One common labor union objection to defined contribution pension plans (401-k plans) is that the administration costs are “1%-3%” annually. They assert that it’s much less expensive to let CalPERS or other “experts” manage a huge pooled account.
And indeed that high 1-3% individual account annual cost would be a major impediment. IF it were true.
It’s not. Not if one makes even a rudimentary effort to control costs down to 0.2%. And in some cases, the cost can approach 0.1% a year.
No, not 1% a year. That’s ONE-TENTH of ONE PERCENT annually –TOTAL cost. And it can be even less.
Furthermore, the employer — public or private — can make and set such cost limitations for the employees. There are sensible restrictions the employer can suggest to avoid the gambler’s tendency to figuratively bet on the lottery with their pensions.
Let me add that the advice contained below is readily available for ANY investor — IRA’s, 401-k plans or just brokerage account investing of personal investments. Everyone should at least be aware of this option.
The “trick” is to not buy and sell individual stocks, but to use several different mutual funds, which gives you a tiny equity position in thousands of companies. And the lowest cost mutual funds are INDEX mutual funds — a fund that essentially reflects an index such as the S&P 500. And among these funds, the “ETF” (Electronically Traded Funds) index funds — traded as stocks — are the cheapest of all.
Here’s a recent, excellent FORBES magazine article, “All-Star ETFs.” It lists the best (defined as lowest cost) ETF index funds. It’s well worth a read.
http://www.forbes.com/sites/baldwin/2012/04/11/15-super-cheap-all-star-etfs/
Of the 15 best funds the article cites in five different types of fund investment, 11 are Vanguard funds. Vanguard, a huge money manager, has always been among the lowest cost mutual fund providers.
To make the Vanguard choice an optimum solution, one should consider setting up the plan within a Vanguard brokerage account. Remarkably, Vanguard allows FREE account trading of Vanguard ETF’s (unless you get goofy and try to time the market by trading the same ETF over 25 times a year — good luck with that!).
https://personal.vanguard.com/us/whatweoffer/stocksbondscds/feescommissions
Let me add that defined contribution plans are a breeze to run from an employer standpoint — certainly compared to the mess that constitutes defined benefit plans. And there’s no surprise unfunded liability!
Bottom line? Diversified security investing in tax qualified retirement plans, or in one’s own personal account — is available for a tiny cost per year, if desired.
There. Another bogus labor union objection roasted and skewered. It’s Miller time!
Comments 4
You mean we won’t have to eat cat food and sleep in cardboard boxes?
Vanguard really does this for free?
Author
Alger, I provided the links that verify my assertions. Check ’em out.
And no, it is not “free.” Never said that (though they do offer free TRADING of Vanguard ETF’s within their brokerage accounts).
BTW, I was as surprised as you seem to be about this ETF and trading uber-low cost combo. Rather amazing, actually. The FORBES article was an eye-opener.
Fear not — Vanguard makes money on the ETF’s — Vanguard ain’t a charity. They just do it for very, VERY low cost.
Think of Vanguard as the Costco of the mutual fund industry. (I’d say they were the “Walmart,” but I know that doesn’t sit well with you liberals).
You might want to tell your labor union buddies about your cost-saving discovery. You’ll be a pension hero!
No need to give me credit.
Author
Sorry Bradley, but the cardboard box serving cat food awaits you. This package will not prevent the market from going to zero (the common union “concern”).
Of course, if the stock markets (domestic AND foreign) go to zero, it’s likely that our economy will be less than peachy, so it’s not clear how governments would pay the “guaranteed” defined benefit pensions if there are no earnings to tax.
It’s like infinity — it’s best not to think about such things.