What is Really Killing Your Retirement?

I have heard a lot of talk about this John Oliver clip and finally just got around to watching it.  I have seen this most often on Twitter, most often accompanied by a headline such as, “John Oliver eviscerates the retirement industry” or the even more dangerous “Oliver tells you why your 401k is ripping you off”. Do not read any of the headlines. Go ahead and watch the clip. The whole thing is about 20 minutes.

Personally, I think it’s a bit overboard, but then again this is HBO, not an online course at Devry Technical Institute. The biggest shortfall when it comes to retirement, by an order of magnitude, is people not saving enough.  Yes, fees can eat into your return and you should be aware of them, but do not let the fear of fees stop you from saving in your 401(k).  You could be missing out on a matching contribution from your employer as well as tax breaks that add up to a ton more than a 0.03% record keeping fee.  Yes, the financial industry is great at nickel and diming consumers. That is a fact. Just ask your HR people when the last time they shopped around the 401k plan and ask if anyone on staff knows what fees are being charged and who is paying them. Is the company paying, or are the participants? Furthermore, ask who looks over the retirement plan. Is there a committee in place to make sure the plan participants are getting a good deal? In larger companies there definitely should be. In smaller companies unfortunately, it’s probably a committee of one, and that’s usually just the head of HR who has a ton of other things on their plate. Seriously though, if you think the difference between a 1% fee and a 2% fee adds up to a lot, just try looking at saving $100 per month versus $200. Let’s check the results after 25 years.

Retirement graphic

As you can see the fee difference is about $20,000 for the $200/month savings rate (I assumed an 8% net return). This is not insignificant. But the difference between paying 2% at $200/month is still over $50,000.

The average family between 56 and 61 has $170,000 saved. That may sound like a lot until I tell you that if you were wanting to live on $60,000 per year, you would need closer to $750,000 saved. I can assure you the difference between $750,000 and $170,000 was not eaten by fees. It was spent on lattes, dinners out, and kid’s shoes. Money that was spent and did not have an opportunity to grow. It has been spent because people do not pay attention to their contribution paperwork and leave money on the table.

John also makes the funny and very relevant point that it does not take any real licensing to call yourself a financial advisor or analyst. I have mentioned before (here) that there are a lot of charlatans in the financial advice industry – always tread carefully. If you are looking for financial advice, someone with a Certified Financial Planner (CFP®) designation is usually a safe bet.  Yes, make sure that your advisor is a fiduciary. Charging 1% is pretty standard especially for someone with less than $1 million in assets, and 1.4% is not unusual below $100,000. Mutual fund fees should be the same. A low-cost stock index fund can be purchased for 0.08%, and an actively managed fund can be had for 0.5% to 1.5%.

So before you get all bent out of shape over the fees that financial industry is charging, just remember that you have the right to shop around. Get some quotes and know that it should not cost a fortune to get good financial advice.  The biggest impediment to retirement saving is not the fees you’re being charged but how much you can contribute into the plan.

As a side note, I have often joked that I have the only profession where I can get outperformed by a monkey smoking a cigarette.  Now apparently a cute kitten is also in the stock picking game.  Remember that anytime someone says they can consistently beat the market.


Until next time…

“We have met the enemy, and he is us” – Pogo by Walt Kelly