a5ehren on
  • 38thDoe38thDoe lets never be stupid again wait lets always be stupid foreverRegistered User regular
    Thanks for the answer, now at least I know what kind of fees they are up against. It looks like this is not the payroll deduction kind though which is part of what I'm trying to figure out. The vanguard site says you just put money in there from your bank account.

    Do you do the Vanguard instead of or in addition to a 401k at work? I heard max out employer matching, but I know these guys are running that too, so its probably getting fees from both companies again.

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  • FeralFeral MEMETICHARIZARD interior crocodile alligator ⇔ ǝɹʇɐǝɥʇ ǝᴉʌoɯ ʇǝloɹʌǝɥɔ ɐ ǝʌᴉɹp ᴉRegistered User regular
    edited September 2016
    38thDoe wrote: »
    Do you do the Vanguard instead of or in addition to a 401k at work? I heard max out employer matching, but I know these guys are running that too, so its probably getting fees from both companies again.

    You and a5ehren are talking about two different things. Let me break this down a little.

    Pretend that my mother's name is Alice. Alice has a retirement account. This account might be an employer-provided 401k where money is automatically deposited into it from a payroll deduction, or it might be an IRA where she has to transfer money herself. In some cases it might be something else (especially for people who work in education or government, who have similar funds that just have slightly different rules and names like 403b). Most of the time, though, it's going to be a 401k or IRA.

    Within that 401k or IRA, that money should be invested into one or more stocks or funds. If I look at Alice's 401k, she might have a statement that looks like this:
    Positions

    Vanguard 500 Index Admiral Shares: $90,000
    Core Bond Fund: $40,000
    Vanguard S&P 500 Index: $18,000
    Apple (AAPL): $1050

    Cash: $950

    Total Balance: $150,000

    Each of those funds has its own set of fees, its own rules, and its own expected and real returns.

    In a typical healthy scenario, Alice's 401k is invested primarily in mutual funds or exchange-traded-funds with low expense ratios and good expected rates of return. Index funds usually give the best returns for the lowest fees, so the typical rule of thumb for a small-time investor is to focus on index funds.

    Feral on
    every person who doesn't like an acquired taste always seems to think everyone who likes it is faking it. it should be an official fallacy.

    the "no true scotch man" fallacy.
  • CauldCauld Registered User regular
    edited September 2016
    Your 401k will tell you the fees on each fund it offers. I think anything over 1% is too much. My vanguard index fund through my 401k has an expense ratio of 0.04%, which is why i put most of my money in there, for example. I think the vanguard target funds are in the .7% - .8% range.

    The big benefit to doing an employer 401k is the matching contributions. If you get a 100% match on the 1st 3%, that's an immediate 100% return (after vesting, etc.) If there's no match, I would choose a low cost provider, like vanguard, for my IRA instead.

    Cauld on
  • FeralFeral MEMETICHARIZARD interior crocodile alligator ⇔ ǝɹʇɐǝɥʇ ǝᴉʌoɯ ʇǝloɹʌǝɥɔ ɐ ǝʌᴉɹp ᴉRegistered User regular
    edited September 2016
    Cauld wrote: »
    Your 401k will tell you the fees on each fund it offers. I think anything over 1% is too much. My vanguard index fund through my 401k has an expense ratio of 0.04%, which is why i put most of my money in there, for example. I think the vanguard target funds are in the .7% - .8% range.

    Yeah, this. Though to be honest I think 1.0% is way too high.

    Most of my money is in this fund (ITOT): https://www.ishares.com/us/products/239724/ishares-core-sp-total-us-stock-market-etf

    Expense Ratio: 0.03%

    Keep in mind that I'm not recommending this fund, just using it as an example of a low-fee fund. The reason I have it is because I have a Fidelity Traditional IRA, and Fidelity lets me purchase shares in ITOT without paying a commission. There was a period of time when that was the best fit for my situation, and I just haven't touched it since. (I also have a 401k. Having both is a little uncommon, but not unheard of.)

    According to WSJ,
    An expense ratio tells you how much an ETF costs. The amount is skimmed from your account and goes towards paying a fund’s total annual expenses. Remember, the expense ratio doesn’t include the brokerage commissions you pay to buy and sell ETF shares.

    The average ETF carries an expense ratio of 0.44%, which means the fund will cost you $4.40 in annual fees for every $1,000 you invest. The average traditional index fund costs 0.74%, according to Morningstar Investment Research.

    Morningstar also has an article on what they consider to be "high" fee funds: http://news.morningstar.com/articlenet/article.aspx?id=701598

    Most of the funds in this article have expense ratios of 1%-1.17%, which means you lose $1.00-$1.17 per year of every $100 you invest.

    Feral on
    every person who doesn't like an acquired taste always seems to think everyone who likes it is faking it. it should be an official fallacy.

    the "no true scotch man" fallacy.
  • hsuhsu Registered User regular
    38thDoe wrote: »
    Do you do the Vanguard [IRA] instead of or in addition to a 401k at work?
    If your work has a 401k match, always fund up to the 401k match.

    For the rest, IRA vs 401k depends upon (1) how much money you make and (2) how good your 401k is at work.

    If you make too much money, you have no choice but to only use your work's 401k.

    If you are below that salary limit, choose an IRA if your work's 401k sucks for choices. The trend has been for companies to just use Vanguard or Fidelity as their 401k providers, which gives you effectively unlimited choice, but if you have one of those 401k plans that has like 5 or 10 total mutual fund choices, go with an IRA.

    iTNdmYl.png
  • FeralFeral MEMETICHARIZARD interior crocodile alligator ⇔ ǝɹʇɐǝɥʇ ǝᴉʌoɯ ʇǝloɹʌǝɥɔ ɐ ǝʌᴉɹp ᴉRegistered User regular
    @38thDoe, Lifehacker has a good article on finding a financial planner who doesn't suck: http://twocents.lifehacker.com/how-to-find-and-hire-a-financial-advisor-who-won-t-rip-1729724424 and there are also some good links you can drill down through.

    every person who doesn't like an acquired taste always seems to think everyone who likes it is faking it. it should be an official fallacy.

    the "no true scotch man" fallacy.
  • SimpsoniaSimpsonia Registered User regular
    If you're concerned, what I'd recommend is finding out the exact funds that they have your mother invested in. Then, check them out on Morningstar, and put together a couple of the comparative charts vs some Vanguard funds like VTSAX (Vanguard Total Stock Market, my personal favorite) or VFIAX (Vanguard's Admiral S&P 500 Index). The charts can show you, if you invested $10k here, here's where they would be at now. It would be the only way to show her in an easy manner how she might be getting ripped off by high expense ratio funds.

    Before I started researching personal finance, I entrusted everything to my cousin who runs an Ameriprise franchise. Then I found out that the main fund he put me into has a 2.09% expense ratio. I don't talk to that cousin anymore. It was little more than highway robbery, and I actually lost money from 2013-now, when everyone else was skyrocketing.

  • Mr KhanMr Khan Not Everyone WAHHHRegistered User regular
    a5ehren wrote: »
    Basically, your parents are paying a fee to the broker/financial person and then the expense ratios for the funds they actually hold on top of that.

    Your parents probably aren't getting "ripped off", but most people are better off with a hands off investment with low costs like a Vanguard Target Retirement fund. Very, very few low-level financial pros beat the market over the long-term, and this number drops to very nearly zero once fees are accounted for.

    This statement obviously doesn't apply to the mega-rich and I-Banks, but they're not playing the same game as people like us.

    Even high level hedge fund managers don't perform that well for the outrageous fees they command. There are a few geniuses out there, but how much of that is just luck is up for debate.

    I've got a Target Retirement account for when i turn 65, but i'm hoping to get into a position with a 401k or 403b and employer match within the next year. My issue is that i'm just not making that much yet and need to have an employer pitch in if i'm going to get ahead.

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