Three Things I Think I Think – Tragic Fees Edition

Here are some things I think I am thinking about:

1)  401K’s Have Trapped Millions of Investors in high fee Mutual Funds.  This article at Fund Reference is depressing. It highlights the billions of assets that are trapped in 401K plans with high fee mutual funds that are adding no value.  For instance, they talk about this fund called the Great-West S&P 500 Index Fund which has $2.2 BILLION in assets. The assets are mostly captured in 401K plans. But here’s the kicker – the fund charges 0.6%.  For an index!  You can obtain the same thing at Vanguard or Schwab for 4 or 5 bps.  That’s $12,320,000 that is being siphoned out of accounts for no valid reason.

The plan administrators here are seriously failing their participants and it’s resulting in millions in fees that are being taken from their plan participants.  This sort of stuff is really sad. There’s no reason this should be happening, but it’s a widespread problem. High fee closet indexing mutual funds have captured huge swaths of the financial markets and most investors don’t have a clue how badly this is impacting their retirement planning….

2) Bubbles Confuse Economists.  Noah Smith has been on a good roll lately over at Bloomberg View. In yesterday’s column he discussed the theory of rational expectations and why it might be wrong.  Of course, heterodox economists have long stated this. Noah gives all the credit to behavioral economists which is fine I guess. Who cares who gets credit for it. But it’s certainly interesting to watch this shift continue. Heterodox economists are slowly winning lots of very important battles here:

• The financial crisis exposed major flaws in mainstream models regarding the use of money and the financial sector in models.
• Prominent Central Banks have come out endorsing the endogenous money view and rejecting the money multiplier.
• Economists like Paul Krugman now fully endorse the idea of a sovereign currency issuer.

And now the idea of rational expectations is under attack.  Of course, this doesn’t mean that mainstream economics had it all wrong. They certainly didn’t. But they’re adopting an increasingly heterodox view on many things which is nice to see.

3)  When is Enough Enough?  I really liked this piece by Tim Harford in the FT about JM Keynes and his prediction that we’d all be living a life of leisure by this point in history. He was clearly wrong. And Tim notes two possible explanations. Either, we really like working or we’re just never satisfied with what we have. Now, this doesn’t seem like an either/or question to me. In fact, the two seem to go hand in hand.  We generally work on becoming more talented.  And the only way to become more talented is to work harder and smarter.  And this is a naturally competitive action because it forces others to try to “keep up with the Joneses”.

John Bogle wrote a fantastic book titled “Enough”. In it he explores the idea of what it means to have “enough”.  But I don’t know if there’s such a thing. Humans are evolving animals who are inherently progressing. We’re never satisfied with “enough” because we’re all too aware of our deficiencies and how to solve them. And therein lies one of the great conundrums of capitalism. In a lot of ways this desire for more, more, more means we’re always striving to create better goods and services for one another. But at what cost does this desire for more come?