In this election year, there's a lot of talk about how the middle class has been decimated by our economic woes. In a sobering study, titled "[T]he lost decade of the Middle Class", Pew Research Center defines this beleaguered group as those with household incomes between $39,000 and $118,000. According to Pew, since 2000, the middle class "has shrunk in size, fallen backward in income and wealth, and shed some -- but by no means all -- of its characteristic faith in the future." Their median income has fallen from $72,956 to $69,487.
It's not surprising that savings for this group have also declined. Most employees are relying on their 401(k) plans to secure their retirement. At the end of 2011, over $3.1 trillion was invested in these plans. Workers in their sixties with more than 30 years of tenure with their current employers had average account balances of $202,329 at the end of 2011. This will hardly provide "retirement with dignity" even to this very limited class of hard working, loyal Americans. At a prudent withdrawal rate of 4.5% of savings, they had better be prepared to live on $9,100 a year ($758) a month, plus Social Security and any other savings. At this income level, a family of two would be close to or below the 2012 poverty guidelines of $15,130 set by the U.S. Department of Heath and Human Services.
Another depressing study found that 46% of people die with less than $10,000 in assets. Their retirement years were anything but "golden." They relied almost entirely on Social Security benefits. Many of them didn't even own a home, after a lifetime of work.
A key reason for the low balances of the even those at the top of the pecking order for 401(k) plans is unconscionable fees imposed by the mutual fund industry. According to a report by Demos, the average mutual fund earns a 7% return but, after fees, the net return is only 4.5%.
Think of it this way: You work hard. You contribute the minimum to your 401(k) plan necessary to get the maximum contribution from your employer. The mutual fund industry takes over a third of the total returns they generate. Few employees realize this stunning fact because the "expense ratio" of the funds is expressed as a percent of total assets. Demos found the average expense ratio of mutual funds in 401(k) plans was 1.27% in 2010. This doesn't sound very significant until you do the math.
It's not surprising that the mutual fund industry is one of the most profitable sectors in the U.S. According to Management Practice, Inc., the average return after all costs of mutual fund companies is "about 30% of revenue."
While these fat cats are reaping these profits and taking no risk, how are they doing as "investment managers"? Every investor should read David Swensen's scathing indictment of the mutual fund industry. Mr. Swensen is the chief investment officer at Yale University. He correctly notes that "[F]or decades, investors suffered below-market returns even as mutual fund management company owners enjoyed market-beating results. Profits trumped the duty to serve investors."
It's time to stop the carnage.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book is The Smartest Money Book You'll Ever Read. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
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