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Mutual Funds

Mar 31 2011

True Cost of 401k and 403b

Due to continuous bleeding of many defined contribution retirement plans for the past 10 years, hidden fees in these plans becomes a hot topic in many financial publications. These discussions rarely address the fundamental problem with many retirement plans: lack of risk management and lack of investment performance. Nonetheless, disclosure of layers of hidden fees charged by all retirement plans probably can slow down the bleeding a bit.

How outrageous are these hidden fees after all? It is estimated that Bernie Madoff’s Ponzi scheme victims lost $20 to $30 billion over the period of 40+ years. With $3 to $4 trillion dollar of asset in defined contribution retirement plans today, each 1% hidden fees would cost retirement plan participants $30 to $40 billion dollars each year.

Edward Siedle, a former attorney with the SEC, says it very well in Forbes article 401ks: the America’s Biggest Investment Fraud Was Foreseen and Preventable.

The following 2008 video clips from Bloomberg has in-depth investigations on the hidden 401k fees.

(1) The part 1 of the video has an 401k plan expert review a John Hancock 401k plan participant’s account to show all hidden fees combined (wrap fees, soft dollars, revenue sharing, finder fees, shelf space, surrender charges, 12B-1 fees, etc) can be 3000% more than the 0.1% fee disclosed by the plan administrator. In many 401k plans Edward Siedle audits, he says investors are paying 3% to 5% hidden fees.

(2) The part 2 of the video reveals an union 403b plan with a shocking 12.17% hidden fee. It also shows a Walmart’s agreement with its 401k provider Merrill Lynch to withold fee information from employee in its 401k plan with $9.5 billion in asset.

(3) The third video clip has an expert examine the hidden cost of one of the largest 401k plans in the nation – Ford’s 401k plan administratored by Fidelity with $12 billion in asset. The video also have retirement plan specialists show some complicated charts demostrating even plan advisors can’t figure out where the fees go.

Yale Professor David F. Swensen’s words in page 294 of his 2005 book “Unconventional Success” is probably the best conclusion of all these hidden fees: “For the vast majority of mutual-fund investors, the future appears dim. Regulators identify abuses, deal superficially with the most high-profile issues, and move on to other matters. Meanwhile, the mutual-fund industry find new ways to place profits above investor interests. Even if the SEC eliminates pay-to-play revenue sharing, enforces fair-value pricing mechanisms and bans soft dollars, the mutual-fund industry, as it has from its beginning in 1924, will employ its endless creativity to find visible and less visible means to take advantage of individual investors.”

Written by Hengfu Hsu · Categorized: Investment Myths, Investment Vehicles, Mutual Funds

Mar 31 2011

Fund Ownership of Mutual Fund Managers

Have you wondered why the mutual funds you owned in your 401k account continued to hold on to Lehman Brothers stock all the way from $65 on Jan 1, 2008 to $0 on September 15, 2008, even though there were plenty of time to get out at $50, $40, $30, or even $20, etc prior to it filed bankruptcy?

Morningstar recently published a great article on fund managers’ ownership of their own funds (https://news.morningstar.com/articlenet/article.aspx?id=372678), which may explain why most fund managers do not feel the pains fund shareholders are feeling:

“Fully 4,347 funds out of about 6,557 have at least one manager who isn’t investing in the fund. And of the 1,126 funds where there is just one manager, there is no manager ownership. On the plus side, 564 funds have at least one manager with more than $1 million at stake in the fund they run.”

4,347 funds out of about 6,557 is a shocking 66.29%! On the other hand, Warren E. Buffett, the most successful investor and money manager in the world, has invested almost all his money along with share holders of Berkshire Hathaway Inc.

Written by Hengfu Hsu · Categorized: Investment Myths, Investment Vehicles, Mutual Funds · Tagged: funds

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