Essay on Retirement Savings Drain
http://www.pbs.org/wgbh/frontline/film/retirement-gamble/
I will send the pdf file ( TheRetirementSavingsDrain.pdf )
Write a minimum of at least three pages on the following questions (size 12 font and double spaced). The paper needs to be submitted as a Word document file into Canvas (Vericite). Cite all of your sources. For each of your answers I want you to provide clear reasoning detailing your position using concepts and economic logic learned in class and from the textbook.
1) Why is there a market failure in the 401(k) market? (Hint: read chapter 8 and its description of imperfect information)
2) Describe and detail all of the fees/costs associated with a 401(k).
3) Calculate two individuals total amount of retirement assets after 30 years of investing using the following two examples to display and articulate the effect of compounded fees on two different individuals’ retirement accounts with the exact same mutual funds. The two mutual funds have the same before expense rate of return, but one mutual fund charges a higher expense ratio than the other. Describe what effect fees have on the two different individuals’ retirement assets:
(a)
Yearly Savings: $15,000, Inflation Rate: 2%, Rate of Return:(8.15%-.15%=8%), Expense Ratio of Mutual Fund: .15%, Periods: 30 years
(b)
Yearly Savings: $15,000, Inflation Rate: 2%, Rate of Return:(8.15%-.65%=7.50%) (It is lower than example (a) due to the increased expense ratio), Expense Ratio of Mutual Fund: .65%, Periods: 30 years
Use this financial calculator website for the examples:
http://www.financeformulas.net/Future-Value-of-Growing-Annuity.html (Links to an external site.)
4) Describe and come up with your own solution, reform, or public policy to alleviate the inherent problems with 401(k)s. You can use ideas from other individuals and organizations, but make sure that you cite and credit those sources.
1) Why is there a market failure in the 401(k) market?
There are two basic reasons why the 401K plan incurred and continues to create problems in the marker; first is balance and second is transaction transparency. Often, those who are offered or even demanded to fill up their 401K forms are not that knowledgeable about investments. Hence, when they are passed on with a large document with so many information in it, they tend to just fill the forms without reading through. Entrusting the government with their hard-earned money may not be that easy for several employees, but because they are forced into it, they seem to find no choice nor do they find a better solution for the situation. Hence, upon signing the forms, they give the government the capacity to manage their money. Without proper understanding on what “investments” are about, 401K plan holders are not also able to track where their money is being used. Accordingly, this creates long-term problems that will eventually create conflict and issues among the plan holders, making it harder for them to enjoy the money they thought they saved for many years to support their retirement. Most of the time, plan holders are surprised to know who small the amount of retirement funds they have because of the fees and investment policies that their savings were used in.
