The Time Value Ripoff

I wanted to write this to make it clear what happens when an investment company charges you a fee within a retirement account.  These companies make their money by fucking people over in complicated ways, so I wanted to lay it all out.  The problem is that the real fee comes 30 years after the fact, when you retire.

My 401(k) rolled over from Great West Retirement Services to Betterment.  Great West decided to charge my account an $815 termination fee.  That’s about 4.5% of the money I put in ($36k).  My company said they would contribute $815 to the following year’s 401(k).

Consequences in different scenarios:

(1)  Me.  I max out my 401(k).  After the fee, I have $815 less under a tax shelter.  On a 30 year plan at 7% investment earnings, $815 turns into $6204.  Invested outside the tax shelter, it likely only gets about half of what it would be get when sheltered: $3,102.  So I’ve lost $3,102 in future dollars.  Assuming inflation is 3%, $3,102 future dollars is about $1,323 in today’s dollars.  It’s an impact of opportunity cost.  B/c GWRS decided they would charge that fee within the account, I have $1323 less at retirement.  But of course none of that is shown up front, and that’s even accounting for my company’s generous offer to make up to the $815 fee.

(2) Somebody who contributes < $17,185 to their 401(k).  In this scenario, the $815 is invested for only 29 years instead of 30.  29 years is $5,798.15.  30 years is $6,204.  $406 dollar difference.  Accounting for inflation, it’s ($1323/$3102)*$406 = $173 less at retirement.

Okay, so fair enough, (2) is a bit bullshit because the fee was charged in December and made up in January.  The money is unplugged for X many days anyway for the rollover.  The calculation isn’t really 29 years vs 30 years, it’s more like 29.9 years vs. 30 years, but there’s still a “hidden” time value cost on average.

When you max your retirement, any money that is stolen from the account has a much higher opportunity cost (b/c there is so much benefit for money under the umbrella, and when you’re maxing and somebody steals money, you can’t make it up by contributing the following year).


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