By Mark Folgmann In his most recent book “Outliers” Malcolm Gladwell states that his research shows you can be an expert in just about anything if you put in 10,000 hours. This applies to playing hockey, writing software, music and yes even brain surgery. If we do the math we find out that this would take up 5 years of full time effort or 10 years at 20 hours per week each and every year. Last year my wife and I were invited to Hilton Head to spend 4 days with my favorite Uncle and Aunt. Once we arrived we were notified that my cousin Brian was driving up from Florida to grill steaks. I was happy that I would get to see Brian but thought to myself, heck I can grill steaks, why was everyone so excited to have Brian grill steaks. Brian showed up at noon after a three hour drive and spent about 15 minutes preparing the steaks. I’m not sure what he did but since it only took 15 minutes it couldn’t be all that important, right? Anyway after he was done Brian and I shot off to play golf for the rest of the afternoon with no further thought about those steaks. Brian had them marinating back at the condo after he trimmed the fat and prepared for cooking. About 5 hours later we returned from golf and Brian started on the rest of the meal. Preparing the salad and cutting and washing vegetables. After taking everyone’s order on how they wanted their steaks prepared he left and returned with the best steaks I have ever tasted. I have to say the meal Brian prepared was the highlight of my trip. Sure it was great seeing everyone but to watch someone that is truly great at what they do was a pure pleasure. Most would not realize what went into that meal but I truly did. I knew Brian had spent his 10,000 hours becoming an expert and I appreciated someone who is great at what they do. Not only was it interesting to watch but I benefited from his effort. Even though the end process looked effortless I was fully aware that Brian had paid the price and pulled off an experience that was unforgettable. After all I am still thinking about that meal a year later.
The question is what does this have to do with your retirement? Everything. We can’t be expected to create a successful outcome with only one opportunity to practice. Sure retirement is far more important than grilling steaks so don’t you think the prudent thing to do would be find someone that has 10,000 hours of experience. Someone that understands how to prepare, monitor and evaluate the process. Wouldn’t you want someone that has burned a few steaks and has learned from that experience? When I grill my wife knows to have a glass of water handy at all times. Anyone that has ever grilled knows what the water is for. There are clearly two problems to this retirement dilemma, first is the accumulation stage which is by far the easier issue. The more difficult problem is once you retire and attempt to make your money last as long as you do. Brian knows exactly what temperature to grill steaks so they don’t burn and in my world I have to know what distribution rate and expense ratio’s are acceptable over a 30 year retirement so your money doesn’t disappear before you do. There is always a very fine line between a great meal and burning steaks. Oh, did I forget to tell you what Brian's profession is? He's a Chef.
By Mark Folgmann In today’s uncertain environment where few trust Wall Street; it’s fair to wonder if your 401(k) is structured and monitored in a prudent way. Most companies slap a 401(k) into place, let the advisor pick a basket of funds and hope it all works out. Sure they review the funds once per year but really never get to the bottom line; is my retirement account going to be fully funded the day I retire? If not, what changes need to be made to assure that happens. I mentioned countless times in previous articles that the 401(k) is not a product; it’s a delicate income producing system that needs constant care by trained fiduciaries who understand the critical questions to ask in order to improve employee’s retirement income.
For the first time there is an independent rating service for your 401(k), a start-up out of San Diego run by brothers Mike and Ryan Alfred. You can access the rating system as a plan sponsor or employee by visiting www.brightscope.com. Since Brightscope is a start-up it does not have all plans in its system yet but just passed a milestone of rating its thirty thousandth plan and also just released their top 30 list of 401(k)s for 2009. They have developed a rating algorithm that calculates a single numbered score for each and every 401(k) evaluated which falls between 1 and 100. Currently the highest rated company score is 96 and the lowest is 26 and this score is derived from over 200 data points such as plan cost, investment quality, contribution rates and company generosity. A score of 100 would indicate a typical employee would be able to retire and walk away with a million dollars on a working salary of fifty or sixty thousand dollars. They also translate this number score into how many additional years the average employee will have to work because his company has an inferior plan. The companies that were rated best in class for 2009 have average employee balances over $350,000 and scored in the 90s with over 15,000 employees. The weakest plans might have average employee balances of $15,000 or less than one year’s current income. Remember this is not the only factor since there are 200 data points but average account balance is a very good starting point. They also do an excellent job of uncovering most of the plan cost including trading cost for investments which many times can double the overall cost of the plan.
I had the pleasure of spending time with both Mike and Ryan Alfred at a recent Independent Fiduciary Symposium hosted by Matthew Hutcheson in Boise Idaho and can attest to the passion these young men have about the future of 401(k) improvement that will be driven by an independent rating system much like Morningstar rates individual mutual fund. Any employee or employer can go to Brightscope to check if your companies plan has been rated. If your plan has not yet been rated you can follow instructions on the website to input data and have your plan evaluated. Since Brightscope does not receive any funding from the financial service industry you can be sure you will get an unbiased review of your plan and there is no fee to have your plan evaluated. Once again this is an example of an innovative approach to improving our futures by a private company that was started because they saw the need for third party independent evaluation of our retirement plans. Remember this is information that Wall Street does not want you to know and they spend million and millions each year fighting full disclosure with their lobbing efforts.
By Mark Folgmann In order to create a solution we must first admit we have a problem. If you are a regular reader of my column you will already know that I believe we have a major disappointment coming when our current workforce gets ready to retire over the next 25 years. Most 401(k) plans we review are dramatically under funded and will not be large enough at retirement to assure a desired lifestyle. The average employee has less than one year of income accumulated within their plan. Unfortunately most fiduciaries entrusted with the oversight of these plans are not actively engaged and are somewhat in denial. Operating in this environment reminds me of the quote by the Pulitzer Prize-winning historian Daniel Boortin when he said “The greatest obstacle to discovery is not ignorance, it is the illusion of knowledge.” Both employees and employers are way overconfident about their ability to deliver successful outcomes.
Albert Einstein said “You can’t fix the problems with the same minds that created them.” Therefore the solution to the 401(k) problem is for the employers and professional asset gathers (Financial Advisors) to get out of the retirement plan business. We must admit we have a problem and enlist the minds of people that truly understand the problems and know what they must do to solve them. Someone who can discharge their duties of loyalty to both the participants and their beneficiaries so they can increase retirement incomes. It’s my personal opinion that virtually all plans with less than 10 million of assets join a multiple employer plan. This is a plan that allows small business owners to ban together like the Governments Thrift Savings Plan to gain economies of scale and create successful outcomes for employees. In his August column this year Scott Simon from Morningstar Advisor calls the multiple employer plan the “Platinum Standard.”
In the marketplace there are very innovative solutions that allow the small business owner to get out of the retirement plan business while still providing a fantastic retirement plan for their employees. The business owner ends up making only one decision, to join the plan or not while everything else is automatic. Just imagine, no enrollment meetings, no boring employee education sessions eating away at company time but yet a plan structured for success while providing the company protection from liability. The best also utilize professional portfolio managers to create model portfolios to obtain market returns for their employees. Since the average employee is not trained or capable of managing their investment portfolio these professionally managed model portfolios will increase their account balances. A multiple employer plan can typically be joined for about half the cost of a typical 401(k) offered by the financial service industry. To learn more about multiple employer plans visit www.gfiduciary.com. With a combination of technology and innovation we are likely to see more and more solutions for the retirement dilemma but we must be willing to get outside the box and look for 21st century solutions.
By Mark FolgmannLast time we talked about the Federal Thrift Plan and how the economies of scale have created a plan with not only extremely low cost but also very efficient investment options with great oversight. Most small business owners are at a great disadvantage because they try to set up a stand alone retirement plan and due to their size they end up paying far too much in expenses and set-up cost. They also are at the mercy of the financial service industry which markets bundled 401(k) s that are filled with excess fees, mediocre investment and often end up locked into an expensive insurance or annuity product. When I talk to small business owners I usually find two very different scenarios, the first is the busy owner who ignores his companies retirement plan due to his time spent running his company and second is the person that fills the fiduciary role but overestimates their ability to create successful outcomes for their employees.
When I review a plan with employers I already have a real good idea whether they have a good plan or not because all information about their plan is public information and can be obtained with two clicks of the mouse. Therefore I can evaluate a plan based on the mechanics of the plan which are things like contribution rates, loan amounts, investment choices and employer generosity. I can also estimate average employee balances and project number of year till the plan will be fully funded. There are somewhere between eight and twelve levers that will either create success or assure failure within a 401(k). Unfortunately most of the people responsible for the oversight of the plan don’t recognize what they are. Most of their time is spent discussing investment choices, don’t get me wrong these are important but investment choice will not make or break a plan if the more important factors are not addressed. This becomes very frustrating because they usually don’t understand their own plan well enough to ask the critical questions to assure successful retirement outcomes for their employees. They are being asked to act as fiduciary’s for their companies retirement plans and have not been trained for this role. A sound fiduciary process demands that a plan sponsor utilize Prudent Experts. Once again I stress creating successful retirement outcomes is very hard work not something you can take lightly and hope it works out. In my twenty plus years of reviewing hundreds of 401(k)s and thousands of employees that contribute to them I have only found one company plan that meets my criteria as an excellent well thought out plan that was truly created to increase their employees retirement income. Don’t get me wrong there are many plans today that are getting much better but most if not all benefit the companies offering the plan more than the employees funding the plan. Next time in part two of the 401(k) solution I will show you how to beat the odds and guarantee your company has a great retirement plan.
By Mark FolgmannWe 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.
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.
By Mark FolgmannOnce again I’m watching human behavior take over and it’s causing people to do the wrong things at the wrong time. The individual investors that sold their holdings after the major market decline in 2008 and have been sitting on the sidelines throughout 2009 are now ready to re-enter the market. Be very cautious since we have already witnessed a 25-75% increase since the March 9th low depending on which asset class we are discussing. This is the problem with investors that try to time the market and are controlled by fear and greed. You have to always make multiple right decisions. When do I get out and when do I get back in? Make one wrong decision and you loose money and run the risk of never recovering. In my humble opinion a properly diversified portfolio will always win over the long term. Instead of jumping back in after this major increase it might be smart to dollar cost average back into the market to reduce your risk of buying after a major run up in the markets.
For those of you that did not have a diversified portfolio last year and suffered significant losses but stuck it out, this might be a perfect time to reorganize your portfolio. If you’re in this group it would be a great time to diversify since we have had a significant increase in your portfolio during the current year. Hopefully you have realized that a prudent investor does not expose himself to a portfolio that consists of 100% stocks regardless of his age. The time tested estimate of holding your fixed assets within your portfolio equal to your age is a real good rule of thumb, even when the media wants you to believe these common sense strategies somehow have become obsolete.
Dalbar recently completed their annual survey on investor results and once again confirmed that we are not very good investors. The most recent 20 year results for the S/P500 ending in 2008 was 8.5% per year yet the average investors return was
a paltry 1.9% after fees, taxes and bad behavior. Remember your retirement accounts are like a bar of soap. The more you touch them the smaller they get. Remember Wall Street operates on volume. Transactions generate fees and fees generate profits for Wall Street. Pick a prudent allocation and diversify your portfolio with low cost investment options. Add regularly and rebalance on your birthday. It’s really that simple!
