The Great American Rip-Off

The idea of a 401(k) created by Congress was a beautiful idea. What is not attractive about them is how they are managed—managed by Wall Street. In Congress's favor, the idea was brilliant; they merely forgot one small detail. Where there are over a trillion dollars, there will be Wall Street lurking in the shadows.

Yum, Yum, can't you see these creeps smacking their lips!

Of course, the way Wall Street keeps its hands in the cookie jar is sort of behind the scenes. They don't take money from the plan participants in plain view; they subtract it in the form of fees before the actual 401(k) owner account balance is known.

Not only is it a Rip-Off, but it is done with the full permission of the plan participant and fully approved by the governing bodies. How did they get this approved? Simple. It is the form the actual participant signed when the 401(k) was established at his workplace.

All legal.

Many plan participants are unaware of the fees being subtracted from their accounts; they only focus on what the account shows. Some costs, in many cases, are obscene.

Here is an Insider's Secret: The Wall Street guys get paid even if the account loses money. They make money regardless of how the account performs. It loses value; they get paid. It gains value; they get paid.

How does the actual process work? The plan participant has a full menu of choices to invest his money; almost entirely, the menu has mutual funds. The employer sets up the plan, and an outside fiduciary does the accounting and recordkeeping, then the INVESTMENT broker helps the participants make their selections. Does he care? No. His fees are almost the same regardless of what fund or category of fund I selected. Once the participant makes the selection, the employer withholds the contribution, making the investments.

Here is another Insider's Secret: the investment professional gets paid on the participant's account year after year, even if no contact or anything is provided. Fees for the sale are constantly flowing to the investment professional.

Let's have a look at those fees.

Each mutual fund choice in a 401(k) has operating costs; costs which plan participants who are the only ones with financial exposure, allow the fund to collect the fees.

These fees, however, are mostly hidden from savers because they've taken off the top of the mutual fund returns. Fees, therefore, don't appear on the participant's 401(k) account statements; they're disclosed only in the fund prospectuses. Most plan participants don't read the prospectus or would have difficulty understanding them if they did.

Fees and expenses for mutual funds in a 401(k) fall into four categories. 

Administration fees: Recordkeeping, statement production, processing, following correct procedures and regulations are all examples of this category of expenses. Fees for these services typically range from .25% to .5% (annually) of the overall value of the mutual fund.

Investment or Asset Management fees: The actual management of the fund, employee salaries, research, and management are covered in this fee category. Typically, annual fees would fall between .5% and 1.2%.

Marketing fees: These fees, also known as 12b-1 fees, cover advertising, trail compensation, brochures, information, and other sales-related expenses. Often these fees cover any rebate of sales expenses to the original brokerage firm or similar arrangement. Marketing fees are limited to 1% annually.

Trading fees: Assets held in the mutual fund are often bought and sold. When this occurs, fees and expenses are generated to cover the cost. Mutual funds pay a broker to buy and sell a stock, bond, or asset in the fund. Fees for these services vary based on the asset and the investment amount.

The combination of all fee categories can drastically affect the returns for the plan participant. In some cases, it would be possible to have a range of fees from 1% to 3%. Over a period, fees at this level will undoubtedly be a negative factor in long-term returns. Plan size also influences the overall expenses. Smaller plans appear to have a much higher overall cost than larger plans. How does the plan participant protect themselves? The apparent answer is education and being informed of the actual total expenses in each category. Education and questions can play a crucial part in how long-term growth can help your retirement account.

401(k)s are not forever; should you leave your employer, your 401(k) can be rolled over to a self-directed IRA, and you get to choose who helps you and where the funds are invested.

The IRS offers help with information and questions regarding a 401(k). Here is the link: https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview