Thursday, April 25, 2013

The 401k Wallstreet Slight of Hand

 I have personally written on the 401k train robbery in previous posts.  I will enumerate certian jaw dropping facts exposed in "The Retirement Gamble" written by the outstanding team of Martin Smith and Marcela Gaviria.  It is an EXCELLENT book which showcases the staggering greed run rampant in both Wallstreet and this nation.
Excerpt: "If you work for Wall Street. You are their slave, their lackey and as long as their toadies dominate in Congress, nothing is going to change on the legislative front to stop the looting. Wall Street seized millions of homes through illegal foreclosures and stripped the equity from the owners. They got away with it. Some Wall Street firms further enriched themselves making bets that the housing market would collapse, using their inside knowledge of the bogus loans they had made. They got away with that also.

Now Wall Street is busy asset stripping the 401k  retirement plans of the working class in America, while KING Obama proposes to cut Social Security benefits through a discredited calculation called Chained CPI – conveniently causing people to save more in their 401(k) plans to make up for the potential loss. But the more you save, the more Wall Street asset strips."

This egregious affront to the American middle class should have Congress and the Justice department up in arms, but that is not he case..

Excerpt: "The U.S. Justice Department had “no investigations going on. There were no subpoenas, no document reviews, no wiretaps.” The head of the criminal division of the Justice Department, Lanny Breuer, announced he was stepping down one day after "The Retirement Gamble" written by the outstanding team of Martin Smith and Marcela Gaviria program aired."

The revelation of the two-thirds wealth transfer machinery was delivered by none other than John Bogle, the legendary founder of The Vanguard Group, a low-load mutual fund firm, who served as its Chairman and CEO from 1974 to 1996. Bogle is no slouch. He’s one of the most highly respected men in finance and graduated magna cum laude from Princeton University with a degree in Economics. 

The following bombshell dropped by Frontline’s Martin Smith in PBS's program, The Retirement Gamble is shocking and sickening!  

 Transcript from the program: 

Bogle: Costs are a crucial part of the equation. It doesn’t take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get. The money managers always want more, and that’s natural enough in most businesses, but it’s not right for this business. 

Smith: Bogle gave me an example. Assume you’re invested in a fund that is earning a gross annual return of 7 percent. They charge you a 2 percent annual fee. Over 50 years, the difference between your net of 5 percent — the red line — and what you would have made without fees — the green line — is staggering. Bogle says you’ve lost almost two thirds of what you would have had. 

Bogle: What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact. There’s no getting around it. The fact that we don’t look at it— too bad for us. 

Smith: What I have a hard time understanding is that 2 percent fee that I might pay to an actively managed mutual fund is going to really have a great impact on my future retirement savings. 

Bogle: Well, you have to rely on somebody to get out a compound interest table and look at the impact over an investment lifetime. Do you really want to invest in a system where you put up 100 percent of the capital, you the mutual fund shareholder, you take 100 percent of the risk and you get 30 percent of the return? 

Smith takes Bogle’s advice and pulls up a compounding calculator on his laptop. On air, he shows the viewer the results: 

Smith: Take an account with a $100,000 balance and reduce it by 2 percent a year. At the end of 50 years, that 2 percent annual charge would subtract $63,000 from your account, a loss of 63 percent, leaving you with just a little over $36,000. 

There’s another way to prove the point. Pull up a compounding calculator on line. Take an account with a $100,000 balance and compound it at 7 percent for 50 years. That gives you a return of $ 3,278,041.36. Now change the calculation to a 5 percent return (reduced by the 2 percent annual fee) for the same $100,000 over the same 50 years.

 That delivers a return of $1,211,938.32. That’s a difference of  $2,066,103.04 – the same 63 percent reduction in value that Smith’s example showed. 

Presently, 70 percent of Americans who have any kind of retirement plan at their place of employment have a 401(k) plan. Not everyone is paying 2 percent fees. Some are paying more and others are paying less – sometimes much less if using passively managed index funds.

"To No Ones Surprise Wall Street has, again and again, preyed on the uninformed and the least educated, which tends to be the poor and middle class."
   Thanks to Wallstreet this is my family's retirement home.


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