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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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Animation: The 20 Largest State Economies by GDP in the Last 50 Years

This animation shows how the largest state economies by GDP have changed over the last five decades of time, and what such a ranking looks like today.

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Animation: The 20 Largest State Economies by GDP

When it comes to understanding the size and scope of the $18 trillion U.S. economy, it’s sometimes easier to consider that it’s the sum of many parts.

Many states already have economies that are comparable to some of the world’s largest countries, giving you a sense of what they might be combined.

And while every state plays a role in the bigger picture, some states such as New York and California have an outsized impact on fueling the country’s overall economic engine.

The State of State Economies

Today’s animation comes to us from SavingSpot, and it covers the size of state economies by GDP going back all the way to 1963.

The video uses inflation-adjusted data from the U.S. Bureau of Economic Analysis, showing how the ranking of top state economies has changed over time as different states have taken advantage of economic booms.

Let’s dive into the data to see how things have changed.

Going Back in Time

The earliest data in the animation comes from 1963, when New York led the pack with a $70.6 billion economy in inflation-adjusted terms.

State Economies by GDP, Inflation-Adjusted Chained $USD (1963)

RankState EconomyGDP, Billions of USD (1963)Share of U.S. Economy
🇺🇸 United States (Total)$607.0100.0%
#1New York$70.611.6%
#2California$67.811.2%
#3Illinois$39.56.5%
#4Pennsylvania$34.55.7%
#5Ohio$33.35.5%
#6Michigan$30.55.0%
#7Texas$29.34.8%
#8New Jersey$23.43.9%
#9Massachusetts$17.42.9%
#10Indiana$15.62.6%
#11Florida$14.72.4%
#12Missouri$13.62.2%
#13Wisconsin$12.72.1%
#14North Carolina$12.62.1%
#15Virginia$11.71.9%
#16Washington$11.21.8%
#17Minnesota$10.71.8%
#18Georgia$10.31.7%
#19Maryland$10.31.7%
#20Connecticut$9.91.6%
#21Louisiana$9.71.6%
#22Tennessee$9.11.5%
#23Kentucky$8.41.4%
#24Iowa$7.91.3%
#25Alabama$7.31.2%
#26Oklahoma$6.21.0%
#27Kansas$6.11.0%
#28Colorado$5.91.0%
#29Oregon$5.70.9%
#30District of Columbia$5.10.8%
#31South Carolina$5.10.8%
#32West Virginia$4.60.8%
#33Arizona$4.50.7%
#34Mississippi$4.40.7%
#35Nebraska$4.30.7%
#36Arkansas$3.80.6%
#37New Mexico$3.00.5%
#38Utah$3.00.5%
#39Rhode Island$2.70.4%
#40Maine$2.40.4%
#41Hawaii$2.40.4%
#42Montana$2.00.3%
#43Delaware$1.90.3%
#44Idaho$1.80.3%
#45Nevada$1.80.3%
#46New Hampshire$1.70.3%
#47North Dakota$1.60.3%
#48South Dakota$1.60.3%
#49Wyoming$1.40.2%
#50Alaska$1.10.2%
#51Vermont$1.00.2%

California ($67.8 billion), Illinois ($39.5 billion), Pennsylvania ($34.5 billion) and Ohio ($33.3 billion) round out the top five, and together they added up to 40.5% of the national GDP.

The Largest State Economies by GDP Today

Looking at the most recent data from 2017, you can see the ranking changes significantly:

State Economies by GDP, Inflation-Adjusted Chained $USD (2017)

RankState EconomyGDP, Billions of USD (2017)Share of U.S. Economy
🇺🇸 United States (Total)$18,051100%
#1California$2,57614.3%
#2Texas$1,6169.0%
#3New York$1,4147.8%
#4Florida$8834.9%
#5Illinois$7454.1%
#6Pennsylvania$7013.9%
#7Ohio$5913.3%
#8New Jersey$5473.0%
#9Georgia$5112.8%
#10Michigan$4592.5%
#11North Carolina$4842.7%
#12Virginia$4642.6%
#13Massachusetts$4902.7%
#14Washington$4812.7%
#15Maryland$3632.0%
#16Indiana$3211.8%
#17Arizona$2971.6%
#18Minnesota$3221.8%
#19Tennessee$3151.7%
#20Wisconsin$2921.6%
#21Colorado$3231.8%
#22Missouri$2761.5%
#23Connecticut$2391.3%
#24Louisiana$2271.3%
#25Alabama$1931.1%
#26South Carolina$1991.1%
#27Kentucky$1851.0%
#28Oregon$2081.2%
#29Oklahoma$1911.1%
#30Iowa$1690.9%
#31Nevada$1430.8%
#32Kansas$1480.8%
#33Utah$1500.8%
#34Arkansas$1140.6%
#35District of Columbia$1220.7%
#36Mississippi$1000.6%
#37Nebraska$1110.6%
#38New Mexico$910.5%
#39Hawaii$790.4%
#40West Virginia$710.4%
#41New Hampshire$740.4%
#42Delaware$640.4%
#43Idaho$670.4%
#44Maine$560.3%
#45Rhode Island$530.3%
#46Alaska$520.3%
#47Montana$440.2%
#48Wyoming$390.2%
#49South Dakota$450.3%
#50North Dakota$510.3%
#51Vermont$300.2%

California is the largest economy today – it has a state GDP of $2.6 trillion, which is comparable to the United Kingdom.

Meanwhile, Florida and Georgia are two states that did not crack the top 10 back in the 1960s, while Texas jumped up to become the second largest state economy. It’s actually not a coincidence that all of these states are in the southern half of the country, as air conditioning has played a surprisingly pivotal role in shaping modern America.

In fact, the share of the nation’s population living in the Sunbelt rose from 28% in 1950 to 40% in 2000, and this increase in population has coincided with economic growth in many of the states that used to be a sweaty mess.

A Final Look

Here is a final animated version of the top 10 largest states by GDP, also provided by SavingSpot:

Animation: The 20 Largest State Economies by GDP in the Last 50 Years

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Where the World’s Banks Make the Most Money

Last year, the global banking industry cashed in an impressive $1.36 trillion in profits. Here’s where they made their money, and how it breaks down.

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Where the World’s Banks Make the Most Money

Profits in banking have been steadily on the rise since the financial crisis.

Just last year, the global banking industry cashed in an impressive $1.36 trillion in after-tax profits ⁠— the highest total in the sector seen in the last 20 years.

What are the drivers behind revenue and profits in the financial services sector, and where do the biggest opportunities exist in the future?

Following the Money

Today’s infographic comes to us from McKinsey & Company, and it leverages proprietary insights from their Panorama database.

Using data stemming from more than 60 countries, we’ve broken down historical banking profits by region, while also visualizing key ratios that help demonstrate why specific countries are more profitable for the industry.

Finally, we’ve also looked at the particular geographic regions that may present the biggest opportunities in the future, and why they are relevant today.

Banking Profits, by Region

Before we look at what’s driving banking profits, let’s start with a breakdown of annual after-tax profits by region over time.

Banking Profit by Year and Region ($B)

 2009201020112012201320142015201620172018
Global ($B)$388$530$635$703$859$963$1,070$1,065$1,144$1,356
United States$19$118$176$263$268$263$291$275$270$403
China$95$135$174$225$255$278$278$270$301$333
Western Europe$78$34$21-$70$28$95$154$159$186$198
Rest of World$196$243$265$285$309$327$348$361$387$421

In 2018, the United States accounted for $403 billion of after-tax profits in the banking sector ⁠— however, China sits in a very close second place, raking in $333 billion.

What’s Under the Hood?

While there’s no doubt that financial services can be profitable in almost any corner of the globe, what is less obvious is where this profit actually comes from.

The truth is that banking can vary greatly depending on location ⁠— and what drives value for banks in one country may be completely different from what drives value in another.

Let’s look at data and ratios from four very different places to get a sense of how financial services markets can vary.

CountryRARC/GDPLoans Penetration/GDPMargins (RBRC/Total Loans)Risk Cost Margin
Global Average5.1%124%5.0%0.8%
United States5.4%121%5.0%0.4%
China6.6%147%6.0%1.4%
Singapore13.0%316%4.6%0.4%
Finland3.4%133%2.8%0.2%

1. RARC / GDP (Revenues After Risk Costs / GDP)
This ratio shows compares a country’s banking revenues to overall economic production, giving a sense of how important banking is to the economy. Using this, you can see that banking is far more important to Singapore’s economy than others in the table.

2. Loans Penetration / GDP
Loans penetration can be further broken up into retail loans and wholesale loans. The difference can be immediately seen when looking at data on China and the United States:

CountryRetail LoansWholesale LoansLoan Penetration (Total)
United States73%48%121%
China34%113%147%

In America, banks make loans primarily to the retail sector. In China, there’s a higher penetration on a wholesale basis — usually loans being made to corporations or other such entities.

3. Margins (Revenues Before Risk Costs / Total Loans)
Margins made on lending is one way for bankers to gauge the potential of a market, and as you can see above, margins in the United States and China are both at (or above) the global average. Meanwhile, for comparison, Finland has margins that are closer to half of the global average.

4. Risk Cost Margin (Risk Cost / Total Loans)
Not surprisingly, China still holds higher risk cost margins than the global average. On the flipside, established markets like Singapore, Finland, and the U.S. all have risk margins below the global average.

Future Opportunities in Banking

While this data is useful at breaking down existing markets, it can also help to give us a sense of future opportunities as well.

Here are some of the geographic markets that have the potential to grow into key financial services markets in the future:

  1. Sub-Saharan Africa
    Despite having 16x the population of South Africa, the rest of Sub-Saharan Africa still generates fewer banking profits. With lower loan penetration rates and RARC/GDP ratios, there is significant potential to be found throughout the continent.
  2. India and Indonesia
    Compared to similar economies in Asia, both India and Indonesia present an interesting banking opportunity because of their high margins and low loan penetration rates.
  3. China
    While China has a high overall loan penetration rate, the retail loan category still holds much potential given the country’s population and growing middle class.

A Changing Landscape in Banking

As banks shift focus to face new market challenges, the next chapter of banking may be even more interesting than the last.

Add in the high stakes around digital transformation, aging populations, and new service opportunities, and the distance between winners and losers could lengthen even more.

Where will the money in banking be in the future?

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