ETFs and Funds Retirement Stocks

The NSFW 401(k) Cheat Guide

How to figure out WTF is going on with your employer's retirement plan.

For the sake of not dying of boredom, NSFW officially recommends just skipping to the questions you actually care about first. This stuff is not fun. The financial industry has ensured that it sounds as boring and complicated as possible. It’s a lot easier to take advantage of people when they’re asleep. **Edited: NSFW has removed a comment referencing Bill Cosby here as it is already a dated reference and not that funny. **

 

The Basics

What is a 401(k) and why is it called that?
It’s a retirement plan set up by employers that lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn later (ideally in retirement). The name 401K comes from the part of the tax code that created these plans.  The account your plan uses is made specifically to invest for your retirement and nothing else. Another company, called a plan administrator, takes care of and manages the account for both you and your employer.

My company says they will “match contributions”? What the hell are they talking about?
A contribution is the money you put into your retirement plan. The match means your employer will put in the same amount of money that you put in. You put in $100 a month, they will also put in $100. That means you now have $200 to invest with. Generally, an employer will have a maximum amount they will match (around 3-5% a month or per check on average).

What’s the catch? Why would they do that?
The catch is called “vesting”. It means that even though they put that money in there for you, you don’t usually get to keep it for quite some time. Nearly all retirement plans have a vesting schedule. Vesting schedules tell you how long you have to stay with the company to keep the money they “gave” you.  Companies love to talk about the employer match because it sounds like a great benefit (and it can be), but most will never even say the word vesting. It’s quite common for companies nowadays to require people to stay with the company for 5 or more years before they can keep 100% of their employer matches. Any gains that you made from investing the employer’s contribution will ALSO be taken away from you if you leave early. Sneaky Bastards.

How much can you put in to the plan/account per year?
2018 limit = up to $18,500
2019 limit= up to $19,000
Note that these maximums are set by the IRS, not your employer.

Can I invest in anything I want or do I have to choose from the funds specified in the plan?
Just the stuff in the plan. There will generally be a list of 20 or less mutual funds.

 

 

How to Willingly Give Wall Street Your Money While Bitching About Wall Street Taking Your Money

(aka Hidden Fees you are probably already paying)

 

“96% of people know how much they pay each month for streaming media services like Netflix. Just 27% know how much they’re paying in fees on their 401(k) accounts.”

Most people, if they invest at work at all, don’t bother looking at the cost of their retirement plan. Unfortunately, this can really suck away the returns that you make on your money over the long run. When people see a fee like .25% (for clarity that is just a quarter of one percent) they don’t give a second thought, because they’re still not completely comfortable with the idea of compound interest. The chart below can show you how much even a quarter of a percent can affect an investment return over time.

effect of fees on return 30 yearsSource: Investor.gov

Notice that the difference between the blue line and the green line is only .75% in fees. Not even 1%. In 30 years it shaved off around $30,000 from your retirement. So pay attention…

 

Types of Fees:

Plan Administration Fee = Money you pay the 401k plan administrator for managing your retirement plan. Generally there is no way around this fee while you’re with your employer, but it’s something to be aware of. This is also one of the many reasons why you don’t want to leave your 401k with an employer custodian after you’ve left.

Expense Ratio = The management and operations fees of the fund are generally grouped together into this number. It will be given as a percentage that you will pay each year you have your money in the fund.

12B-1 Fee Money you pay the fund to use for trading commisions at the brokerage and for advertising to other investors. This way you get to pay for marketing, not them. Not even kidding. You probably wouldn’t give them money if they called it Advertising Fee though. 12B-1 sounds fancy and people don’t ask alot of questions. This fee should be already included in the expense ratio.

Load = A sales charge. A load is a fee you pay when putting money into or taking out of a mutual fund. For example, a front-load fee of 1% on the fund means that before they even invest your money, you pay them 1% of all the money you’re giving them to invest. Pretty sweet deal, huh? If you pay the fee when taking the money back out of the fund, that’s called a back-load.

Redemption Fee = Money you pay for taking your money out of a fund too quickly. For example let’s say a mutual fund has a redemption fee for withdrawals before 30 days. You put your money into it. 3 weeks later, you decide you think another fund would be a better investment.  So you sell out of that mutual fund. You get to pay them for selling out before 30 days have passed.

What is a reasonable amount I can expect to pay in fees?
If you work for a large company, expect to pay about 1-2% a year with all fees included. Aim for 1% or Less (expense ratio + plan administration). Smaller companies with retirement plans generally run higher in fees (2-3%+). Aim for not paying more than 2% tops. Generally, when people are even made aware of the fees they are paying, they will make better decisions for fund choices. If a fund commands a higher fee, you may want to make damn sure that it has a long history of outperforming all other choices available.

Funds with higher fees are generally actively managed vs just indexed. The ironic thing is, the cheaper indexed funds usually outperform the stock picking managers (about 90% of the time). So just remember, 90% of the time, you’re best off just picking the index fund(s).

If you want a short cut in finding out how much money you’re giving away FINRA (financial regulator) has a free tool for you.

Fund Fee Analyzer
*Can be used for Mutual Funds, CEF’s, ETF’s, etc.

 

WHAT THE F*CK?

(A translation guide for that stupid packet they gave you at work)

 

Allocation
How your money is split up and used to buy stocks, bonds, or funds.

Equity (equities)
Stocks.

Fixed-Income
Bonds.

Balanced
Your money is put into a mix of different types of stocks and bonds.

Aggressive
Your account value is going to swing up and down more, but you have the potential to make more money in the long run.

Conservative
Your account value will be relatively stable, but you probably won’t make as much money in the long run.

Moderate
In-between conservative and aggressive. You won’t make the huge gains when the market goes up, but you also won’t lose as much if the market goes down.

Index (indexed)
The fund doesn’t have somebody making decisions on what to buy and sell. The value of the fund tries to match the growth/value of a specific market or theme.  Example, a fund that is indexed to the Dow Jones means you won’t have to buy every company in the Dow Jones. The fund owns all those companies and you will get the cumulative gains and losses of everybody. These funds are (as a rule of thumb) cheaper, better options than actively managed funds.

Global
At least some of your money will buy stocks or bonds from countries other than the US.

Developed
The big European countries. Think Germany, France, Switzerland, etc.

Emerging
Money is at least partially invested in the up and coming countries that aren’t typically considered as well off economically as the US or Europe. Think China, India, Brazil, Russia, etc.

Target Fund (aka TR  2050 or whatever number)
The 4 digit number is the year you expect to retire. A target fund means you pay a manager to allocate your money between stocks and bonds and reallocate regularly in the hopes that by the time you retire they will have invested your money way better than you could have. Hot tip: these funds are garbage and work superbly for Wall Street to bleed money from people who are too lazy to make a few simple, informed decisions.

 

Quote Source: TD Ameritrade 2018 Survey of 1000 active investors. The percentage of the general population who know about 401(k) fees is far less than 27%.