How 401(k) fees destroy wealthInvestingMillenials

New Book Explores How to Cope With Student Debt and Beyond

Going to college used to be affordable, but the modern economy and rising expenses of advanced education have changed dramatically enough to make college tuition an exorbitant burden.

Today, about 70% of all students in the U.S. have some college tuition debt and the numbers below show the extent of the problem:

A Snapshot of Student Loan Debt 
National Student Loan Debt – $1.52 trillion
· Overall Number of Student Loan Borrowers – 45,000,000 (or about 70%of college students)
· Student Loan Default Rate – 11.5%
· Student Loan Delinquency Rate – 5.41%
· Average Debt per Student Borrower – $27,975
(Resource: Federal Reserve Bank of New York Consumer Credit Panel/Equifax, Federal Student Loan Portfolio) (Source: The Student Loan Report)

While 40% of this debt is owned by graduate students, there is enough debt to go around to alter the lifestyles of millions of college graduates. If these borrowers did not have the debt, they could afford to buy a house, but currently, student debt is second only to the home mortgage market.

This astronomical debt has also turned into a political issue. Progressive candidates, such as Bernie Sanders, have proposed free college tuition as part of an overall new progressive economic agenda. And while that could be decades away, borrowers still have to face up to the debt, earn a living and put enough money away to pay bills and fund retirement.

Facing the Problem

The years after graduation are especially tough financially, so new graduates and younger people in the workforce should develop healthy, smart savings and investing habits.

But this is easier said than done, mainly because investing is an over-discussed and abused topic, replete with some bad advice. Oddly, some of the best advice is the most straightforward and relies on some market knowledge and advanced common sense.

According to Michael C. Taylor, author of The Financial Rules for New College Graduates, the best advice is to follow “dumb, simple things,” such as appreciating the power of compound interest; a concept that Einstein said was one of the mathematical wonders of the world.

But in Taylor’s book, he says following investing advice is important, but not everything. “My book is only 23 chapters long and it only has two chapters on investing. And from this, one of the most important ideas is be fully invested in equities in low-cost mutual funds or ETFs and never sell. If you do that in your 20s, you will be fine.”

Avoid the High Fees

He also stresses that investment fees and expenses are the hidden killer of investment returns. “Don’t pay the 1% fee because over 20 years that 1 % turns out to be huge.” He also believes that active investment management, aka the Efficient Market Hypothesis, is alive and well and no matter what a fund manager says, they will not beat the market in the long-run.

As cited in the book, How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves, “uninformed investors often become victims and in a 401(k) plan with high expenses, the toll can be devastating. As an example, if an employee has been working for 35 years and contributes $5,000 annually into their 401(k) account, they would earn about $469,000 over that period (assuming a 7% annual return and no fees.) But an annual fee of just 1.5% of the account balance would reduce the return to $345,000; a loss of $124,000. (Source: “Determining Whether 401(k) Fees are Reasonable: Are Disclosure Requirements Adequate?” AARP Policy Institute, September 2008, as cited in “401(k) Participants’ Awareness and Understanding of Fees,” February 2011, AARP.)

Taylor also has chapters on how to apply the traits of modesty, skepticism and optimism into financial decision making. There is also a discussion about what wealth really means and the nature of work. For instance, he said anyone concerned about building wealth needs to think about their own death and values. This includes thoughts on what it means to be wealthy.

“It’s important to do work that makes you feel valuable, so you can enjoy the things that make you happy. It’s also the philanthropy that makes you feel wealthy. You won’t feel wealthy if you don’t give something back,” he said.

While many of the investment suggestions are not new, the math behind the essential financial concepts of power of compound interest and the role of discounted cash flows are presented in an easy-to-understand way.

There is also an important chapter on taxes and the progressive interpretation that “tax laws are written by and for capitalists, not working people. The tax system is rigged against the average workers. People need to know this and this is how you have to manage your tax exposure so you can use all legal available means to be taxed at a lower rate,”  he said.

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Chuck Epstein

Chuck Epstein

Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry.

He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial.

He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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