Markets
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!
Markets
Recession Risk: Which Sectors are Least Vulnerable?
We show the sectors with the lowest exposure to recession risk—and the factors that drive their performance.

Recession Risk: Which Sectors are Least Vulnerable?
This was originally posted on Advisor Channel. Sign up to the free mailing list to get beautiful visualizations on financial markets that help advisors and their clients.
In the context of a potential recession, some sectors may be in better shape than others.
They share several fundamental qualities, including:
- Less cyclical exposure
- Lower rate sensitivity
- Higher cash levels
- Lower capital expenditures
With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.
Recession Risk, by Sector
As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:
Sector | Margin (p.p. change) |
---|---|
🛒 Retail | -0.3 |
📝 Paper | -0.8 |
🏡 Household Equipment | -0.9 |
🚜 Agrifood | -0.9 |
⛏️ Metals | -0.9 |
🚗 Automotive Manufacturers | -1.1 |
🏭 Machinery & Equipment | -1.1 |
🧪 Chemicals | -1.2 |
🏥 Pharmaceuticals | -1.8 |
🖥️ Computers & Telecom | -2.0 |
👷 Construction | -5.7 |
*Percentage point changes 2021- 2022.
Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.
Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.
In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.
What to Watch: Corporate Margins in Perspective
One salient feature of the current market environment is that corporate profit margins have approached historic highs.
As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.
According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.
Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.
Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.
Sector Fundamentals Looking Ahead
How are corporate metrics looking in 2023?
In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.
Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.
For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.
S&P 500 Sector | Percent of Companies With Revenues Above Estimates (Q1 2023) |
---|---|
Health Care | 90% |
Utilities | 88% |
Consumer Discretionary | 81% |
Real Estate | 81% |
Information Technology | 78% |
Industrials | 78% |
Consumer Staples | 74% |
Energy | 70% |
Financials | 65% |
Communication Services | 58% |
Materials | 31% |
Source: Factset
Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.
Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.
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