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What Your 401(k) Provider Doesn’t Want You to Know

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What Your 401(k) Provider Doesn't Want You to Know

What Your 401(k) Provider Doesn’t Want You to Know

Born in 1984, the 401(k) plan gave regular Americans a way to make tax-deductible contributions to a retirement account directly from their paychecks.

Today, it’s the single most important investment vehicle for most people in the country:

  • 90 million Americans participate in 401(k)s
  • $6 trillion in assets are invested in 401(k)s
  • 51% of employers match a portion of employee 401(k) contributions

The only problem? With trillions of dollars at stake, financial firms have scrambled to get their hands in as many 401(k) cookie jars as possible.

And today, the vast majority of plans are characterized by huge commissions, expensively managed funds, and layer upon layer of additional – and often hidden – charges.

Flying Below the Radar

Today’s infographic is from Tony Robbins, and it uses data and talking points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.

It reveals that although 401(k) plans can be used as crucial vehicles for tax-free retirement saving, 92% of investors admit that they do not have any clue about the fees associated with their plan.

Further, 71% of people enrolled in 401(k)s incorrectly think that there are no fees at all.

The Retirement Savings Drain

Many people are unaware of the types of fees that get loaded onto 401(k) plans – and here are just some of them that get passed to the investor:

  • Investment expenses
  • Communication expenses
  • Bookkeeping expenses
  • Administrative expenses
  • Trustee expenses
  • Legal expenses
  • Transactional expenses
  • Stewardship expenses

How much does this all end up costing?

According to a thinktank report from Robert Hiltonsmith, the additional 401(k) fees can cut down the size of your retirement nest egg by an average of 30% for an average worker earning $30,000 per year (and saving 5%), this ends up being $154,794 over his or her lifetime.

For someone making $90,000 per year, it works out to a whopping $277,000 in 401(k) fees.

Paying to Play

Hidden fees are bad, but this next practice is potentially even worse.

It turns out that most big-name 401(k) providers accept payments from the mutual funds they offer on their plans, as a part of revenue sharing agreements. In other words, many of the funds you get to choose from are not there based on merit – instead, they were the ones that coughed up the money to be there.

Not surprisingly, these tend to be actively managed, expensive funds – some of which even charge a “front-end load” fee of 3% to even buy into.

Why are there so few options to choose from?

  • 93% of 401(k) plans carry under $5 million in total plan assets
  • These are the small and medium-sized companies that make up most of the economy
  • However, they also have the lowest buying power to demand better options for their employees

As a result, most providers offer limited options to their smaller, less lucrative accounts – and the low fee options that are offered are sometimes marked up big time.

For example, one major insurance company offers an S&P 500 index fund for 1.68% annually when the actual cost is 0.05%. That’s a 3,260% markup!

Small Fees Make a Big Difference

How much do these seemingly tiny percentages really hurt savers? More than you think.

Take two people saving for retirement generating the same return – one is charged 1% in fees, and one is charged 2%.

The 1% difference in fees may not sound like much, but through the power of compound interest, it works out to 10 years of extra retirement money!

What to Do About It?

The problems here are systemic, and not any one company is to be blamed. If you want to take action, here’s what you can do:

Examine: Take a look at your plan’s fee disclosures and the expense ratios of mutual funds you’re invested in. If expense ratios are above 1%, you are likely paying too much.

Compare: Look at available fund options and switch to lower fee options if they offer similar levels of performance.

Lobby: If your 401(k) is getting battered by fees, tell your employer. Employers not only have a fiduciary duty to benchmark their 401(k)s, but also to seek the best option for employees.

The journey towards financial freedom is tough enough as it is – and while a 401(k) is a wonderful tool to help you get there, it needs to be used correctly!

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Will Tesla Lose Its Spot in the Magnificent Seven?

We visualize the recent performance of the Magnificent Seven stocks, uncovering a clear divergence between the group’s top and bottom names.

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Will Tesla Lose Its Spot in the Magnificent Seven?

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

In this graphic, we visualize the year-to-date (YTD) performance of the “Magnificent Seven”, a leading group of U.S. tech stocks that gained prominence in 2023 as the replacement of FAANG stocks.

All figures are as of March 12, 2024, and are listed in the table below.

RankCompanyYTD Change (%)
1Nvidia90.8
2Meta44.3
3Amazon16.9
4Microsoft12
5Google0.2
6Apple-6.7
7Tesla-28.5

From these numbers, we can see a clear divergence in performance across the group.

Nvidia and Meta Lead

Nvidia is the main hero of this show, setting new all-time highs seemingly every week. The chipmaker is currently the world’s third most valuable company, with a valuation of around $2.2 trillion. This puts it very close to Apple, which is currently valued at $2.7 trillion.

The second best performer of the Magnificent Seven has been Meta, which recently re-entered the trillion dollar club after falling out of favor in 2022. The company saw a massive one-day gain of $197 billion on Feb 2, 2024.

Apple and Tesla in the Red

Tesla has lost over a quarter of its value YTD as EV hype continues to fizzle out. Other pure play EV stocks like Rivian and Lucid are also down significantly in 2024.

Meanwhile, Apple shares have struggled due to weakening demand for its products in China, as well as the company’s lack of progress in the artificial intelligence (AI) space.

Investors may have also been disappointed to hear that Apple’s electric car project, which started a decade ago, has been scrapped.

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