Here's the essential shape of 401(k) as a backbone of the retirement system:

— Poor people get absolutely nothing.
— Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect.
— For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words, it's inverse to need.
— A small minority of middle-class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee, broadly diversified fund as their savings vehicle.
— Most middle-class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.
— A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle-class mass market based on their ability to swindle people.
Congratulations, America! Across a very wide range of products there's a strong case for a large dose of consumer sovereignty. People should buy the shoes and sandwiches and shirts they want. They should watch the shows they want to watch. Get the furniture and appliances they like, and pick their own hairstylists and their own favorite grocery stores. Tastes differ, so even though competition and choice will rarely lead to a perfect outcome it's going to lead to a much better outcome than trying to have a Shoe Commission tell everyone how many shoes they need and what they should cost and look like.

Middle class retirement savings isn't like that. We know roughly how much people need to put away in order to retire with a standard of living they'll be comfortable with. And we definitely know what kind of investment vehicles are most appropriate for middle class savers. And we have abundant evidence that, left to their own devices, a very large share of middle class savers will make the wrong choices. What's more, because of the nature of the right choices it's obvious that the dominant business strategy for vendors of middle class investment products is to dedicate your time and energy to developing and marketing inferior products, since the essence of superior products in this field is that they're less remunerative.

Anonymous wrote:

Anonymous wrote:Yes, mutual funds have management fees - you can see what percent they are when you read the small print or look them up on Morningstar. Many mutual funds that are actively managed (a fund manager gets paid to buy and sell stocks or bonds that make up the fund) have 1-2 percent fees. Studies show that in the long run, no one beats the market, so just buy the market (the index fund) and don't lose the fees, which add up over time.
Vanguard mutual fund company has very low fees. Many folks don't have vanguard as an option in their 401k.

FWIW, the TSP is the gold standard - very very low fees. Feds should max contributions to the TSP, and keep it in there after retirement.

Now I could go on and explain how places like Ameriprise take an additional cut, thus lowering your returns even further (While telling you that you are doing really well), but that's a story for another day.

I know this is an incredibly stupid question, but how do you buy index funds? And which are the better ones?

Anonymous wrote:Yes, mutual funds have management fees - you can see what percent they are when you read the small print or look them up on Morningstar. Many mutual funds that are actively managed (a fund manager gets paid to buy and sell stocks or bonds that make up the fund) have 1-2 percent fees. Studies show that in the long run, no one beats the market, so just buy the market (the index fund) and don't lose the fees, which add up over time.
Vanguard mutual fund company has very low fees. Many folks don't have vanguard as an option in their 401k.

FWIW, the TSP is the gold standard - very very low fees. Feds should max contributions to the TSP, and keep it in there after retirement.

Now I could go on and explain how places like Ameriprise take an additional cut, thus lowering your returns even further (While telling you that you are doing really well), but that's a story for another day.