Wall Street's $88 Billion Handout

And you thought the hundreds of billions in bailout money Wall Street got during the financial crisis was bad…

At least all that bailout money was paid back. And it didn’t come right out of your pocket in the first place. 

But this $88 billion is different. It’s basically a handout. And it comes right out of your retirement savings and goes right into their pockets. Oh, and it’s not going to be paid back, either. 

The easiest and most popular way to save for retirement is through an employer-sponsored 401(k) plan. You can have money taken out before taxes, and your employer probably matches a certain amount of your money that goes into the plan. From that standpoint, the match you get from your employer is basically free money.

But the company that manages your 401(k) plan is basically getting a bunch of free money, too. Because you pay fees to them to “manage” your account. At a 2% annual rate, we’re talking about an $88 billion handout to these 401(k) managers. 

And the thing is, you don’t really have a choice. That’s why I say it’s a handout. These 401(k) management companies charge a fee when you enter the plan, they charge you for the funds you buy, they charge you if you sell too soon, and they charge an annual management fee. And for what?

They don’t put the funds in the plan together. The funds you’re offered are probably from American Funds or Fidelity or some other big mutual fund company. 

And the 401(k) company doesn’t manage those funds, either. All it does is buy the funds you want through a broker and then send you a statement every once in a while. If anyone can explain to me how that’s worth $88 billion (or more) a year, well, I’m all ears. 

It’s ridiculous that they make so much money off you and your retirement savings. The 401(k) system is completely broken. Even the man who invented the 401(k) says so. “Now this monster is out of control,” Ted Benna told SmartMoney.com. “I would blow up the system and restart with something totally different.” 

The Monster is Out of Control

The fact that 401(k) plans will charge you as much as 2% for a mutual fund is crazy. Especially when you can buy a Vanguard fund for a fraction of a percent. But it’s even worse than that. Sometimes a fund that your 401(k) company offers is more expensive than it should be. You could buy the very same fund through your own broker for less. 

That’s just nuts. And it’s also wrong. 

401(k) companies are taking advantage of American retirement savers because they have nowhere else to go…

So I tell anyone who will listen that they should open their own Roth IRA account. A Roth Ira is the single most powerful retirement savings account that’s ever been created. Because everything you withdraw is tax-free. That’s right — you don’t pay any taxes on Roth IRA withdrawals. No capital gains taxes, no income taxes, nothing. 

Tax-free withdrawals from a Roth IRA can be a windfall. Especially if you have a good while to invest before you retire. Because you could save 15% right off the bat by not having to pay capital gains taxes. And the income tax savings could be significant, too.

But there’s another reason I like Roth IRAs so much. It’s because you can buy individual stocks in a Roth IRA. 

The only way you can beat the market is with individual stocks. Obviously, an index fund can’t do any better than the index it tracks. And after you pay the fees for such a fund to a 401(k) company, well, you’ll never beat any benchmark. 

A lot of Wall Street types say that individual investors should not bank on individual stocks for the their retirement accounts. They think index funds are the way to go. And it’s because they don’t think the average investor is savvy enough to buy individual stocks for the long term. 

They think you’ll screw it up, that you’ll sell the first time the market looks sketchy, or that you’ll buy risky stocks…

Basically, they don’t think the average investor really understands how to invest for the long term. 

How to Invest for the Long Term

Let me let you on a little secret: It’s not that hard to invest for the long term. In fact, the formula is pretty simple: buy great companies that pay dividends, and you will be fine. Let dividend compounding and time do the work. 

And you don’t need to own a ton of stocks to do well, either. A handful will usually do just fine. 

So how do you go about finding great companies? They are all around. The thing to ask when looking at a company for investment is: where will this company be in 10 years? In 20 years?

Like, where will Disney (NYSE: DIS) be in 20 years? It’s a pretty good bet that in 20 years, Disney will be doing exactly what it is now: making great movies, running awesome theme parks, and bringing us live sporting events.

What about Bank of America (NYSE: BAC)? Will it be around in 20 years? Ummm, yes. Forget the “break up the banks” nonsense. That’s not happening. The U.S. population will grow and make more money, and much of that will be on deposit at BofA.

How about Starbucks (NASDAQ: SBUX)? Can you imagine Starbucks losing its appeal over the next 20 years? Not likely. Those kids you see at Starbucks all the time these days are customers for life. 

What about Netflix (NASDAQ: NFLX)? I love Netflix, as a service and as a company. But I can’t tell you were it will be in 20 years. Maybe it will get bought out. Maybe the competition will drive it out of business. I don’t know. And I wouldn’t invest in Netflix for the long term.

Same goes for a company like Tesla (NASDAQ: TSLA). No doubt Tesla’s founder is a genius. And no doubt that electric cars are the future. But Ford makes electric cars. So does GM, Nissan, BMW, etc. I can’t tell you that Tesla will be a market leader in 20 years. So I’d have to pass on that one, too. 

Now, these are just a couple examples. But if you can answer the simple question about where a company will be in 20 years, then you probably have a pretty good company for investment. And if that company pays a dividend (as all those I just mentioned do), you will make money over time. 

Here’s an idea: Do you have a company you’re looking at for a long-term investment? Do you want to talk about where a company you like will be in 20 years? Well, send in the ticker to Angel customer service, maybe add some commentary of your own, and we’ll hash it out, right here in Wealth Daily. 

That sounds like fun, right? 

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.