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!
By Mark FolgmannThe financial service industry loves to use the word independent. Almost every advisor uses the word in all their advertising. Let’s take a closer look at what this means and why it’s so important. Webster dictionary’s definition of Independence is “Not contingent on something else for existence, operation, etc or not influence by others in opinion.” Virtually every advisor that will use the term Independent will have small print at the bottom of the advertisement that states whom they really represent and normally this is a broker-dealer or insurance company. This broker-dealer decides what products they can offer, process all their business and writes their paychecks. Without a broker-dealer the advisor can not operate. Typically these advisors want you to believe they sit on your side of the table and always act in your best interest but in reality they owe no Fiduciary Standard to you their loyalty and responsibility is to their mother-ship and their only duty to you the client is known as the Suitability Standard. In the simplest terms this means that they have done you no harm but have not necessarily done the best job possible because they are constrained by what they can do through their broker-dealer. Therefore it is my argument that they are not Independent at all because their existence relies on someone else for existence and operation.
Why is a word so important? This lack of Independence also creates many conflicts of interest driven once again by the mother-ship. They set compensation based on the negotiation completed by the broker-dealer and the product companies. Normally they have different compensation for like products which are structure to increase sales. There are also trips and conferences that are structured to drive sales and these also can create multiple conflicts of interest that may change client recommendations. Now don’t get me wrong, you will end up with many more choices from these advisors claiming to be independent but in my mind this still does not meet Webster’s definition of “Independent.” Hopefully this will give you a little more insight so that you can ask the right questions in the search for a true independent advisor
By MARK FOLGMANNThe last 16 articles I’ve written were to educate the marketplace about some of the problems you face when you deal with the financial service industry. Today I would like to share what we do at Ark Advisors LLC and why we act as Independent Pension Fiduciary's for 401(k)s.
Our main objective is to protect and safeguard the retirement incomes of employees while improving overall retirement outcomes. We find that most employers do not have a very good way to evaluate and monitor the success of their plan. We are hired directly by the 401(k) therefore our loyalty is to the plan participants and this eliminates conflicts of interest. We accept fiduciary responsibility in writing therefore releasing the small business owner of many risks involved within the plan.
We also find that we must set reasonable expectations with the business owners that oversee the plans because we do not believe most people can increase their retirement income by thousands of dollars per month - but we do believe the average employee can increase their retirement income by $500-$700 per month by utilizing an Independent Fiduciary.
This may not sound like a tremendous amount of money but to a 78 year old trying to pay his heat bill or a retiree attempting to buy medicine for his ailing wife of 40 years; it’s a significant amount of money. This is why employers can’t become complacent by implementing a 401(k) and forgetting about it. It is not a financial product to be bought and sold but a delicate income producing system that has the ability to under girth the American economy for the next 25-40 years.
It’s critical that employers meet your employees halfway to assure success. Once you understand how important this issue is, you will start to ask yourselves some critical questions.
Is our retirement plan good enough so that when our employees retire they will have enough money to come back and purchase goods and services from us? Once we begin to understand the depth of this question we will start to understand the intended role of the Independent Fiduciary.
In most cases it’s my job to get the small business owner out of the retirement plan business so they can focus on running their business. At that point I can then implement a proven fiduciary process that will increase the overall probability for success within the plan.
This process is based on expectations, insurance is based on guarantees but everything in finance is based on expectations. Therefore, part of our process is to match plan cash flows with expected portfolio returns so that we can set expectations regarding retirement income. By combining these expectations with the lowest cost solutions, we can consistently improve retirement outcomes for the employees.
With proper fiduciary oversight, the 401(k)s in America will live up to their expectations and without oversight they are doomed to failure.Mark Folgmann is president of Ark Advisors LLC in Traverse City. He has more than 25 years of experience within the financial service industry. To learn more about the plan review process discussed here, contact Folgmann at (231) 668-4118 or mark@arkadvisor.com.
