“A Great Government Plan?”

By Mark Folgmann

We are constantly bombarded by all the things our government does not do well. What kind of grade would we give them on the management and oversight of Medicare or Social Security? Probably not an “A.” Let me share a little know area where our government does an excellent job. It’s in an area that benefits them directly and the rest of us indirectly. The Government Thrift Savings Plan is bar none the most attractive voluntary retirement plan system in the nation. This plan is so well thought out and implemented that the overall cost is almost zero. They have linked all the Federal agencies and into the same plan to obtain economies of scale and drive down overall cost to the Federal employees to 1.9 basis points. They have limited asset class choice to only five and have dramatically simplified the plan. This means that an employee saving for their own retirement will pay only 19 cents in cost for every one thousand dollars invested in their account. When I review 401(k)s in our region I typically find the overall plan cost are in excess of 300 basis points, that’s right 150 times more expensive than the government’s thrift plan. Let’s assume we have a 35 year old earning $45,000 with $15,000 accumulated in his 401(k) and adds $300/month until he’s 65. Let’s also assume that both portfolios earn an identical 7.5% gross return before cost. The government employee in this case would end up with approximately $515,000 account balance that would generate $1,716 per month in retirement income. The non government employee would have an ending balance of $285,000 which would generate $950 per month in retirement income. Since the government takes its fiduciary responsibility serious and have implemented the best low cost solutions they are demonstrating that it is possible to produce successful outcomes.

Just think about this for one minute, a difference of $766 per month in retirement income for the rest of your life and the only thing we changed was the cost of the plan. We have not even addressed the problem of contribution rates or investment behavior. We have not even talked about implementing a prudent fiduciary process to increase outcomes. We haven’t yet thought about matching cash flows of the plan with future expected liabilities nor have we discussed proper investment diversification. We have only focused on one thing, fees! I stated earlier that the Government Thrift Savings Plan benefits us indirectly and what I was referring to is the fact that most if not all government employees will retire with more money than they would in the private sector and therefore they will have the economic ability to live with dignity independence and therefore support and drive our economy. This probably will not be the case with the private sector unless we really start to pay attention. I talk to employers each and every week and there are too many employers placing their employee’s retirement income in the hands of unqualified people and therefore trusting them to deliver successful outcomes. The typical worker needs between ten and fifteen times their ending salary in their plan to maintain their lifestyle and dignity in retirement. Imagine what Northern Michigan or Michigan for that matter would be like if each and every retiree had an additional $766/month, each and every month for the rest of their life. Next time we will discuss how we can copy the Government Thrift Plan to produce better retirement outcomes for private sector employees.

Do we need more Advisors?

By Mark Folgmann

I recently attended a 401(k) Fiduciary Symposium at Boise State University hosted by Matthew Hutcheson the nation’s best know Independent Fiduciary currently working with both Congress and the Department of Labor on improving America’s retirement income. I had the pleasure of sitting next to Sheryl Garrett founder of “The Garrett Planning Network.” This is a group of fee-only financial advisors that have a very unique business model and have over three hundred advisors around the country that help individual clients on an hourly basis. This advice can be purchased in blocks of time depending your level of complexity and the amount of time you need. You could purchase two hours to review you 401(k) and asset allocation while also updating your insurance needs. Once this is completed you may not need additional help till 2011 at which time you come back in for two or three hours of review. Since the advisors are paid by the client on an individual basis they have eliminated most conflicts of interest and are able to deliver quality advice because their only agenda is to help the client and provide more value than what they charge. They spend time educating clients so they can make smarter financial decisions with regard to their overall financial situation and are always available if you get stuck or need additional help.

With so many jobs leaving Michigan, this is an area where many jobs could and should be created. Traverse City is an excellent example of a place where an hourly planner is desperately needed. It’s my belief that the majority of the country should hire and do business with an hourly planner. Unfortunately there is not one available in our area and I believe we could support at least four in Traverse City alone. Most people’s situations are not so complicated that they need ongoing comprehensive analysis and care. Normally you must acquire significant assets before this level of care is needed and usually would be in excess of $750,000 if not $1,000,000. In my practice I have noticed that there is a certain level of assets where many people become uncomfortable managing their own investments. I believe most of our workforce (at least 95%) could benefit from financial advice delivered on an hourly basis ordered up when life and situations change. There are too many salespeople whom are marketing products under the title of “Financial Advisor or Financial Planner” and not nearly enough true advisors whom do not sell products. The question is “Are we ready to write a check for advice or will we continue believing we are getting trustworthy advice for free by people selling products?” Most still believe they are not paying fees if they don’t write a check but in reality you always pay the bill. I hope Sheryl will find an advisor for our community and I will do my part to support that effort.