Have you ever heard of Ron Wayne? Every once in a while his name pops up on my Twitter feed. The story is he worked with Steve Jobs and Steve Wozniak to help develop Apple. In 1976 he sold his 10% stake in Apple for $800. Twitter being Twitter likes to use the extreme example of what his 10% stake would be worth now, assuming no stock dilution. That number is roughly $80 billion. Not shabby.
People’s reaction to him losing out on tens of billions makes me shake my head. Why? Because most investors are pulling the equivalent of a Ron Wayne every day in their own investments.
I have mentioned before John Bogle’s, founder of Vanguard, story of paying too much in fees. These fees include what you pay for investment products and also what you are paying your financial advisor. His example is that if you invest $1 for 50 years and enjoy a 7% annual return your $1 will turn into $30. Most investors net a return of 5% instead of the 7%. This drop is because they pay out 1% to their advisor and another 1% to investment companies.
This drop from 7% to 5% wreaks havoc on your returns. Now, your $1 growing at 5% over a 50-year period of time grows to $10. Yes, that is correct. Your return is now worth 1/3 of what it would have been without paying the high fees.
Imagine being a diligent saver who busted his or her butt to have a nice $100,0000 balance in their 401k plan by the time they are 35. This person could easily live another 50 years. Well, with a 5% vs a 7% return their account value would be worth $1,000,000 instead of $3,000,000 over their lifetime.
I wanted to bring this Bogle example back up because of something I read recently regarding fees in 401k plans. A few years back a Yale professor studied over 3,500 401k plans. His results showed a “substantial amount” of these plans had poorly designed investment menus with high-cost funds. Amazingly, his findings showed that in 16% of the plans the fees were so high it made more financial sense for younger employees to forego the tax benefits of a 401k plan and instead invest in an outside, low-cost retirement account. You read that right – Some 401k plans have such high expenses it makes more sense for some employees to skip participation entirely.
So, what’s my point? While Twitter may laugh at Ron Wayne because he took $800 instead of a chance at $81 billion, how many of those laughing are being their own version of Ron Wayne by losing 2/3 of their retirement savings by paying too high of fees? Studies have shown it is even easier to do if your work 401k plan has high fees. The difference between Ron Wayne and the average 401k participant is he made the conscious choice to sell his shares because he was not happy working with Apple. In the case of 401k plans, half of Americans have no clue what they are paying in fees. Do yourself a favor and find out what you are paying in your 401k.