Our Roles in the Economy

Do you have money in a 401(k) or maybe a 403(b) plan? If you are part of the 54% of Americans with money in the stock market, how were you introduced to the concepts of investing? Did a representative come to your workplace to explain how your employer's plan worked? Guess what? That person wasn't an educator, they were a salesperson. Because you weren't taught the fine points of investing at any time in your education, you were set up to do what you were told to do without a clear understanding of why.

Did your salesperson explain to you what an expense ratio of a mutual fund is? What about a 12b-1 fee? If you’re in a 403(b) plan, did they explain why your plan is wrapped in an annuity even though that hasn’t been a requirement since 1974?

Those things mean nothing to most people but they should. Those are the names of tools used by licensed thieves to steal your retirement nest egg. It won’t take me any time at all to draw fire from a financial advisor who will justify the value they provide to their clients. Before you hear their arguments, let’s examine what we're really getting at. The expense ratio of a mutual fund and the 12b-1 fees represent payments made by you. However, you will never write a check; you’ll never have to give out your credit card number or pull out a wad of cash from your pocket. The financial services industry has a much more efficient system. Let’s say the stock market goes up 5% and the expense ratio of your mutual fund is 2%. The value of your mutual fund shares will go up only 3% instead of five. That’s 40% less money! As this compounds over time, the percentage can grow even greater. What this means is that your profits are supposed to be re-invested year after year so that they grow exponentially. Here is an example:

Let’s say you made ten times your money each year:
Year 1: $1 is turned into $10
Year 2: $10 is turned into $100
Year 3: $100 is turned into $1,000
Year 4: $1,000 is turned into $10,000
Year 5: $10,000 is turned into $100,000

BUT if 40% of your profit were taken each year it’s a whole different picture:
Year 1: $1 is turned into $6.40
Year 2: $6.40 is turned into $40.96
Year 3: $40.96 is turned into $262.14
Year 4: $262.14 is turned into $1,677.70
Year 5: $1,677.70 is turned into $10,737.28

The example above is extreme but we want you to understand the impact. In just five years, almost 90% of the value of your account will have been stolen! If the real number is 10% or 20%, is that any better? We say stolen because this happens without most people ever having a clue that they have paid anything. Last year, investors spent billions of dollars on 12b-1 fees alone. We’re not saying this information isn't hidden in the fine print or included in a document that everyone knows you will never read. Each of us