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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

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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Markets

The Dominance of U.S. Companies in Global Markets

U.S.-based companies have a heavy weighting in global equity markets. In most industries, their market capitalization exceeds 50% of the total.

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U.S. Companies Dominate Global Markets

Are global indexes as “global” as you think they are?

With the aim of tracking market performance around the world, these indexes incorporate securities from various regions. However, while the number of securities may be relatively well diversified across countries, a dollar perspective tells a different story. When market capitalization is taken into account, country weightings may become much more unbalanced.

Today’s visualization is based on a concept by S&P Dow Jones Indices that shows the percentage of U.S.-based companies in global sectors and industries as of December 31, 2019. The calculations reflect the market capitalization of companies in the S&P Global Broad Market Index (BMI), an index that tracks over 11,000 stocks across 50 developed and emerging economies.

Percentage of U.S. Companies by Sector

U.S-based companies—those that maintain their primary business affairs in the U.S.—are a major component of many global sectors and industries.

Here’s how it breaks down:

Sector% of U.S.-based CompaniesMost U.S.-heavy Subsector
Information technology73%Software (86%)
Health care65%Health care providers (82%)
Utilities53%Electric utilities (57%)
Real estate51%Equity REITs (69%)
Consumer discretionary49%Specialty retail (73%)
Consumer staples46%Household products (74%)
Industrials46%Aerospace & defense (73%)
Energy44%Energy - other (73%)
Financials44%Financials - other (73%)
Materials30%Chemicals (41%)

U.S.-based companies make up a staggering 73% of the information technology (IT) sector. However, China may soon threaten this dominance. The Made in China 2025 plan highlights new-generation IT as a priority sector for the country.

The U.S. is still the world’s leader, but China is coming up very fast.

Rebecca Fannin, Journalist & Author of Tech Titans of China

Healthcare is also heavily skewed towards U.S-based stocks, which make up 65% of the sector’s market capitalization. This weighting is perhaps not surprising given the success of many U.S. healthcare companies. In Fortune’s list of the 500 most profitable U.S. companies, 41 healthcare organizations made the cut.

The materials sector has the smallest weighting of U.S.-based stocks, but they still account for almost one-third of the overall market capitalization. Three American companies are in the sector’s top 10 holdings: Air Products & Chemicals, Ecolab, and Sherwin-Williams.

U.S. Equity Views in a Global Context

Given the high weighting of U.S. stocks in global sectors and industries, having a U.S. view is important. This refers to investors gaining a clear perspective on the risks and opportunities that exist in the country. Investors can consider the trends influencing American companies in order to help explain stock performance.

U.S. stock dominance also impacts geographic diversification. While it helps non-U.S. investors overcome their home bias, American investors may want to consider targeting specific international markets for well-rounded exposure.

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Finance

Intangible Assets: A Hidden but Crucial Driver of Company Value

Intangible assets – such as goodwill and intellectual property – have rapidly risen in importance compared to tangible assets like cash.

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valuing intangible assets

Intangible Assets Take Center Stage

View the high resolution version of this infographic by clicking here

In 2018, intangible assets for S&P 500 companies hit a record value of $21 trillion. These assets, which are not physical in nature and include things like intellectual property, have rapidly risen in importance compared to tangible assets like cash.

Today’s infographic from Raconteur highlights the growth of intangible asset valuations, and how senior decision-makers view intangibles when making investment decisions.

Tracking the Growth of Intangibles

Intangibles used to play a much smaller role than they do now, with physical assets comprising the majority of value for most enterprise companies. However, an increasingly competitive and digital economy has placed the focus on things like intellectual property, as companies race to out-innovate one another.

To measure this historical shift, Aon and the Ponemon Institute analyzed the value of intangible and tangible assets over nearly four and a half decades on the S&P 500. Here’s how they stack up:

Intangible vs. Tangible Assets

Source: Aon

In just 43 years, intangibles have evolved from a supporting asset into a major consideration for investors – today, they make up 84% of all enterprise value on the S&P 500, a massive increase from just 17% in 1975.

The Largest Companies by Intangible Value

Digital-centric sectors, such as internet & software and technology & IT, are heavily reliant on intangible assets.

Brand Finance, which produces an annual ranking of companies based on intangible value, has companies in these sectors taking the top five spots on the 2019 edition of their report.

RankCompanySectorTotal Intangible ValueShare of Enterprise Value
1MicrosoftInternet & Software$904B90%
2AmazonInternet & Software$839B93%
3AppleTechnology & IT$675B77%
4AlphabetInternet & Software$521B65%
5FacebookInternet & Software$409B79%
6AT&TTelecoms$371B84%
7TencentInternet & Software$365B88%
8Johnson & JohnsonPharma$361B101%
9VisaBanking$348B100%
10AlibabaInternet & Software$344B86%
11NestleFood$313B89%
12Procter & GambleCosmetics & Personal Care$305B101%
13Anheuser-Busch InBevBeers$304B99%
14VerizonTelecoms$300B83%
15ComcastMedia$276B92%
16MastercardBanking$259B99%
17NovartisPharma$252B101%
18WalmartRetail$252B68%
19UnitedhealthHealthcare$245B94%
20PfizerPharma$235B98%

Note: Percentages may exceed 100% due to rounding.

Microsoft overtook Amazon for the top spot in the ranking for 2019, with $904B in intangible assets. The company has the largest commercial cloud business in the world.

Pharma and healthcare companies are also prominent on the list, comprising four of the top 20. Their intangible value is largely driven by patents, as well as mergers and acquisitions. Johnson & Johnson, for example, reported $32B in patents and trademarks in their latest annual report.

A Lack of Disclosure

It’s important to note that Brand Finance’s ranking is based on both disclosed intangibles—those that are reported on a company’s balance sheet—and undisclosed intangibles. In the ranking, undisclosed intangibles were calculated as the difference between a company’s market value and book value.

The majority of intangibles are not reported on balance sheets because accounting standards do not recognize them until a transaction has occurred to support their value. While many accounting managers see this as a prudent measure to stop unsubstantiated asset values, it means that many highly valuable intangibles never appear in financial reporting. In fact, 34% of the total worth of the world’s publicly traded companies is made up of undisclosed value.

“It is time for CEOs, CFOs, and CMOs to start a long overdue reporting revolution.”

—David Haigh, CEO of Brand Finance

Brand Finance believes that companies should regularly value each intangible asset, including the key assumptions management made when deriving their value. This information would be extremely useful for managers, investors, and other stakeholders.

A Key Consideration

Investment professionals certainly agree on the importance of intangibles. In a survey of institutional investors by Columbia Threadneedle, it was found that 95% agreed that intangible assets contain crucial information about the future strength of a company’s business model.

Moreover, 98% agree that more transparency would be beneficial to their assessment of intangible assets. In the absence of robust reporting, Columbia Threadneedle believes active managers are well equipped to understand intangible asset values due to their access to management, relationships with key opinion leaders, and deep industry expertise.

By undertaking rigorous analysis, managers may uncover hidden competitive advantages—and generate higher potential returns in the process.

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