Some of the best and brightest people — often graduates of our finest business schools — work on Wall Street. They are highly skilled at what they do. Here’s a summary of their “genius” from my perspective:
- They are great at convincing you to entrust your money to their care.
- They do so by claiming to have an expertise they don’t possess.
- They are brilliant at hiding the fact they are terrible managers of your money.
- They are extraordinarily creative at coming up with new, complex products and persuading you to invest in them.
- They are extremely adept at ensuring the political process is rigged in their favor by making massive contributions to actual and prospective members of Congress.
- They are superb at keeping their real agenda from you, specifically that their system for “managing” your money is set up to transfer as much of your savings as they can from you to them.
I believe the combination of hypocrisy and chicanery is stunning and unabated. The latest example of hypocrisy is the Feb. 3 approval by the House Ways and Means Committee of a bill that would raise barriers to the passage of the proposed rule by the Department of Labor requiring that advisors to retirement plans be fiduciaries.
What about the retirement plan for members of Congress? It’s called the Thrift Savings Plan (TSP). If all advisors to retirement plans were required to be fiduciaries, you would likely see many more plans modeled after the TSP.
The TSP is a retirement savings and investment plan for Federal employees and members of the uniformed services. It has more than $400 billion in assets and is the largest 401(k) plan in the country.
The TSP offers a limited number of investment options. They consist only of index funds covering domestic and international markets, a short-term U.S. Treasury securities fund and target date funds, at different risk levels, that invest only in the individual index funds offered by the plan.
The key to the success of the TSP is the extremely low expense ratios of the funds it offers. For 2015, the average net expense ratio of these funds was only .029 percent, which is just under 3 basis points. Obviously the huge size of the TSP permits it to negotiate this low rate. Nevertheless, there are many multi-billion dollar plans using Fidelity’s Freedom Funds, some of which have expense ratios as high as 0.75 percent.
Higher investment fees and expense ratios can dramatically affect your returns. Vanguard, a low-cost provider of index funds, has a calculator you can use to calculate their impact.
It’s ironic that some members of Congress fight against a fiduciary rule that would likely allow their constituents to have a retirement plan modeled after their own superb plan.
Meanwhile, Wall Street continues to dream up new products likely to enrich itself at your expense. A recent article reported efforts by Morgan Stanley and Bank of America to persuade high-net-worth clients to invest in a fund called the New Rider LP. The fund essentially permits investors to invest in companies (like Uber) before they go public, but it has a unique twist. Investors are provided with no financial information, which means they are trusting totally in the judgment of their broker.
There’s an alternative
If you want to maximize the possibility of a secure retirement, here’s my suggestion. Heed this admonition to become an index-based investor from famed financial author Charles Ellis: “Think of how many people have gotten really good educations that come in to be practitioners and have been provided with fabulous equipment, tools, and information so that they can compete. Unfortunately each of them is competing against others who also went to great schools also studied also became CFA [charterholders] and also have wonderful facilities, and also have tremendous energy and brain power, and as a result the case for indexing gets stronger and stronger and stronger.”
Wall Street wants to lure you into a game only it is likely to win.
This commentary originally appeared February 16 on HuffingtonPost.com
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