6 / 10 - Asset #5: Fee-Laden Retirement Accounts

The final and perhaps least appreciated asset that contributes to perpetual poverty is the retirement account itself when it is loaded with hidden fees, misguided investment choices, or predatory management. It may seem odd to suggest that one's 401k or IRA could work against you. After all, saving for retirement should be lauded as prudent behavior. Yet the average retail investor - someone without the time or expertise to parse mutual fund prospectuses - often ends up paying 1 to 2% per year in management fees, front-end loads, or hidden expense ratios.

If a modest investor contributes $5,000 per year for a decade, looking forward to a comfortable nest egg, they might find that at retirement age their account has compounded to only half of what an equivalent low-fee fund would have delivered. Moreover, many retirement brokers incentivize clients to roll over pensions into annuities or high-fee IRA products, earning referral fees at each rollover.

In some cases, Wall Street brokers become financial advisors to unsuspecting working-class families, recommending investments that promise guaranteed returns which are in fact deeply opaque derivatives or proprietary funds that allow the broker to extract 4 to 5% of assets under management every year. Only when the investor retires and sees a monthly distribution that is far less than expected do they realize that tens of thousands of dollars have been siphoned off in fees and commissions.

Worse, just as the dot-com crash of 2000 or the mortgage meltdown of 2008 taught us, investment risk is not uniform. Small investors who cling to guaranteed products find their accounts frozen, their funds illiquid, and their financial futures endangered when the insurer or brokerage firm stumbles. In other words, a retirement account that most working Americans assume will deliver comfort in their old age can instead become a millstone of high fees, employer match limitations, and even corporate mismanagement - myriad ways in which the promised asset fails to do its job, leaving its owner once again treading water in later years.