Ripping off senior investors
The article is about the scams that are out there looking to grab senior-citizen's money. You've seen the infomercials on there about the Indian guy who made $3,000 in 15 minutes on his first trade without knowing English really well and on and on.
But as I read through it all I could think of was the 401k meeting we had at our job a few weeks ago. The company in charge does a little presentation every year to show us how everything works (to educate us, supposedly), for those that don't know about/care investing.
Which is great. I'm all for it. I had some questions I was curious about myself.
So after the woman goes through the presentation, the "main guy" steps up to kind of show his face (I'm assuming he's our executive contact) and tells us how great a job they are doing handling our retirement money.
A few things: I've read their whole menu of options and realized that they have one true index fund. Just one. Now, historically—if you read up on this issue—the majority of managed funds will not beat an index fund. So you pay less expenses and your money is well diversified. It's the big draw behind index funds.
So I start reading the details of each investment option we have (they have life cycle funds, which I think is perfect for most people. Conservative maybe, but ideal for most) and I'm noticing something very strange: most of their options are function like index funds but their expense ratios (their cost) are high like managed funds.
Turns out that that, for any given fund, 80% of it is tied to an index and the rest is managed. That means that with 80% of the money the manager is given, he just treats it like an index, which takes no skill at all. Then with the other 20% he tries to maneuver in such a way that he/she can beat the index.
It's a scam and I couldn't believe it.
So I raised my hand and mentioned it, "This is a two-part question. First, why do we have only one index fund and two, why are so many of the other funds 80% index funds but then we still get charged for an actively managed fund?"
A few things: this questions made me feel pretty good about myself. I was pointing out an injustice and I was also showing off how much more I knew about this stuff to my co-workers, who I was really helping out here, I thought.
The executive stepped forward, staring at me like I had just impregnated his virgin daughter, and said something to the effect of, "Why would we do that? Index fund? It doesn't make any sense to have a whole bunch of index funds in there. For us or for you. Our clients continue to come back to us, for our business, because we have"—and here is where I cringed and wanted to stand up and yell something out to everyone— "historically beaten the indexes."
This is something no fund manager could EVER get away with saying in a room filled with other managers unless he had the proof on a slide. Of course, I was being given the death-laser look so I just backed down and nodded my head.
Stupid.
I already knew the answers to all these questions. Of course they don't want index funds. They can charge 0.30 % for an index fund (which is still a little high for a standard S&P 500 index fund) but for their other funds they'll take over 1% of your money (A LOT) and tell you they are making sure that you are "beating the indexes."
It's the greatest job ever because when people get their statements and if they bother to check up against the indices and say "Whoa, wait a minute, why didn't you beat the index this year?" they can just say "It was a bad year for the economy, the elections got in the way, the war, etc. etc.
A week later I cut my contribution from 6% back down to the maximum matching of 4%. The hell I'm giving these people any more of my money than I have to.
Anyone else have good work/investment stories?
But as I read through it all I could think of was the 401k meeting we had at our job a few weeks ago. The company in charge does a little presentation every year to show us how everything works (to educate us, supposedly), for those that don't know about/care investing.
Which is great. I'm all for it. I had some questions I was curious about myself.
So after the woman goes through the presentation, the "main guy" steps up to kind of show his face (I'm assuming he's our executive contact) and tells us how great a job they are doing handling our retirement money.
A few things: I've read their whole menu of options and realized that they have one true index fund. Just one. Now, historically—if you read up on this issue—the majority of managed funds will not beat an index fund. So you pay less expenses and your money is well diversified. It's the big draw behind index funds.
So I start reading the details of each investment option we have (they have life cycle funds, which I think is perfect for most people. Conservative maybe, but ideal for most) and I'm noticing something very strange: most of their options are function like index funds but their expense ratios (their cost) are high like managed funds.
Turns out that that, for any given fund, 80% of it is tied to an index and the rest is managed. That means that with 80% of the money the manager is given, he just treats it like an index, which takes no skill at all. Then with the other 20% he tries to maneuver in such a way that he/she can beat the index.
It's a scam and I couldn't believe it.
So I raised my hand and mentioned it, "This is a two-part question. First, why do we have only one index fund and two, why are so many of the other funds 80% index funds but then we still get charged for an actively managed fund?"
A few things: this questions made me feel pretty good about myself. I was pointing out an injustice and I was also showing off how much more I knew about this stuff to my co-workers, who I was really helping out here, I thought.
The executive stepped forward, staring at me like I had just impregnated his virgin daughter, and said something to the effect of, "Why would we do that? Index fund? It doesn't make any sense to have a whole bunch of index funds in there. For us or for you. Our clients continue to come back to us, for our business, because we have"—and here is where I cringed and wanted to stand up and yell something out to everyone— "historically beaten the indexes."
This is something no fund manager could EVER get away with saying in a room filled with other managers unless he had the proof on a slide. Of course, I was being given the death-laser look so I just backed down and nodded my head.
Stupid.
I already knew the answers to all these questions. Of course they don't want index funds. They can charge 0.30 % for an index fund (which is still a little high for a standard S&P 500 index fund) but for their other funds they'll take over 1% of your money (A LOT) and tell you they are making sure that you are "beating the indexes."
It's the greatest job ever because when people get their statements and if they bother to check up against the indices and say "Whoa, wait a minute, why didn't you beat the index this year?" they can just say "It was a bad year for the economy, the elections got in the way, the war, etc. etc.
A week later I cut my contribution from 6% back down to the maximum matching of 4%. The hell I'm giving these people any more of my money than I have to.
Anyone else have good work/investment stories?
Labels: index funds, investing, scams
posted by Carlos P at 6:45 AM
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