The story of 401(k) plans has many parallels to the English fairy tale, Jack and the Beanstalk, in which our young protagonist plants beans that are intended to grow to the sky, yet his particular variety of legume almost gets him eaten alive.
Jack was actually luckier than most flesh-and-blood 401(k) investors, especially those whose retirement savings are planted in so-called Target Date Funds, or TDFs.
Like Jack’s magic beans, TDFs are supposed to shoot up into a towering pillar – comprised not of rugged vegetable fibers but of sturdy, dependable stocks, bonds and cash or cash equivalents.
Roughly 10% of all 401(k) assets are now funneled to TDFs, which are the fastest growing sector of the retirement planning universe. At least 15 million Americans already have some or all of their retirement savings in TDFs.
The concept behind TDFs is simple: investors identify the date at which they’d like to retire, for example 2020, and then place their 401(k) monies into a fund designed to grow increasingly conservative as the TDF approaches its eponymous calendar year.
In theory, your fund will earn more aggressive returns early in its lifespan and shift its emphasis to safety as it and you grow old together. Come retirement, your hen will have laid a barn-full of golden eggs.
In theory.
In reality, much of your hard-earned savings will have been chopped down in the form of stealth 401(k) fees long before your retirement. How much? Would you believe annual fees of as little as 1.5 percent can eviscerate – over a lifetime – nearly 40% of your rightful retirement portfolio? That is four of every ten dollars you would otherwise save during the course of your career.
The gory details of TDFs and their ability to grind your financial bones into Wall Street’s bread can be found in an expose, More than 15 Million ‘Zombie Investors’ Unwittingly Allow Others to Feed Off Their Retirement Savings, which I recently coauthored with New York Times bestselling author Pamela Yellen, originator of the life-changing Bank on Yourself system and related personal finance strategies.
Yellen is an indefatigable critic of conventional 401(k) plans, especially TDFs. In her view, 401(k)s and TDFs are unnecessarily encumbered by high fees, volatility and the very real risk of loss of principal.
In fact, as Yellen and I point out in Zombie Investors, TDFs proved highly unreliable in 2008, when funds with a fast approaching target date of 2010 suffered losses averaging almost 25%. At least one of 31 theoretically “safe” 2010 target date funds plunged 41%.
Many workers today don’t even realize they’ve been “assigned” to a TDF fund by their company’s 401(k) administrator. And they most certainly don’t realize how even minor differences in annual fees – say 1.0 percent versus 1.5 percent – can avalanche into lost savings of tens and even hundreds of thousands of dollars.
Yellen’s Bank on Yourself website not only includes ‘Zombie Investors’ articulate and compelling argument against unchecked TDF fees, it also offers employers and employees alike concrete alternatives to 401(k) plans altogether.
Most importantly, Yellen asserts, individual investors – especially those who participate in employer sponsored retirement plans – must be discerning customers.
“The number one fallacy of retirement planning,” Yellen writes, “is that it is safe to entrust your ultimate success to anyone but yourself.”
“Fee, Fi, Fo, Fum,
I smell the blood of an Englishman,
Be he alive or be he dead,
I’ll grind his bones to make my bread”
To read “More than 15 Million ‘Zombie Investors’ Unwittingly Allow Others to Feed Off Their Retirement Savings,” click here.
Comments
I read the full "Zombie Investors" report on the Bank on Yourself site and find it mind-boggling. To think that I'm working a lifetime and 40% of my savings are being highjacked to pay for stupid 401(k) fees?
Congress should step in and stop these Wall Street robbers. Thank you Dean (and Pamela) for alerting us to this scam.
Incredible story. Well done. Funny that you guys have articulated this so well and the mainstream media remains mum. Keep up the great work!
My husband and I are both enrolled in TDFs through our company 401(k) plan. We had no idea just how aggressively fees are eating away at our retirement savings.
I plan to take your Zombie Investor article into our 401(k) administrator and confront her with it. I'll bet she is a Zombie administrator and hasn't a clue.
This is a well-researched and incredibly eye-opening article! I've shared it with several friends who have 401(k)'s.
So much we have been "told" to do has been SO WRONG! Buy and hold. Tie up our money in government plans so we can defer taxes on gains. What gains??? And what kind of tax rates can we expect in the future???
This article is terrific. I fear it only scratches the surface of the misinformation we have all been fed for years though. Please Pamela and Dean keep digging and keep exposing!
I guess we also have to blame ourselves for not doing our own investigation and following the herd (moo...). And a decade of good market returns backed up the rosy picture. Sadly all wiped out by Wall St and Government excesses. And it was us who suffer...
If the markets don't kill you, the fees will. My mattress is looking more and more attractive as an investment vehicle.
Everyone I know says avoid whole life insurance. Suze Orman says buy term life and invest the savings. What savings? If you lose 40% of your savings to fees and as much as 40% to market fluctuations, what's left? I hope Ms. Orman reads this.
TDFs are scary misleading. Avoid them at all costs because they cost all.
Amazing and well researched expose! Dean and Pamela-let's hear more from you!
Thanks for the eye-opening report. Those of us who are looking at retirement in a few years have taken too many hard hits as it is. We've worked a lifetime to put money away for our retirement, taken a nasty beating from the stock market, and now learn that plan administrators have stuck a straw in our accounts and are sucking away at will. There's got to be a better way.
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