I read the headlines, same as you. Investors are panicking. During the drive in to work today, I listened to a radio business show. A correspondent talked about the flood of selling and the deep sense of fear in financial markets. Another expert spoke about investors cashing out and moving assets to the sidelines.
Yes, it is true that in volatile markets, there is more trading. And what is true in the markets is also true at Vanguard. In our 401(k) business, for example, the number of participants making a change in their portfolios, and the dollars they were moving, jumped five- or six-fold on the worst days for stocks. A similar pattern emerges in our retail business. These statistics are the source for headlines about shifting investor sentiment.
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According to a recent survey, more than 70% of participants in 401(k) retirement plans think they pay no fees on their accounts. Less than a quarter got the answer right, acknowledging that they do, in fact, pay fees.
It’s enough to drive true-blue Vanguard investors to despair. But before we give up entirely on our fellow investors, I’d like to suggest that there are some important issues here at play.
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As I’ve discussed in prior blog posts, 401(k) account balances for many Americans have recovered as a result of better financial markets and ongoing contributions. In tandem, the debate over 401(k)s has shifted—to the question of fees.
Critics share a common complaint: 401(k) fees are too high.* I’ve been asked this question in this way: Why aren’t 401(k) plans as cheap as a low-cost Vanguard index fund? The Vanguard 500 Index Fund, for example, carries a current expense ratio of 0.18%. By comparison, the median 401(k) plan, according to one study, costs about 0.70%—nearly four times as much.
Why the difference? There are four reasons.
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A new poll from Gallup says that Americans expect to depend more on Social Security when they retire—and less on 401(k)s, IRAs, and part-time work. I don’t believe it for a minute.
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While I have been publishing research for many years, I consider myself new to the blogosphere. So I was a little surprised when my recent post on a new 401(k) rating service, Brightscope, elicited some response, including a critique from founders of the company. Frankly, I don’t think anyone has ever created an “open letter” to me before now. But I was glad to get a conversation started. Read more »
