Managed Mutual Funds
and Retirement Income
How Economic Literacy Pays Big Dividends

Our focus is consumer education, primarily in the financial
arena

Our goal is to provide information so that consumers can
make educated decisions

We want consumers to take responsibility for their
financial well-being

We provide motivation and education through the Big
Bend Saves program
Big Bend Saves

Free online program to encourage individuals to

Save money

Reduce debt

Build wealth
Based on the theories of behavioral economics
 Make a pledge to save
 Set financial goals, track spending and take control of your
financial future

David W. Rasmussen
James H. Gapinski Professor of Economics

Florida State University

Dean Emeritus, College of Social Sciences and Public
Policy

Affiliate: Pepper Center on Aging and Public Policy

Affiliate: L. Charles Hilton Center for the Study of
Economic Prosperity and Individual Opportunity
The Main Story

How to achieve a solid investment strategy for retirement
assets

Preview: about 70 percent of all financial retirement
assets are getting a lower rate of return than they should

This amounts to tens of thousands of dollars for even
modest savers
Is There a Natural Tendency to be
Financially Illiterate?

People are generally:

Myopic

Ignore the power of compound interest

Do not understand risk
 Psychologically
illiterate
we may be wired to be economically
Where Retirees Get Their Income
Income
< $5,000
Earnings Housing**
Based
Wealth*
Other
Wealth***
Work
Income
$1,902
$8,004
$156
$259
$10,321
6,757
7,572
139
448
$14,916
$10,000-14,999
11,337
7,548
101
535
$19,521
$15,000-19,999
15,948
9,408
191
830
$26,377
$20,000-29,999
21,247
11,304
686
2,475
$35,712
$30,000-39,999
27,064
12,768
1,236
5,597
$46,665
$40,000-49,999
28,936
13,848
2,220
12,503
$57,507
32,998
15,300
3,904
20,870
$73,072
38,737
21,684
12,584
73,309
$146,314
$5,000-9,999
$50,000-69,000
$70,000 +
*Social Security, private and government retirement
**monthly rental value of owned *12
*** interest, dividends, rental income, and other property income
Source: Consumer Expenditure Survey, U.S. Department of Labor Statistics, August 2016
Fundamental Insights for Future Retirees

Social security and defined benefit pensions will provide less income
in the future

Continuing to work will be critical for more households

Some households can tap housing equity for emergency situations

Saving by individuals will be more important as will continuing to work
Economic literacy is required for household decisions
Pitfalls in Saving

70% of the $13.7 trillion in 401K Retirement Funds are in
high cost managed funds that the Economist calls a
“rotten deal”

Consumer Reports headlines “Mutual Fund fees skim big
bucks from 401(K)s: A household of two median –income
earners will pay about $155,000 over 40 years”

The Consumer Federation of America reports that a
“Review of 25 major brokerage firms and insurance
companies find all posing as fiduciaries, misleading
consumers
A Comparison of Investments in Managed
Funds vs an Indexed Mutual Fund
Fee Level
High*
Medium**
Low***
Investment Amount
$20,000
$20,000
$20,000
Estimated Return
7.00%
7.00%
7.00%
Holding Period (years)
15
15
15
Fund Value After 15 years
$39,910
$48,068
$53,872
Profit/Loss
$19,910
$28,068
$33,872
Total Fees and Expenses
$9,337
$4,417
$820
*Virtus Enhanced Core Equity Fund Class
**Dreyfus Appreciation Fund, Inc. Class Investor
***Vanguard 500 Index Fund Investor Class
Source: Financial Industry Regulatory Authority, Fund Analyzer,
apps.finra.org/fundanalyzer/1/fa.aspx
Why are Returns to Managed Funds
Lower than Index Funds?

Distribution fees

Sales commissions

Bid/ask spreads

Cash drag
Lower Fees Make a Big Difference
Comparing Returns: Index vs Managed Funds
Age
30
40
50
60
70
Annual
Savings
7%
Return
Annual
Savings
4.8%
Return
$600.00
$642.00
$600.00
$628.80
$9,470.16
$10,133.07
$8,435.54
$8,840.44
$26,919.11
$28,803.44
$20,957.77
$21,963.74
$61,243.82
$65,530.89
$40,969.95
$42,936.51
$124,473.77
$133,186.93
$68,891.41
$72,198.20
Why do Smart People Make Dumb
Financial Decisions?

Brokers benefit from selling high fee managed funds while
“serving” us

We want to believe self-interested brokers that we can
beat the market

The Illusion of control
The Challenging Task
of Increasing Financial Literacy



An easy message of financial literacy: low fee index funds
pay better
In principle, a nudge towards a responsible broker
How to combat myopia in decisions regarding work, home
equity, and saving
Questions?