By Mark Folgmann
“The Free Lunch Seminar” I work with an elderly widow downstate and meet with both her and her grown children at least three times per year. A little over a year ago her husband of 50 years passed and she lives pretty much on her own since her daughter is about two hours away. While completing her taxes for 2008 we noticed multiple transactions that we were not familiar with that generated excess taxes for my client. I immediately called a family meeting with the intent of taking an updated inventory and bring everyone up to speed. We got the children involved about 3 years ago because we were becoming more and more aware of my clients aging process and her memory loss and believed they needed their family to help in the decision making process. We set up trust and put the daughter in charge of most of her assets but like any independent individual she was not willing to give full control of her assets to her family.
Anyway, as we completed an inventory of assets and changes made for the year my client mentioned the name of the individual that she had been working with for about 3 months whom she met when she attended a “Free Lunch Seminar”. As we worked our way through the transactions we learned that IRAs were cashed with no regard for taxes and CDs were surrendered with multiple surrender charges. Annuities were liquidated and transferred again without attention to taxes or surrender charges. All told this individual sold my client 4 annuities, LTC policy, life insurance and a prepaid funeral policy. Now remember this was all going on while her daughter and I was meeting with her on a regular basis and when we asked if she wrote any checks to this individual or his company she said “I don’t remember”. After reviewing her check register we discovered checks written for hundreds of thousands of dollars and many checks were written within days of our meetings. All told we estimated the insurance agent made over $30,000 in commissions and tied her money up to age 95 with surrender charges. Have you ever wondered how they can afford to buy lunch for a room full of senior citizens? After this episode my client’s daughter took a full day off work and they visited all the banks where money was left and moved everything into the trust for safekeeping. The lesson I learned from this episode is we must have open communication with professional oversight. Your family’s professionals should communicate with each other as a form of checks and balance for the safety and security of your family.
By Mark Folgmann This is the 12th and last in a series of articles on 401ks. We have spent the past 6 months attempting to educate both the employers and employees about their retirement plans. These plans have the potential of becoming great and funding our retirements but we must spend time educating ourselves and understanding how to keep our 401(k) current. I have found that there are many outstanding resources that can help us do that and most of us can be highly informed with as little as 8 - 10 hours of concentrated study. Just imagine, we spend somewhere around 80,000 hrs working so that we can retire and most don’t have the time for 10 hours of preparation on how to assure retirement becomes a reality. I see more and more people who will never be able to retire and that is a real sad situation.
For employees that are two excellent books available at your local bookstore. The first is “The Smartest 401(k) Book You’ll Ever Read” by Daniel Solin. This is a really easy read broken down into 4-5 page chapters on key points that affect your plan. Dan also does an excellent job of covering how your behavior can destroy your retirement plan. The second book I would recommend is “Stop the Retirement Rip-Off, How to Avoid Hidden Fees and Keep More of Your Money” by David Loeper. David will teach you how to uncover all you plan fees and what to do if your fees are too high. These 2 books will put you in a position to make great decisions about your 401(k) and I would add “The Successful Investor Today” by Larry Swedroe who will show you how to experience a successful outcome with regard to your investment choices within your plan. For employers I would recommend “Fixing the 401(k) by Josh Itzoe. This book focuses on the problems of the plan sponsor and will lead you to a great plan.
We will be continuing this article next time with information that you need to make informed financial decisions and empower you to deal with the financial service industry. Remember Wall Street is not your friend and it’s main objective is to make profits off your money.
By Mark Folgmann Most of us get only one shot at retirement so therefore we really need to pay attention. I am continuously amazed at how much trust and faith employers place with their financial salesperson. I talk to companies each and every week that are blindly following recommendations by someone who gets compensated to sell them products. Wake up employers; these “advisors” whom want you to believe they are on your side are really in the business of marketing products – not creating wealth for you and your employees. As stated in previous articles; it is not ok to be down 50 -60% in your retirement accounts and if you are, look for a second opinion from someone who is not paid to sell products. The criteria for selecting a retirement plan provider should not be the place where we have our checking account or where we buy our life insurance. It should be someone who specializes and understands the unique problems that surround the issue of assuring my employees will be able to retire and their families will be financially secure. This is the definition of a financial fiduciary.
Employees it’s your money and retirement; you can’t bury your head in the sand and hope the problem will go away, it won’t. At some point your 401k will turn into your monthly check for the rest of your life and if that monthly check is reduced by 40% because you did not pay attention to fees it will be a very sad period for your family. Your life is not too busy to take a couple hours educating yourself about your own retirement. Dalbar conducted a survey over a 20 years timeframe where they determined the S/P 500 return was in excess of 11% but the average investors return was only 4.28%. How could this happen? I’ll tell you how, the financial service industry took 30- 50% of the return in fees and the investor made investment mistakes managing his portfolio which cost him the rest. This is why it’s important that we build low cost 401ks (less than 1% in annual fees) and make available model portfolios for employees to choose instead of individual mutual funds.
Employees managing their own 401k are equal to asking you to land a 747 in mid flight, it really does take training. My firm is in the process of helping a local company rebuild their 401k and so far 100% of the employees have selected model portfolios over individual funds. This gives them great relief because they don’t feel comfortable managing their own investments and realize they have not been trained to do so. Our next article will be our 12th and last article on 401ks. Next time we will provide you resources to educate yourself so you can take charge of your family’s retirement.
By MARK R. FOLGMANNI’ve spent the last nine articles discussing a lot of problems with 401(k)s, which may lead you to believe I don’t like them. The truth of the matter is I love them and spend the majority of my working hours helping companies fix their plans.
I was on vacation last week in Asheville, North Carolina watching the Kentucky Derby and was amazed when “Mine that Bird” came from last place and blew by the field like they were standing still to win by six lengths.
I thought to myself wow that is what a great 401(k) should look like. It would leave all other 401(k)s in its dust especially as we recover from this horrible downturn in the economy.
Most 401(k)s look like those horses that we thought were standing still. They have a 300 lb. jockey, no regular training program and suffer from malnutrition. We know real quickly when a racehorse is out of shape because they race periodically, not so with your retirement plan. We tend to close our eyes and hope we will be all right at the finish line (age 65). Our race tends to last 30 or 40 years.
I believe the 401(k) is the absolute best vehicle to assure America’s retirement, but we must race now and then. We must review fees, conflicts of interest and make sure our fiduciaries are truly acting in our best interest. If we keep our 401(k) in top shape, we will be in position to win the race.
I am extremely proud to announce on April 28 my firm, Ark Advisors LLC, was endorsed by Matthew Hutcheson as one of only 17 firms in the United States that truly embraces a “Participant First” approach to delivering retirement plan services.
Matt in my opinion is the foremost expert with regard to 401(k) plans and fiduciary responsibility in the nation. He is currently working hand in hand with both the Department of Labor and Congress to identify fiduciary firms and solve the country’s retirement dilemma.
Matt was the key figure within the Bloomberg Report on hidden fees and recently participated in both the “60 Minutes” and “CBS Evening News” segments covering the same subject. We were required to go through a rigorous screening process before being selected as one of the nation’s select few who strive to create the best possible retirement outcomes for employees.
Mark Folgmann is president of Ark Advisors LLC in Traverse City. He has more than 25 years of experience within the financial service industry. This is the 10th in a series of columns discussing topics related to 401(k) planning. To contact Folgmann, call (231) 668-4118 or mark@arkadvisor.com.
By Mark FolgmannHopefully you caught 60 Minutes on CBS last week, they had a great segment on all the hidden fees within our 401ks. Katie Couric also picked up the story and did a follow-up on Tuesday. It’s great to see the problem is getting more press on a national basis. We approached a random local company and asked if we could review their plan for our article. We wanted to pick a local company to illustrate that almost all plans are filled with problems and fees that are not disclosed. The company employees over 100 employees and has in excess of 7.5 million dollars in their plan invested with a bank.
This plan was review by the bank recently and the disclosed fees were approximately $39,000 for investment expenses and $6,000 in administrative cost for a total of approximately $45,000. These were the obvious fees and once we started reading all the fine print we discovered revenue sharing fees, additional fund access fees, transaction/brokerage fees and custodial fees. Do you ever wonder why all the questionable fees are in the fine print? By the time we added it all up we were over $120,000 per year in total cost. Our analysis showed that even though the majority of the plan assets were invested in low cost Vanguard funds the bank was charging outrageous fees on top of the Vanguard management fees to allow access within the plan. Virtually all investment choices other than Vanguard were paying kick-backs to the bank to be included in the investment line-up. This pay to play philosophy creates huge conflicts of interest for the plan sponsor. Great funds do not have to pay to play and they stand on their ability to generate excellent returns with low cost. Imagine the bank charging employees 300-600% more that the Vanguard managers charge, just to include them in the fund line-up. This plan prices out at about 1.75% of plan assets with virtually all the cost being asset based, meaning the percentage remains constant on future plan growth. I believe there is another .5 -1% that even I can’t find; most experts agree that overall plan cost are usually in excess of 2.5% per year. If you recall from previous articles I stated that most plans should cost less than 1% of total assets and large plans like this one should be closer to .75% of assets. Overall this would save the employees between $60,000 and $120,000 per year in unnecessary fees. This cost should be able to be obtained while using an advisor that accepts written fiduciary responsibility; which the bank will not. Lastly there was not an Investment Policy Statement in place which acts as the plans guiding principles. It allows for a fiduciary process so the plan sponsors can make smart ongoing decisions regarding the investments within the plan. This statement would have driven different decisions to eliminated most of the conflicts of interest within this plan.
Just wanted to remind you employers out there that we are conducting another “Understanding you 401k” class at NMU on Thurs 5/14 @ 2:00pm. Call the college for details.
By Mark Folgmann I was planning on a case study this week but due to a long tax season and timely questions from my daughter-in-law I decided to put off the case study till next time. We have an excellent local plan to use in our 1st case study and would like to review another 3-4 over the next month. Please call my office if you would like your companies plan reviewed and you have the authority to provide us with all the specific details.
Over the weekend she came to me and asked about an article from a few weeks ago when I stated that many employees are better off not participating in their 401ks especially if they don’t receive matching on their savings. I thought it would be a good idea to explain further so we ran the numbers on her plan (which is one of the worst I’ve reviewed) and compared her end results with a Roth IRA funded through Vanguard. She is 24 years old and we funded her Roth IRA for 41 years at $3,000/year without any increases. We also grew her account by 9%/year compounded with .20% annual fees through Vanguard and 3.00% annual fees through her 401k. The advisor on her plan is using “C” class shares which are about the most expensive share classes in the entire industry.
I’m sure you can guess what account outperformed. The Vanguard Roth IRA value at age 65 was $1,207,140 and the 401k account value at age 65 was $531,664. Just imagine, a 55% increase in retirement value and retirement income all because of one choice. My calculation ends at 65 and we all know that her money will work for another 25 or 30 years after her retirement date. I won’t even show you how much would be lost to fees on account balances that large because you would not believe it possible. End result could be loss of 70-80% of retirement income because of one ill informed decision when she was 24 years old, all caused by the lack of fee disclosure. It’s a shame that most can’t even get the information to make an informed decision about how and where to save for retirement.
There are two distinct advantages to her 401k at this point. #1 is payroll deducted savings and this is a big one. Money is deposited before it gets in her hands and this assures it gets into the retirement account (very important but not worth $675,476) and #2 higher contribution limits within the 401k. It’s very complicated and hard to make good choices about your retirement accounts without knowing all the fees and rules of the different accounts. With all the choices available both pretax 401k and Roth 401ks (not all 401ks have updated for Roth contributions) regular IRAs, Roth IRAs and Spousal IRAs if you are married it can be a quite daunting task without professional help. You also have income restrictions on your individual IRA accounts which could eliminate your deduction if your household income is too high. These decisions should be based on savings amounts, household income, fees attached to accounts and timeframes. These factors should be evaluated by an unbiased 3rd party and second opinions are very important so you don’t make costly mistakes.
By MARK FOLGMANN
We’ve spent the last six articles unpacking the problems and concerns with the small business 401(k). Today we will take a closer look at what an ideal plan would look like so that you may compare your plan with an ideal plan. For my money an ideal plan would revolve around three issues - which would be plan design, cost and overall investment experience. The overall goal should be to create a plan that would allow for the greatest chance of a successful retirement for each and every employee.
We start with plan design because this puts all the triggers and measurements in place to assure success. This starts with a fiduciary process in which an Investment Policy Statement is created with the rules of the plan. This document would specify what our investment strategy is, and why we include certain investments and how and why investments are replaced. It would also point out what we measure success against with regard to indexes such as S/P500 or Russell 2000.
Next we would create an Investment Committee, whom along with a Fiduciary Advisor (RIA) will implement and monitor the process. We would also suggest automatic sign-up and annual increases in salary deferral till an employee reaches a benchmark of 10, 12 or 15 percent. Add in a Roth option because tax-free is the name of the game when possible.
Cost is the next areas of focus within a plan. Start with transparency, if you don’t know who is getting paid and how much – you have a problem.
The only control you have over your plan is the cost and most don’t know what they are paying. I would expect your overall cost within your plan to be south of one percent, and this should include everyone including the advisor. A well-crafted plan should have about .30 percent (or less) for investment cost, .30 percent (or less) for recordkeeping and custodial care and .40 percent (or less) for a fiduciary advisor.
In order to get your investment cost less than .30 percent you will have to utilize low cost institutional class index/passive mutual funds. Since there is no academic proof that high cost actively managed funds outperform the market over long periods of time, we believe the best strategy is to match the market with the lowest cost.
The typical plan I review has all in cost of 2.5 percent or more with many of these fees buried in hidden cost. Once you know who is getting paid and how much, you can monitor and make annual decisions on who needs to stay and who needs to go - this is the plan sponsors fiduciary responsibility. Normally these funds or investments are institutional classes such as Vanguard or Dimensional Funds who do not pay advisors to market them. An annual check-up on all plan cost keeps everyone on their toes.
Lastly we must deal with investment experience of the participants. As stated in an earlier article, the average investor during the boom 1990s only experienced 3.9 percent annual growth from their funds while the market return was over 10 percent a year. Therefore, we should allow professional money managers to create model portfolios and let the employees pick their portfolios based on their individual situations.
The current market has shaken the most sophisticated investors and most are now in agreement that we are not trained to manage our own money.
Last but not least is the use of Institutional Funds vs. retail funds. You want your retirement money commingled with professional money managers, not the typical retail investor who does the wrong thing at the wrong time (all the time). Professional managers are not driven by fear and greed; they are driven by asset allocation and rebalancing. Over time this has a significant impact on the overall investment experience.
A friend of mine Josh Itzoe, author of “Fixing the 401(k)” recently wrote a white paper available on my Web site, which estimates the cost of not having a “Fiduciary Advisor” at $450,000 per participant. You can read the full article at www.arkadvisor.com under the 401(k) section. If you oversee a 401(k) and would like a review of your plan, you can reach me at (231) 668-4118 or mark@arkadvisor.com. Next time we will look at a case study to demonstrate what an inferior plan can cost you over time.
Mark Folgmann is president of Ark Advisors LLC in Traverse City. He has more than 25 years of experience within the financial service industry. This is the seventh in a series of columns discussing topics related to 401(k) planning.
