Memo to participants/considerers of 401(k) investments

16 years ago

Greetings investors,

All that I know about the 401(k) system, you could stick into your eye! As a Canadian I know next to nothing of them, but have gained the impression that mutual funds are related to them.

I have found some information that claims to relate to them which I think may interest some of you who use them or may be interested.

The source is a financial advisory service that I prefer not to identify here but will tell you privately if you ask. They are solely an advisory service and do not manage funds or other financial instruments.

Their message assumes a contribution of $100.00 per month, $1,200.00 per year.

They assume also a rate of return of 10.4% on the ongoing investment, which they claim to be, " ... the market's average over the long haul".

Then they assume that one investment which the owner chooses is operated by a management company which charges an annual management fee of 2% of (I assume) the central account, allocated according to the proportion of that account owned by each of the investors ... so does not show on their annual account report, but does appear on the prospectus outlining the operating system of that fund - their Management Expense Rate (MER).

Their calculation is that, after 40 years of such an investment and management program, the value of the fund would be $349,000.

However, they say, if the not-so-average investor, wanting to learn more about the way that his/her investment works, could make use of a manager whose annual management fee was only 0.4%, and assuming that the growth rate could be as they assumed earlier, the average rate of growth of the market as a whole, that $1,200.00 annual investment for 40 years would have grown, after 40 years, to $632,000.

That is an increase of $283,000.00, a substantial increase.

There are some assumptions here which might not work out in fact - they are for purposes of comparison in this instance.

I offer this information for your consideration, but do not recommend it (or not, either).

As I have said in these forums recently, the rate of annual management fee charged by management companies of mutual funds has a substantial result in terms of their ongoing performance results.

The longer the term - the larger that variation on the final result becomes.

In this case, a potential increase of $283,000. (or any comparable amount) is pretty good potential pay for learning how to manage one aspect of one's asset more effectively!

Some ideas that you may find interesting.

ole joyful

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Comments (8)

glenda_al
16 years ago
Interesting!
Chemocurl zn5b/6a Indiana
16 years ago
Hi OJ,

You are right in that they usually contain a choice of mutual funds.

Below is a link to the funds offered by my previous employer, Verizon.

One of the main benefits of a 401k though is that the employer matches all or a portion of an employees contribution to it up to a certain percent of their wages.

Pensions as you well know are more rare than they were in years past, so the 401k is often a wonderful incentive for the worker to save for his/her retirement, with b4 tax dollars.

Sue

Here is a link that might be useful: 401K Funds offered by Verizon's plan
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joyfulguy
Original Author
16 years ago
Hi again Sue,

Can one carry other than regular mutual funds in one's 401(k)?

Are there other tax-deferred retirement accounts which one can use that allow one to use other types of investment and which allow for employers' matching contributions of part of the invested amount?

I gather that one must pay tax on money before investing it into the Roth plan(s), but that tax is deferred ... (never payable? I doubt that) on the increase developed.

ole joyful
sable_ca
16 years ago
Joyful - There are no federal taxes on a Roth IRA, not on the profits, not on anything. Some profits may be taxed by the state. That's the beauty of the Roth. If you dip into your Roth before age 59 1/2, taxes and a penalty are due. And of course the Roth is only available with after-tax money, unlike the regular IRA. We rolled our regular IRAs into Roths about 8 years ago and had to pay the accrued taxes on profits, but now we are home free. IMHO it's a very good deal.

If you're interested in the details of how Roth IRAs are run, you could call Vanguard or Fidelity - the two largest brokerage houses in the US - and ask them to send you some literature.

401(k)s are only available through one's employer and what is there for investment depends on the employer - usually a selection of mutual funds, but it also could include the employer's stock.
azzalea
16 years ago
There are some serious aspects to consider.

On the tax deferred kinds of savings--who's to say the taxes won't go UP considerably before you start to collect on it (and truly--have you ever known taxes to go down? AND have you ever known the government to NOT take advantage of any taxable situation to the fullest?)

These funds are NOT in the investor's control. Once your money is in, you're allowing someone else to make decisions for you--and trusting that they're as concerned about your future as you are (unreasonable, right?). Not to mention--they aren't as safe as we've been led to believe. There are people already who have LOST their investments in these instruments. Not a common thing, but it is possible.

Lastly. And this is huge to use baby boomers. Congress has already discussed--several times--the possibility of denying social security to ANYONE who has one of these independent retirement accounts UNTIL they've used up their own money. So far, each time that's come up, it's been tabled, but as social security becomes more and more critical, as more and more of us boomers retire, it's a distinct possibility that something along those lines may be passed.

All that being said, I do have a small SEP account (similar type account for the self-employed)--but only took it out because one year I had a tax situation whereby if I hadn't opened the account, all the money would have gone to the gov. in taxes. It was a caculated gamble with money I wouldn't have had anyway. It's in a fund with an extremely good reputation and I can assure you--it's not doing much in this economy. There were a few years where it made good returns, but more where it just held it's own. It depends upon the market and as we all know, right now, that's NOT going to most of us rich overnight. But still, because this was money I wouldn't have had anyway, even if it were to totally disappear, I haven't lost a thing.

When those funds were first proposed, I knew they were a dangerous option. Almost everything I said at the time has come true to some extent.

Better by far, to educate yourself, and CONTROL your own retirement funds. (BTW--my own money, that in my control, grows far faster than the bit I've got stashed in that fund).
Chemocurl zn5b/6a Indiana
16 years ago
As sable said above, it is a choice if mutual funds offered under the 401k plan and often stock with the company (employer). When I was working, my employer contributed 50 cents for every dollar I chose to put into my 401k, up to 6% of my salary. Bingo...I immediately made 50% on my money, but there were stipulations. That 50% was not really mine until I had my account for 5 years I believe and became fully vested.
The 50% that they 'gave' me was in the form of company stock, GTE or Contel at the time.

These funds are NOT in the investor's control. Once your money is in, you're allowing someone else to make decisions for you--and trusting that they're as concerned about your future as you are (unreasonable, right?). Not to mention--they aren't as safe as we've been led to believe. There are people already who have LOST their investments in these instruments. Not a common thing, but it is possible.

Are you speaking of 401Ks? Did those who lost everything maybe choose to put all their eggs into one basket, by just holding company stock in their 401?...not a good thing at all.

All 401k that I know of, have a choice of investments to choose from...see link from my post above. The employee controls what funds their money is in within the 401, and can change the allocation at any time. Some employees just choose to do an equal mix of things...say 10 funds, putting 10% into each of them. Others maybe choose a 1/3 mix of aggressive, moderate, and conservative.

Placing one's savings, whatever it is, 401, sep, IRA, is not for those who do not understand the market and its many ups and downs. Because of that, some will lose sleep over what appears to be lost, even if it is just temporarily.

About 30 years years ago, I remember my (company) stock climbing a good bit in one day. I made $5,000 in one day! Boy was I ecstatic! When it later came down, did I lose money? No. Did I really make $5000 that day it climbed so much? No. I only would have made the money if I had chosen to sell it while it was up. It later came down some, went up some, came down some, etc, and has served me well to this day with its nice dividends. Often times one loses on a stock, or fund, if they choose or must sell when the market (stock or that fund) is down.

Sue
joyfulguy
Original Author
16 years ago
I react negatively to the idea of being in a position where I may have to sell when it doesn't suit me.

I prefer to be in the driver's seat rather than in the back seat and just along for the ride.

Taxi drivers like to get paid ...

... but when I ride a cab, I tell him where to go.

When I go where he chooses (even though he may know the city well) ...

... I may go to places that I don't like.

Or ... get the run-around.

ole joyful
monica_pa Grieves
16 years ago
Ed,
Your advice is often appreciated, but ...

I don't see an understanding of the US Tax laws regarding 401K investments in your argument, nor is there a full understanding of the various types of investment options or corporate contributions that are offered by many 401Ks.

As stated above, there are choices, and there are differences in performance by fund managers within Investment companies that offer corporate 401K plans.

Nor would I, a US citizen, advise on Canadian employer-offered investment plans or taxes.

Memo to participants/considerers of 401(k) investments

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glenda_al

Chemocurl zn5b/6a Indiana

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joyfulguy
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sable_ca

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Memo to participants/considerers of 401(k) investments

Comments (8)

glenda_al

Chemocurl zn5b/6a Indiana

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joyfulguyOriginal Author

sable_ca

azzalea

Chemocurl zn5b/6a Indiana

joyfulguyOriginal Author

monica_pa Grieves

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joyfulguy
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joyfulguy
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