Stop the Retirement Rip-off E-Book

David B. Loeper

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 196

Veröffentlichungsjahr: 2009

Beschreibung

Saving for retirement is a difficult task, especially during these challenging economic times. Individuals who participate in their retirement plans are being charged billions in fees annually--and no one is looking out for their best interests--even though the laws say both plan sponsors and employers should be held responsible for acting in their employees' best interests. The fact is that unless individuals are willing to stand-up and secure their financial future, they're likely to face less money in their retirement plan accounts and have to work longer to accumulate the funds they need for retirement. In Stop the Retirement Rip-off, author David Loeper provides the necessary tools for readers to take action and make the most of their retirement plans. It offers a road map for employees to understand the fees and costs associated with their plans; as well as improve their standing within their company by proactively helping their employer to take needed action. The book features a non confrontational positive approach to bringing your retirement plan problems to the attention of your employer. Written in a straightforward and accessible style, Stop the Retirement Rip-off provides readers with sensible strategies for making the most of their retirement funds, and will put them back in control of their financial future.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Preface

The Rip-off YOU CAN FIX

Fixing This Is Up to You!

Acknowledgements

Introduction

This Is Why It Is So Important for You to Take the Steps Needed to Improve Your ...

Chapter 1 - Step One: Understanding the REAL and HIDDEN Expenses You Pay

Is It Any Wonder Some People Think They Have No Expenses?

How to Find Your REAL Expenses

Quirks You Might Discover

Paying for Your Boss’s Retirement

Important Update at Press Time

Chapter 2 - Deeply Hidden Expenses

Wrap Fees

Mortality and Expense (M&E) Charges

Surrender Charges

Fund-of-Fund Fees and Life Cycle Fund Fees

Other Hidden Mutual Fund Expenses

Money Market “Spreads”-Banks Get to Hide Fees, Too!

“Float”

Chapter 3 - The Price to Your Lifestyle of Needless Expenses

Uncertainty Is CERTAIN

Soup Lines and Scare Tactics

Uncertainty Is Manageable but Not Controllable

The Comfort and Confidence Zone

Chapter 4 - Step Two: Complaining Without Sounding Like a Complainer

You Can Determine Your Retirement Plan

What Do You Do with These Numbers?

Chapter 5 - Step Three: Rallying Your Troops-Just One Coworker Can Help

Water Cooler/Lunch Room/Happy Hour with Peers

Subordinates and Immediate Superiors

Chapter 6 - Step Four: What Happens If My Employer Ignores Us?

What Is Reasonable?

Contact the Labor Department

Chapter 7 - Step Five: Now That My Retirement Plan Is Fixed, How Can I Make the ...

More Bait and Switch

The Benefits of Stopping the Retirement Rip-off!

The Only Thing Constant Is Change

The Markets Are Not the Only Thing that Is Uncertain

Chapter 8 - Resources, Investment Selection, Asset Allocation, Tools, and Advice

Investment Selection

Fundgrades.com

Asset Allocation

Questionnaire

Scoring

Scoring Model and Model Portfolios

“Age”-Based Investing, “Life Cycle” and “Target Date” Funds

Life Relative Allocation

How Do We Know that Fees More Than 0.75 Percent Are Too High?

Using the Appendix A Tables to Estimate the Price of Excess Fees in Your Life

Appendix A - Lifestyle Prices of Excessive Retirement Plan Expenses

Appendix B - Sample 401(K) Participant Statement

Appendix C - Sample Summary Annual Reports

Appendix D - Sample Annual Form 5500 Reports

About the Author

Index

Praise forStop the Retirement Rip-off

“401(k) plans are costly, inefficient clunkers. Fortunately, there is a way out, and Loeper’s book provides us a great map.”

—Evan Cooper, Senior Managing Editorof Investment News

“If you want to know what’s lurking inside of your 401(k), read this book.”

—John F. Wasik, author ofThe Merchant of Power andBloomberg News columnist

“Loeper’s new book shows plan participants how to actually do something about these [401(k)] costs.”

—W. Scott Simon, J.D., CFP®, AIFA®,author of The Prudent Investor Act:A Guide to Understanding

“This book should spur an entire new industry of 401(k) police . . . This is just too important an issue to be ignored.”

—Len Reinhart, President of Lockwood Advisors(an affiliate of Pershing) and Past President ofSmith Barney Consulting Group

Copyright © 2009 by Financeware, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

Stop the 401(k) Rip-Off! Eliminate Costly Hidden Fees to Improve your Life was published by Bridgeway Books.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

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Library of Congress Cataloging-in-Publication Data:

Loeper, David B.

Stop the retirement rip-off : how to avoid hidden fees and keep more of your money / David B. Loeper.

p. cm.

Includes index.

eISBN : 978-0-470-48030-4

1. Pensions—United States. 2. Banks and banking—Service charges—United States.

I. Title.

HD7125.L59 2009332.0240086’960973—dc222008051547

This book is dedicated to my children, Brian and Megan. I am incredibly proud of both of you for the unique personal qualities you possess. Remember, it is your life and to be happy you need to fearlessly pursue your passions. You have but one life, and it is up to you to make the most of it. Don’t let anyone push you around or tell you how you should live YOUR life!

“I swear by my life, and my love of it, that I will not live for the sake of another man, nor ask another to live for the sake of mine.”

—Ayn Rand, Atlas Shrugged

Preface

Over the last 20 years or so, there has been a major shift in the retirement plans that companies offer their employees. Your parents were probably covered by a pension plan (specifically, a defined benefit pension plan) where the company guaranteed a certain fixed lifetime income (the “defined benefit”). Upon retirement, this would provide an ongoing retirement paycheck throughout their life. Such plans have become less and less popular among employers because the guaranteed benefits cost the company a lot of money.

Employers have increasingly switched to 401(k), 457, and 403(b) plans (collectively known as participant-directed retirement plans), which transfer the risk of the ultimate retirement benefit (along with most of the other expenses) to employees. Such plans have been around for quite some time but were initially not very popular. Employers loved these participant-directed plans, though, because instead of the employer’s guaranteeing a specific benefit (and paying for 100 percent of the cost of the benefit as in many older pension plans), the employer could move both the costs and risk to its employees. Despite this, these types of retirement plans gained in popularity among employees as well, influenced partially by the high market returns some of the mutual funds experienced. Also, many companies that previously could not have afforded the cost or risk of a traditional pension plan could afford to offer a participant-directed retirement plan, since the employees carried the burden of most expenses and all of the risk. Thus, many small companies that never would have had any retirement plan at all started these retirement plans in an attempt to compete with larger employers’ benefit plans. Even though the employee was assuming 100 percent of the investment risk, 100 percent of the retirement benefit risk, and, in many cases, most of the cost in the form of annual contributions (most participant-directed retirement plans have some matching contribution by the employer), the flexibility of these plans made them attractive to some employees.

There is nothing wrong with an employer trying to reduce its share of the costs of retirement benefits by moving to these plans. After all, if your employer doesn’t pay attention to its costs, it won’t be in business for long! Such retirement benefit plans are offered by employers in order to be competitive in recruiting talent and having employees perceive a positive benefit to encourage them to stay with the company. Therefore, your employer’s goal is to offer the greatest benefit as perceived by employees and recruits at the lowest cost to the company. This is Economics 101. A retirement plan with participant direction and funding (such as 401(k), 403(b) and 457 plans1) fits the bill perfectly today, because employees view them in a positive light while generally bearing most of the costs and risks and saving the company a mountain of expenses.

Throughout this book, whenever I use the term 401(k) plan, it is also meant to cover 457 and 403(b) plans as well, even if they are not specifically mentioned. However, if there are differences applicable between these types of plans, they will be highlighted and spelled out for you.

As mentioned, when 401(k) plans first came out, they were not viewed as positively by employees as they are today. Many large companies were slow to move to 401(k) plans because of the revolt from employees. That might be hard to imagine today when it is expected that a company will offer a 401(k) plan, and such plans are normally viewed as a positive benefit to employees. But back when most employees were covered by pension plans, the companies that attempted to switch to a 401(k) plan often froze the benefits in their existing pension plans and offered employees these new 401(k) plans instead. As you might imagine, these employers experienced a fair number of complaints from their employees. At the time, the existing employees covered by the old pension plan realized that with the new 401(k), they were taking on the investment risk, the benefit risk, and most of the cost and expenses. It seemed like a rip-off when compared to the old pension plan in which the employer carried all of the risks and expense.

However, over time, more and more employers were able to pull off this switch, and as new people, who never had the safety of a pension plan guarantee, entered the workforce, the 401(k) became an expected, popular benefit. Also, remember that because the cost and risk to the employer is practically nothing, or at least very small relative to older types of retirement plans, many more companies that would not have offered any retirement plan at all under previous rules now found themselves in a position to offer a retirement plan to their employees.

So that is where we are today. There is over $3 trillion in 401(k) plans covering more than 47 million employees and well over $1 trillion in 403(b) and 457 plans covering millions more. Odds are that you—and if married, your spouse or both of you—participate in such plans. More than 600,000 employers offer these plans, meaning that a retirement benefit program is no longer just for large public companies, as was generally the case in the past. There are fewer than 6,000 public companies in the United States, which means that more than 98 percent of these 401(k) plans are offered by smaller, privately held companies.

Over the past 20 years, employers have been able to dramatically reduce their benefit costs and risks and transfer most of these to their employees, and they have done so with their employees generally being happy about it! If you are happy, the person sitting in the cube or office next to you is happy, and your employer is happy, shouldn’t we just all lock arms and sing “Kumbaya”?

The Rip-off YOU CAN FIX

Complacency and the general euphoria employers and employees alike have with their retirement plans have created a massive opportunity for product vendors to excessively profit from your retirement savings.

This is not someone crying wolf. A study by the Center for Retirement Research at Boston College noted, “The bottom line is that over the period 1988-2004 defined-benefit plans outperformed 401(k) plans by one percentage point. This outcome occurred despite the fact that 401(k) plans held a higher portion of their assets in equities during the bull market of the 1990s.”

Since you are bearing all of the risks in your 401(k), what does this 1 percent cost YOU? All things being equal, except this extra 1 percent cost, you may be surprised to find that the price to your lifestyle is HUGE.

For example, if you are 40 years old with $75,000 in your 401(k) plan, and you are earning $50,000 a year, contributing 10 percent with a 50 percent match by your employer, and planning on retiring at age 65 with the hope of a $32,000 annual retirement income, this 1 percent excess expense can cost you any one of the following:

• A 90 percent chance that this excess cost will reduce your retirement fund at age 65 by somewhere from $100,000 to $700,000

• Working three more years to age 68

• Working an extra hour every day for 25 years until age 65

• Living on 22 percent less than you desired ($25,000 instead of $32,000)

• Accepting a 72 percent greater chance of outliving your resources (31 percent versus 18 percent)

• Increasing your annual savings by 80 percent from $5,000 (10 percent) to $9,000 (18 percent)

There is a reason why you are bearing this burden, and it DOES NOT generally have to do with your employer saving money on the costs of offering you a retirement plan. Your employer wants you to perceive a positive benefit from the 401(k) plan it offers. If you and your neighbor in the next cube both perceive the 401(k) plan as an attractive benefit, then your employer has done its job, even if you are getting “taken” to the tune of more than $100,000!

Fixing This Is Up to You!

How would you spend an extra $4,000 a year for the next 25 years? How much more secure would your retirement be with an extra $100,000 or more? How much more time could you spend at your family dinner table if you could work an hour less each day? What would you do in retirement with an extra $7,000 every year? What would you do in retirement if you could retire three years earlier? THIS is the price of complacency to many retirement plan participants.

In the old days of defined-benefit plans, your employer assumed the burden of all of the risks and all of the expenses, and those employers that still offer such plans still carry that burden. Back then, and today as well, employers who accepted the risks and carried the expense of a defined-benefit plan bore a huge incentive to reduce the costs, because THEY would get the benefit of doing so. The benefit they promised was fixed, the variable of the COST of that benefit saved the company money. THEY could avoid increasing THEIR contribution for your benefit by 80 percent if they saved 1 percent in expense. That might just be the reason, or at least part of the reason, that such plans outperform 401(k) plans by 1 percent a year.

In a 401(k) plan, because YOU bear this expense, your employer has little motivation to shop for a better deal if you and your associates are content, even though it probably should be looking for that better deal in its role of a “prudent fiduciary.” This prudent fiduciary standard may be a bit different for 401(k) plans than in some 403(b) and 457 plans. Regardless, the vendors of plans in this market have no reason to compete on fees since practically no one is complaining about them.

A study by the Government Accountability Office,2 commissioned by Congressman George Miller of California, reported that in 2005, despite 47 million people being covered by 401(k) plans, the Labor Department received only TEN complaints about fees. If you aren’t complaining, and no one else in your company is complaining, and if your employer really doesn’t care as long as you are happy with the plan, your employer isn’t going to bear even the tiny cost of shopping for a better deal.

Your retirement plan is probably one of your most important future sources of financial security. This book makes it easy for you to take the five steps needed to add more than $100,000 to your retirement nest egg without taking more risk or saving more money. This can allow you to improve your lifestyle, increase your benefits, identify the hidden costs, and improve your standing within your company by proactively helping your employer to take needed action.

There is no reason, other than the price of this book and a little bit of your time, why you can’t capture the opportunity to improve your lifestyle, reduce how much you need to save, retire earlier, or work less. Isn’t $100,000 worth a few hours of your time?

Acknowledgments

Acknowledgments, to me, are perhaps the hardest thing to write, because we are a product of all of the people we know. How do you thank everyone who has helped make you who you are? Of course, I need to thank all the people of Financeware, Inc., who have each made a contribution to this book, either directly or indirectly. We have a great team of people who truly care about helping people make the most of their lives, and they do so with unbridled passion. They live as role models for others by consistently acting with unquestioning integrity. George, Jerry, Christopher, Brandy, TJ, Elliott, Joe, Will, Jeremy, Bill, and, of course, my executive committee partners, Bob and Karen, have all made huge direct contributions to this book. Thank you all for your patience, objectivity, and coaching and for understanding how to help us to help others.

Of course, I have to thank all of my former associates from my “Wheat First” days that are now, or were, part of Wachovia Securities (soon to be Wells Fargo). These associates had the courage to challenge conventional wisdom and risk being different to better serve clients. I have to credit Dave Monday, Mark Staples, Danny Ludeman, Jim Donley, Marshall Wishnack, and, of course, the late James Wheat, a blind man who had more vision than all of us put together. Respect should be earned, not given, and every one of these people has earned mine. I consider each of them heroes in their own way.

There are a handful of people in the industry I have to thank, because they, too, have truly earned my respect by their actions and courage. People like Len Reinhart, Frank Campanale, Ron Surz, and the late Don Tabone have all contributed greatly to my knowledge, and their willingness to have rational debate on numerous topics has helped me immensely.

I want to thank Dawn and Jim Loeper, who were kind enough to give the manuscript a read and provide some valuable feedback. Also, Donna Wells, who helped to make my normal pontification understandable, is due credit for her enormous contribution.

A big part of understanding expenses came from Parker Payson of Employee Fiduciary Corporation, whose expertise in ferreting out hidden expenses was invaluable in helping to identify the hidden costs.

I want to thank my late father, Kenneth A. Loeper, for teaching me “not to let anyone push me around.” Without that skill ingrained in my brain, I would have never had the courage to face the attacks of the industry groups that hate having their apple cart upset. I also thank my mother, Anna, for teaching me that the biggest responsibility we have in raising children is teaching them to be respectable people of integrity who can take care of themselves.

Finally, I want to thank the late Ayn Rand. Whether you like her or not, you have to respect her passion for and vision of a hero or heroine, so often demonstrated in her novels. The abstracts of her concepts, living a moral life and acting with integrity, helped me to understand and express why I am what I am. Who is John Galt?

Introduction

The Five Steps YOU Can Take

What do you need to do to add more than $100,000 to your retirement nest egg? In this section, I will outline the five simple steps you can take, and each step is covered in detail in the following chapters. The first step is to figure out what you really are paying in expenses in your retirement plan and the price of those expenses to your lifestyle.

Not all retirement plans have excessive fees, but if the company you work for has fewer than 1,000 employees, or if you are in a 457 or 403(b) plan, the odds are high that you are paying them. I wish figuring out what you are really paying could be as easy as reading your statement and looking for expenses, but, unfortunately, that isn’t the case.

That doesn’t mean that it is impossible to figure out. It really isn’t that hard IF you know where to look. The first step is getting your arms around where to look for the hidden expenses you are paying so that you can truly identify your real costs. Once you know where to find your real expenses, it is easy to figure out how much of those expenses you are paying.

Chapter 1 covers this expense discovery process in an easy, step-by-step fashion that will enable you to understand how much you are really paying and to do so in a manner that doesn’t require an advanced degree in mathematics, or even much time or effort. With just 30 minutes and a calculator or spreadsheet, you will know what you are really paying, or at least most of the expenses that are required to be accessible to you by law.

Chapter 2 covers the myriad of expenses that you might be paying but that are not currently legally required to be disclosed to you. Recent proposed regulations from the Department of Labor may help expose some of these fees. But even these new regulations requiring better disclosure will leave some of these deeply hidden costs still hidden. These expenses can be very large and could actually be far more than the expenses discovered in Chapter 1. While discovering many of these expenses requires some additional cooperation from your employer that goes above and beyond the legal obligation it has, it might still be possible to find them. Some of these will be easier to discover than others, and in some cases, it might even be easier to calculate your share of these expenses than those discovered in Chapter 1. In other cases, the best you will be able to come up with is an estimate, but at least knowing these other expenses exist will help you to gain a sense of what you might be paying.

It might be a good idea to have some aspirin nearby in case you have a heart attack once you see all of your real costs from Chapters 1 and 2.