John Oliver’s Commentary on the Retirement Industry

One of the best ways to get people’s attention is satire, and for this reason, John Oliver did the American public a great service by comically pointing out the insanity of the retirement plan industry.  As of this date, it has nearly 5 million views, so apparently he has reached quite a few people.  It felt refreshing to hear someone with such a large audience echo what I have been speaking and writing about for so long:  the retirement plan industry is a giant ripoff!  I especially like how he shed light on annuities which I have written about in a previous post.  I also like the analogy he made with termites, describing as tiny and barely noticeable much like retirement fees that can eat away at your future.

Now maybe people won’t be intimidated to ask basic questions like:

  1.  How do financial advisors get paid?
  2.  What do all the job titles in the retirement industry really mean?
  3.  Should I be paying for services in my retirement plan that I never use?
  4.  How much will all of my service fees cost me over my lifetime?
  5.  And what exactly do all of the service fees in my retirement plan really include?

While John Oliver helped stimulate these kinds of questions (not an easy task when communicating with a mass audience), he could have gone further.  For example, he touted the importance of the fiduciary designation, but given the complexity of the fiduciary rule, he could have warned consumers that simply being a fiduciary does not guarantee that advisors will act in the best interests of plan participants as advisors can recommend record keepers like John Hancock – the same provider that Oliver criticized and decided to get rid of because of their service fees – yet still not violate their fiduciary status.  Furthermore, advisors acting in a “fiduciary capacity” can still charge based on a percentage of plan assets, often resulting in advisory fees completely disproportionate to the level of services provided that still create conflicts of interest.

And while he does a good job pointing out the fact that actively managed funds sold through brokers do not consistently outperform the market, it would have been more helpful if he focused on industry’s addiction to asset-based fees and the retirement plan service providers’ collective desire to deliberately make plans more complicated than necessary in order to sell unnecessary additional services.

Maybe John Oliver will read this blog and consult me if he does a follow up program!



Better Call Saul: Maybe He Needs to Expose the Retirement Plan Industry’s Practices Too

In the first season of Better Call Saul, Jimmy visits a retirement home and learns that the management company has been systematically and massively overcharging their residents for various items like Kleenex where they have to pay upwards of $8 per box.  He became suspicious when looking at one of the resident’s bills and seeing that it was written in such small print that it was clear the management company didn’t want the residents to understand the details of their scam.  Upon uncovering these misdeeds, Jimmy gathers evidence in order to bring this company to trial where he and his brother Chuck seek $20 million in damages due to racketeering, which is defined as:

“A service that is fraudulently offered to solve a problem, such as for a problem that does not actually exist, that will not be put into effect, or that would not otherwise exist if the racket did not exist.  Conducting a racket is racketeering.  Particularly, the potential problem may be caused by the same party that offers to solve it, although that fact may be concealed, with the specific intent to engender continual patronage for this party.  An archetype is the protection racket, wherein a person or group indicates that they could protect a store from potential damage, damage that the same person or group would otherwise inflict, while the correlation of threat and protection may be more or less deniably veiled, distinguishing it from the more direct act of extortion.”

In the case of the retirement plan industry, it’s more than just one company conducting a racket.  It’s a network of large retirement plan service providers, attorneys, and government regulators who continue to tout the importance of the survival and growth of their industry in order to solve our “retirement crisis” that they have all played a major role in creating so they can further their own careers.  Similarly, they all recently agreed on the increased “transparency” that would be brought about by a “fee disclosure” law that not surprisingly turned out to be so convoluted that nobody has been able to fully understand what was disclosed nor has anyone been able to understand what services they are actually paying for or if these service fees are reasonable in light of the services they are using.  If it was clear that retirement plan advisors get paid comparable to brain surgeons, perhaps a light bulb would go on in the heads of business owners and executives that might motivate them to ask this one basic question:  “How much money in HARD DOLLARS have retirement plan participants been paying for each service every year?”  Shockingly, many of these uninformed plan sponsors include law firms, banks, and accounting firms – the very service professionals we rely on to give us advice!

There have been several programs put on by NPR, Bloomberg TV News, 60 Minutes, and PBS Frontline attempting to expose how the retirement plan industry operates.  However, none of them have had any effect, likely because even these programs haven’t delved deeply enough into how intertwined each of the industry players truly are.  Until enough people are able to peel back all the layers and become outraged at what is happening to our money, nothing of any significance will change.


Response to an Article Criticizing 401(k) Plans

Anyone familiar with my blog and my practice should be well aware that although I make a living providing financial advice with respect to employer-provided retirement plans, I am no fan of them to say the least.  So one would think that I would agree with any article that similarly espouses my disdain for 401(k) plans.  In this particular case, however, one would be wrong.  In fact, this article has made me now do something I never thought I would do:  Defend 401(k) plans – or at least separate legitimate criticisms from criticisms that are either false, incomplete, or just don’t make any sense.  Does this mean I no longer believe the industry is a corrupt racket that needs to be put out of its misery and that 401(k) plans should be abolished?  Does this mean I’m pushing 401(k) plans because I make more money if people contribute more? (I don’t make more money because I charge flat fees based on the work I do that are not asset-based)  Of course not.  it’s just that when I saw an article like this, I felt compelled to write a response for people who formed an opinion on 401(k) plans based on this article without doing any further research.  Here is a breakdown of each point:

1. You can be wiped out overnight.

A report on CBS’s 60 Minutes TV show asked of 401(k)s, “What kind of retirement plan allows millions of people to lose 30-50 percent of their life savings just as they near retirement?” Good question. Unlike other investments that are protected from losses, your 401(k) rises and falls with the stock market where you have absolutely no control. Retirement planners will tell you the market averages 8-11 percent returns per year. That may have been true last century, but this century has seen that turned into a fiction. From 2000 to 2015, the market was up just 8.4 percent total when adjusted for inflation, or 0.56 percent per year, and that was after a substantial market rally. Do you want to live your ideal life only if the market cooperates?

The idea that one can lose money in the stock market is no secret.  Of course the market is subject to risk, but the author is only referring to market risk, yet there are many other types of risks to consider such as inflation risk, interest rate risk, credit risk, taxability risk, call risk, liquidity risk, reinvestment risk, social/political/legislative risk, currency/exchange rate risk, and business risk.  Does anyone really believe that they have control over any of these types of risks either?  Is “having control” necessarily better? Yes, the market has not fared well over this recent 15 year period, but cherry-picking one particularly bad time period is hardly evidence to change your entire investment philosophy.  If so, Warren Buffett wouldn’t have said this in one of his annual letters to Berkshire shareholders, dated February 28, 2014: “If “investors” frenetically bought and sold farmland to each other, neither the yields or prices of their crops would be increased.  The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties. Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions.  The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit.  So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm. My advice to the trustee couldn’t be more simple:  Put 10% of the cash in short-term government bonds and 90% in a very low-cost S & P 500 index fund (I suggest Vanguard’s).  I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, or individuals – who employ high-fee managers.”

2. Administrative Fees and the Tyranny of Compounding Costs

The toll taken by 401(k) and associated mutual fund fees is staggering, and can eat up more than half your gains. With 401(k)s, there are usually more than a dozen undisclosed fees: legal fees, trustee fees, transaction fees, stewardship fees, bookkeeping fees, finder fees and more. But that’s just the beginning. The mutual funds inside 401(k)s often take a 2 percent fee off the top. If a fund is up 7 percent for the year, they take 2 percent and you get 5 percent. It sounds like you’re getting more, right? At first, yes, but in the end the mutual fund wins. As Jack Bogle, the founder of Vanguard explains it, “What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compound costs.” If you contribute $5,000 per year, from 25 years old to 65, and the fund goes up 7 percent every year, your money would turn into around $1,143,000. Yet, you’d only get to keep $669,400, or less than 60 percent. That’s because 7 percent compounding returns hundreds of thousands more than a 5 percent compounding return, and none of it goes to you. The 2 percent fee cuts the return exponentially. In the example above, by the time you turn 75 the mutual fund may have taken two-thirds of your gains. Bogle puts it like this, “Do you really want to invest in a system where you put up 100 percent of the capital, you take 100 percent of the risk, and you get 30 percent of the return?”

While there have been no more vocal critics about 401(k) plan fees than me, the statement that “The mutual funds inside 401(k)s often take a 2 percent fee off the top” is flat out wrong.  To illustrate, according to The Investment Company Institute: “In 2013, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.58 percent, down from 0.63 percent in 2012. Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid mutual funds fell from 0.60 percent in 2012 to 0.58 percent in 2013. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.50 percent in 2012 to 0.48 percent in 2013. Participants in 401(k) plans tend to pay lower fees than fund investors overall. The 0.58 percent paid by 401(k) investors in equity funds is lower than the expenses paid by all equity fund investors (0.74 percent) and less than half the simple average expense ratio on equity funds offered for sale in the United States (1.37 percent) (see the figure below for more detail). The experience of hybrid and bond fund investors is similar.” Plans with very little assets will likely have “all-in” expenses of 2 percent or more, but this figure also includes record keeping, administration, custodial, and broker/advisory fees.

3. There’s no cash flow for better opportunities.

The theory behind 401(k)s is you keep putting money away, where you can’t easily touch it without penalty for 30 years, and it will compound into enough to retire on. We’ve seen why you should be suspicious of that story.  Compounding charts don’t look the same at 0.56 percent annual returns. But here’s the other problem.  Money left to compound unpredictably for 30 years is stagnant money.  There’s no cash flow ready to direct to today’s best uses.  Instead, it’s sitting still inside one 30-year bet, while newer, better opportunities may be passing you by.

Not having ready access to money set aside for retirement is a legitimate criticism, so there is nothing wrong with supplementing your retirement outside of your company’s 401(k) plan in additional to making contributions to the plan.  However, just because the market is unpredictable doesn’t mean the money is stagnant.  The word “stagnant” means inactive or showing no activity while the word “unpredictable” means uncertain.  So whether or not money will compound unpredictably has nothing to do with whether or not money will be stagnant. It is also not clear if other opportunities are necessarily better since this question can depend on a variety of factors such as what these opportunities are, your cash flow situation, your current income, your age, whether or not your 401(k) plan has a match, and what your 401(k) investment options and expenses are.

4. Lack of liquidity when you need it most.

Money in a 401(k) is tied up with penalties for early withdrawal unless you know how to safely navigate obscure IRS codes. This means you can’t spend or invest your money to enrich your life without great difficulty and/or taking a big financial hit. The only exception allows you to borrow a limited amount of money from your 401(k) if you promise to pay it back. This automatically leads to double taxation and a slew of other negatives, the worst being if you lose your job or your income dries up, the deal changes and you must repay the loan within 60 days. Not even break-your-thumb loan sharks are that cruel.

Lack of liquidity and the double taxation of loans are definitely issues with 401(k) plans, so I won’t argue that point, but the statement “The only exception allows you to borrow a limited amount of money from your 401(k) if you promise to pay it back” is incorrect.  A simple Google search for “401(k) withdrawal exceptions” will provide evidence to refute this claim by showing many other examples of penalty-free withdrawals that you don’t have to promise to pay back.

5. Lack of knowledge encourages unconscious investing.

With 401(k)s, I’ve seen environmentalists who are unknowingly invested in big oil, and anti-smoking advocates invested in big tobacco. Simply put, 401(k)s teach people to be unconscious while investing. Think about it, how much do you really know about your 401(k)? Do you know the funds in which you’re invested? Do you know the details of the companies inside those funds? Do you know the fund manager’s philosophy, history, and performance?  Probably not, How can you expect to gain a return from something that you know so little about? And how can this be called investing? It’s not investing, it’s gambling.

Yes, I’m sure it’s true that many people do not know the 401(k) funds they’re invested in, but why wouldn’t this also be true to any investment outside of their 401(k) as well?  Do people necessarily know any more about the details of insurance and annuities they buy?  If not, would it be better for people to just keep all of their money in cash and never invest in anything? I’m not arguing that it isn’t a good idea to understand the details of your investments.  I just don’t understand why 401(k)s should be singled out any more than any other investment.

6. Fear of taxes leads to underutilization.

401(k)s are tax-deferred, meaning you avoid paying taxes today by committing to paying them later. But taxes are historically low compared to the days of 50, 60, or even 90 percent marginal rates of the past and chances are, with record national debt, that taxes are going up. If you don’t like paying taxes today, why would you want to pay more taxes in the future? The tax deferral aspect of the 401(k), which is touted as a great boon, is actually a primary factor contributing to its underutilization. When the time finally comes to enjoy or live off the money, retirees are incentivized to let the money sit for fear of triggering burdensome tax consequences.

Has the author of this article never heard of a Roth 401(k) which is funded with after-tax dollars meaning the qualified withdrawals are income tax free?  “No, of course this does not mean that a Roth 401(k) serves as a comprehensive financial solution, but if you are going to criticize 401(k) plans, you cannot ignore the fact that this is an option in more plans now than in years past.  Chris Carosa’s thorough and objective article about the debate over the tax advantages of 401(k) plans is far more informative, especially because it is not a completely pro 401(k) article.”  I would highly recommend it to anyone who is genuinely interested in hearing a wide range of informed opinions on the subject.

7. Higher tax brackets upon withdrawal.

It’s ironic that people anticipate that they’ll have healthy returns on their qualified plan while at the same time figuring they’ll be in a lower tax bracket at retirement. If you have achieved any measure of success, you should actually be in a higher tax bracket at retirement. Most advisors, however, assume the opposite. Even worse, those higher tax brackets are likely to be even higher and more daunting in the future.

Again, why not mention the fact that Roth 401(k)s do not burden participants with taxable withdrawals and that more financial professionals and publications are recommending utilizing this option?

8. No exit strategy.

Early withdrawal penalties, over-the-top borrowing rules, daunting taxes, these are all incentives never to touch the money, ever. Getting into a 401(k) seems simple enough. But how are you going to get your money out of it?

See above

9. 401(k)s are easy targets for estate taxes.

Frankly, 401(k)s are sitting ducks for predatory estate taxes. Since there’s no clear exit strategy without major penalties or taxes,  at the end of a person’s lifetime their 401(k)s often end up being a pile of cash that looks very tempting to the government. When it is passed on to the next generation, it’s likely not only hit by the income tax, but the estate tax as well.

This is true, but does not mention the fact that few people will ever pay any estate taxes based on the federal and state estate tax exemptions which have increased significantly.  Yes, we don’t know what estate taxes will be 30 or 40 years from now, but it is nonetheless important to point out that most people have been and are still not subject to estate taxes, especially given that the current average 401(k) balances for people 55 and over is still only about $150,000.

10. The government owns your 401(k) and can change the rules at will.

You may be surprised to learn this, but your 401(k) does not even technically belong to you. Read the fine print and you will find “FBO” (For Benefit Of). The tax code makes it technically owned by the government, but provided for your benefit. Judging from world history, 401(k)s could be in great jeopardy. Other countries have raided private retirement plans to fund the government. Argentina did it in 2008, Hungary did it in 2010 and Ireland in 2011. Similar pension raids occurred in Poland and France. Could it happen in America? Well, during the last recession, Congress invited an expert to give testimony on confiscating 401(k)s and turning them into a public retirement plan like Social Security. It only takes one economic crisis before you retire for possible rule changes or confiscation of your 401(k).

I have read similar articles and would never assume the government is out to protect us.  Governments have committed far worse crimes than stealing people’s retirement money, so I would not be surprised if our government did this or at least forced some of our 401(k) investments to be in U.S. Treasury bonds.  Of course this could happen to IRAs as well. But what the author also doesn’t mention is that there is no reason why our same “benevolent” government won’t also tax life insurance and annuity cash values.

11. Turmoil in retirement.

When it comes time to withdraw money in retirement, maybe you can stomach the taxes, but can you stomach the market swings? Suppose you’ve projected to withdraw 6 percent a year, based on an average annual return of 8 percent. What will you do when the market is volatile? If your fund is down 10 percent one year, any withdrawal is tapping into your principal. At that point, your only choices are start withdrawing principal, or leave the money alone until your account is up again. Try sleeping at night when your income is at the complete mercy of the markets.

There are multiple ways to withdraw money during retirement, and a strategy that works for one person may not work as well for another since the best strategy will depend on the facts and circumstances of the situation.  But to imply that none of your money (or at least very little) should be invested in the market at all (the market is volatile whether it’s in an IRA, brokerage account, or 401(k) plan) simply because the market is volatile is not intended to actually teach anyone anything, but to convince people to just buy life insurance and commission-based annuities.  David Loeper’s article entitled “How Much is that Guarantee in the Window?” does an excellent job analyzing the costs of guaranteed income and exhaustively analyzing if the costs outweigh the benefits.  In other words, it is meant to educate and make people smarter.   Here are some highlights: Out of 1,000 random lifetimes with simulated random returns even more extreme than have been historically observed, in 997 of the outcomes the annuity had a negative relative value to the simple balanced portfolio. There was a 90% chance the annuity guarantee would cost the investor more than $149,000 (about 1.5 times the initial investment) and a 75% chance it would cost more than $243,000. Does this sound “quite valuable” to you? Think about the other factors on top of this. The cash flows we modeled for spendable income were net after taxes and fees versus the annuity that would likely have some portion of the payment being taxed at ordinary income rates. The annuity has zero liquidity where the balanced portfolio offered flexibility to adjust future income withdrawals if there was an unexpected immediate cash need. Of course, we are also assuming the insurance company financially survives a Great Depression environment and can honor its promise to pay.

12. Lost without a comprehensive plan.

I’ve witnessed many people whose finances are in shambles, yet who continue to contribute diligently to their 401(k) plans. It’s like someone with a slit wrist tending to a scraped knee.  You need a macroeconomic, big-picture plan that identifies, prioritizes and manages all pieces of your financial puzzle in harmony with each other. You don’t need a general, one-size-fits-all plan that’s sold to everyone. I don’t understand how having a “big-picture” plan and a 401(k) plan are mutually exclusive. Can’t a “big-picture” 401(k) plan include analyzing the costs and benefits of a 401(k) plan (including the value of the 401(k) match which was never mentioned in this article) to determine how much, if anything, should be invested?

13. Neglect of stewardship and responsibility.

401(k) plans encourage people to give up responsibility for their investment decisions. They believe they can just throw enough money at the “experts” and, somehow, 30 years later, they’ll end up with a lot of money. Then when things don’t turn out that way, they blame others. A true financial plan requires stewardship and responsibility. In short, saving for retirement is wise and prudent. But other investment philosophies, products and strategies can meet your financial objectives much more quickly and safely than a 401(k). Investing for cash flow, or investing directly in a business, or Cash Flow Banking, where you become your own “bank,” could be smarter moves. Even paying off a high interest rate loan can be a smarter move than contributing to your 401(k). Whatever you choose, I urge you to do it as a conscious investor. I suggest that you don’t swallow Wall Street’s promises blindly, and look to those who tell the whole truth about your financial options.

Again, while I don’t mean to imply that investing in a brokerage account or IRA poses the same issue, it is important to note that the same principles of investing still apply.  Also, does this mean that any money invested in the market necessarily ignores stewardship and responsibility? I agree that paying off a high interest rate loan can definitely be a wiser course of action than investing in a 401(k) plan, especially because so many are loaded with such significant and unnecessary expense that erode people’s returns. As for “Cash Flow Banking”, why not just call it what it is?:  Whole Life Insurance.  In fact, if the title of the article were more honest, it should be called:  Why You Should Buy Life Insurance and Commission-based Annuity Products Instead of Investing in your 401(k) Plan.  Now that would at least be an article where I know what the agenda is.

My point here is not that there is necessarily anything wrong with whole life insurance or annuities.  I’m sure there are many ways in which whole life insurance or annuities can fit well into a financial plan in some circumstances.  I don’t believe they are necessarily a worse alternative than 401(k) plans (in case one gets the impression that I am “pro-401(k) plan and anti-life insurance).  And I also want to stress that it’s not always best to always blindly max out your 401(k) for all of the reasons I have written about on my website and blog.  But if you represent yourself as a “financial advisor” to your clients when you cannot legally provide advice without telling your clients they can buy the same annuities without the commissions or surrender charges or that there are blogs like this that are actually meant to help people make more informed decisions because they expose conflicts of interest while 100% of your compensation comes from life insurance and commission-based annuities is dishonest.  Why not just call yourself a life insurance and annuity salesman and tell all of your clients that you can’t provide financial advice, but if they were to use another professional acting in the capacity of a registered investment advisor and fiduciary, then they could receive financial advice?  What’s wrong with laying out all of the alternatives to your clients so they can make informed decisions?  There’s no shame in that.  Isn’t that the whole reason why they seek out financial professionals in the first place?  Butchers don’t call themselves dieticians.  They sell meat while not pretending to sell anything else and people are happy to buy it.  The problem is when people mistake their butcher for a dietician.

Another analogy is the proper labeling of our food.  As consumers, it is best for us to know all of the ingredients in our food, especially if we are allergic to certain foods.  So shouldn’t we demand the same rigorous standards for labeling the services of financial professionals?

I understand there is meaningful debate over what type of advisor compensation model is best for the client, and I agree that when ideas are subjected to the public process of critical exchange, then we all learn something.  But at the very least, clients should understand that when someone makes all of their money from life insurance and commission-based annuities and cannot legally provide advice, they are more like butchers than dieticians.  If clients did understand, I suspect many of these “advisors” would either go out of business or have to change their way of doing business to more honestly and completely reflect how they make money.  Maybe doctors could start doing that too.

The Trouble with Variable Annuities

Annuities can very confusing, especially when there is a broker involved who earns compensation through commissions that are built into the cost.  But the broker has to get paid, right?  Actually, no the broker doesn’t have to get paid because many annuity companies offer the exact same annuities with the same riders (except that they don’t have any surrender charges or commissions) that are sold through registered investments advisors (RIAs).  Consequently, all of the costs are the same except for the mortality and expense (M & E) charge because the annuity company has to charge a higher ongoing M & E expense in order to recoup the cost of the commissions paid out to the broker.

Now the broker could come back and say, “The RIA is just going to charge a 1% assets under management fee, which over time, will cost the client just as much if not more than buying a commission-based annuity.”  This statement may be true depending on the annuity and the face amount, but it misses the larger point:  How much work is the advisor or broker doing, and are services provided commensurate with the fee the client is paying?

In both cases, the answer is of course no since there are little if any ongoing “management” services to perform, especially for a tax-deferred investment which has no tax consequences from buying and selling securities.  As Warren Buffet said in one of his annual letters to Berkshire shareholders, dated February 28, 2014:

“If “investors” frenetically bought and sold farmland to each other, neither the yields or prices of their crops would be increased.  The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions.  The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit.  So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My advice to the trustee couldn’t be more simple:  Put 10% of the cash in short-term government bonds and 90% in a very low-cost S & P 500 index fund (I suggest Vanguard’s).  I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, or individuals – who employ high-fee managers.

Brokers, for example, who work for firms that are dually registered as RIAs and brokers should at the very least explain the different compensation arrangements to clients.  Otherwise they aren’t acting in the clients’ best interests.

So in the event that a variable annuity is a fit for a client, it would be best to use Vanguard’s variable annuity that has an annual M & E charge of only 0.20% and offers low cost Vanguard index funds.  If an RIA receives an hourly fee or a flat annual fee that also includes comprehensive financial planning services – meaning the services to place a client into an annuity are simply included in the flat fee to provide a financial plan – then that would make more sense.  But since there are little if any ongoing services required, the annual financial planning fee should be adjusted accordingly.

How to Design the Worst 401(k) Plan and Make Sure it Stays that Way

If I were to advise a plan sponsor to design the worst possible 401(k) plan, this is what I would suggest:

1.  Hire a commission-based broker who does not act in a fiduciary capacity and can only earn percentage-based kickbacks (known as 12b-1 fees) from certain mutual funds and not others.

2.  Include as many investment options as possible that nobody understands in order to give the impression that there is a lot of “work” for the broker to do.

3.  Hire a third party administrator (TPA) who receives percentage-based kickbacks (known as sub-transfer agent revenue) from certain funds and not others in addition to the flat dollar quarterly fee he bills you.  You also might want to make sure that the TPA dually acts as a commission-based broker so he can monitor his own services rather than bother to have a third party do it and puts you in a variable annuity contract to ensure he can continue to earn commissions deducted from participants’ accounts which he is allowed to do without having an investment license.

4.  Hire a record keeper who not only also receives sub-transfer agent revenue from certain funds and not others, but also is a mutual fund company who offers its own proprietary funds.

5.  Create an investment policy statement (a written description of a plan’s investment related decision-making process) and then forget about it and don’t follow it.

6.  Make sure you have no idea how much money your providers are taking out of participants’ accounts in hard dollars and that if you ask, that the disclosure is impossible to understand.  It would also be best to always think about your plan in terms of percentages rather than hard dollars because 1% always seems like a small number and therefore a good deal.  And of course, whatever you do, don’t ask for a breakdown of each service fee (advisory/broker, record keeping, administration, and custodial).  That way you will continue to never be able to make any meaningful comparison of fees and services.

7.  Also make sure you continue to keep paying your providers more money each year without them doing any more work.

8.  Always believe your trusted advisors (especially if they are your close friends or family members) when they say “Everything is fine and “in-line” with other plans in the industry.”  Don’t ever compare their fees and services (IN HARD DOLLARS NOT PERCENTAGES) to other providers because it might offend your service providers.  And if a third party ever raises questions and concerns about the unnecessarily increasing fees of your current plan and conflicts of interest that your trusted advisors have, make sure not to think about these concerns too much and forward these concerns to your trusted advisors so they can tell you everything is ok.

Retirement Plan Fascism

“Political language – and with variations this is true of all political parties, from Conservatives to Anarchists – is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.” George Orwell

The Department of Labor’s recent fee disclosure rules have brought out another government buzzword. This time it’s “transparency.” While the word may sound new to people not familiar with government schemes, its purpose is the same: to obfuscate the truth. Unfortunately, the very people with the fiduciary responsibility of overseeing trillions of dollars of retirement plan participants’ money – namely human resource managers, chief financial officers, and business owners – have no better understanding of this subterfuge than anyone else. For this reason, when speaking with people in these positions, the typical response I receive when suggesting that they may not fully understand the corruption, conflicts of interest, and excessive and hidden fees that continue to plague the retirement plan industry is: “Everything now must be disclosed” despite the fact that they still have no idea how much money service providers are taking from participants’ accounts nor how these providers make their money. Ironically, this false sense of security creates a moral hazard by making plan sponsors less likely to actually fulfill their fiduciary responsibilities of monitoring their service providers, asking about conflicts of interest, benchmarking their fees, and fully understanding and complying with the fee disclosure rules. It’s almost as if the government aims to turn people into criminals in order to solidify the power of the largest retirement plan service providers who control the industry.

Those who act in a fiduciary capacity should clearly bear some of the blame, but if we want to understand the real cause of the retirement plan racket, we must turn to central economic planning – especially public education which has turned so many of us into mindless automatons. How else can it be explained why so many people in charge of protecting people’s money lack the critical thinking skills to ask the most basic questions of retirement plan service providers – questions like “How do you actually make your money?” or “How much money in hard dollars did you make from our plan last year?” Given the unrestricted access we now have to technology, retirement plan fiduciaries have no excuse to plead ignorance. A simple Google search for retirement plan fees can level the playing field very quickly.

Those who serve and represent the industry should know better as well, but they tend to view problems through the lens of central economic planning and focus on how central planners should solve our problems rather than if they should do so. The fiduciary standard debate serves as a good example. This debate centers on whether these planners should require that brokers adhere to the fiduciary standard instead of the suitability standard which does not require that a broker act in a client’s best interests. As a registered investment advisor who acts in a fiduciary capacity and has harshly criticized brokers, there is nobody who would like for advisors to act in their clients’ best interest more than me. However, rather than spend my time trying to add more energy to the system that created the same problems we are now trying to solve, I choose to direct my energy into my own business and educating people through voluntary and peaceful means which are far more effective as illustrated by how much easier it is to understand retirement plan fees by visiting my website as opposed to the confusing maze of information put out by the Department of Labor. Albert Einstein reflected this belief when he said, “We cannot solve our problems with the same thinking we used when we created them.”

This centralized retirement planning system is characterized by a partnership between large politically connected businesses and government and an industry-wide revolving door between public and private sector employees, two defining characteristics of economic fascism. Former SEC attorney Edward Siedle and economics professor Thomas DiLorenzo have separately provided parallel accounts of this revolving door in both our current investment industry and Benito Mussolini’s fascist regime. The similarities are eerie and should not be dismissed as hyperbole as we must examine economic regulations in light of the coercion that distinguishes all forms of central planning.

Another characteristic of fascism is the restricted ownership of resources in which private businesses retain ownership, but the state exercises control over how resources are used. For example, while people are free to invest in a 401(k) plan or IRA, the government places restrictions on the level of contributions and types of investments people can choose as well as the kinds of services and advice they are able to receive in connection with their retirement plans. Furthermore, the government even restricts the tax deductibility of IRAs for participants who earn above a certain income if they already participate in a 401(k) plan. There is even a possibility that traditional IRA contributions will be eliminated which will steer even more contributions to 401(k) plans and thus create an even greater windfall for the politically connected 401(k) service providers who lobby through industry groups to ensure the government enacts legislation that favors their interests at the expense of their customers and competitors. In fact, one small retirement plan provider actually had to raise its fees in order to comply with the new fee disclosure rules when its website already clearly disclosed all of its fees! Consequently, while capitalism gets blamed for the failure of our retirement plan system, it is the government’s restrictions on the use of resources and crony capitalism that are causing the erosion of people’s retirement savings. As Sheldon Richman, writer and Vice President of the Future of Freedom Foundation noted, “As an economic system, fascism is socialism with a capitalist veneer.”

These restrictions result from a vertically integrated and institutionalized power structure. Southwestern Law School professor Butler Shaffer has cited the observations of various historians regarding the idea that “institutionalization – with its insistence on regulatory conformity, standardization, and the protection of existing organizational interests – has been a principal cause of the collapse of previous civilizations.” For this reason, understanding the retirement industry in this context might help us understand its true nature and the effect that dependency on politically driven systems has on our lives.

Some people, however, believe that “hope and change” depend on the party in office, but the only real difference is what each party does with our money after they steal it. It’s time we expose central planners for who they really are: people who seek power over others for their own benefit at the expense of those they rule.

Why I often Give Away my Advice for Free

Here’s a great post from the Self-Pay Patient blog:

I’ve written about medical bill negotiators in the past, but I don’t know that I’ve specifically described CoPatient and how they work. The process as described on their web site is pretty straightforward and has one helpful service that I’ve not seen before from a medical bill negotiator. Here’s how they describe their services after people create an account and submit their bills:

  1. Organize all your paperwork. We match your provider bills to your EOBs. You get access to a consolidated view of all your bills.
  2. Review your bills and insurance coverage. We use technology. industry know-how and knowledge generated from other consumers like you to uncover the many errors that happen in medical billing.
  3. Provide you with a report. You can then go in and see a nice snapshot of what you owe and what we think you can save.
  4. Get the errors fixed and recoup or lower your expenses. We fight insurance denials and negotiate your doctor and hospital bills. We have the experience and relationships to do this and you don’t have to spend all day on the phone. We charge a small percentage of what you save as a fee.

One of the interesting things about CoPatient is that they provide you with a report before you pay anything, meaning if someone wants to they can use the information to try to negotiate a discount on the bill themselves. They address this in their ‘Frequently Asked Questions’ section:

Are you concerned the individuals will take the free audits and contact providers or payers directly? Our goal is to create an environment where consumers take a larger role in their healthcare management, and that starts by understanding medical billing. Our philosophy is that if a consumers shares their medical bills with CoPatient — which in turn helps our system grow smarter and faster — then we want to give them something of value in return. Some consumers may want to take action on that data, and we encourage them to fight for what is fair and accurate. However, others opt-in to our appeal service to let our Billing Advocates make the phone calls, send the letters and follow-up with their providers and health plans to fix errors and overcharges.

Needless to say, ‘free’ is a pretty good price for such a valuable report! But the thing that really caught my eye was the fact that CoPatient will also review patients insurance coverage and appeal adverse decisions by insurers to deny payment.

In the modern world of bureaucratic medicine, there are few more frustrating experiences than having medically necessary treatment denied by an insurer. Having someone like CoPatient to help navigate the insurance appeals process seems like a terrific option for self-pay patients who do have some form of insurance!

Similarly, the more a 401(k) plan sponsor shares with me, the more I learn about the industry – which helps me grow smarter and faster – so I want to give them something of value in return.  Some plan sponsors may want to take action on the advice I provide and use it to negotiate a better arrangement with their existing providers, and I encourage them to fight for what is best for themselves and their participants.  However, others decide to engage my services and either have me deal with their existing providers or recommend new providers.

In the modern world of bureaucratic 401(k) plans, there are few more frustrating experiences than having to ask your service providers what you are paying them and then having to hire a consultant just to understand their response!  It’s like someone picking your pocket and then selling you back your own watch – after breaking it – and then providing a manual that only a watch expert can understand .  Having someone who actually acts as your advocate seems like a terrific option for plan sponsors who would otherwise be in the dark.

Book review: Simple Wealth, Inevitable Wealth: How You and Your Financial Advisor Can Grow Your Fortune in Stock Mutual Funds

1.  The main premise that returns are primarily driven by investor behavior is a good one.  Investor behavior is definitely not often driven by a rational and disciplined approach, so I share Murray’s view that the best way in which an advisor can provide value is by protecting investors from themselves.  In fact, I recently sent each of my clients this article that reflects this view:

Conflicts of Interest and Mutual Fund Advice –

The last part is insightful:

“A client called up his advisor, wanting to know what he should do in reaction to the plummeting market. “Nothing,” said the advisor. The next year, he called again, wanting to know what he should do in response to the soaring price of gold. “Nothing,” was the advisor’s response. In year three the client called again, wanting to know what he should do to take advantage of the soaring bull market. “Nothing,” said the advisor again. “Excuse me,” said the client, “but every time I ask your advice, you tell me to do nothing. Remind me again what I’m paying you for.” “You’re paying me,” said the advisor, “to keep you from doing something.”

And therein lies the true value of advice.”

He went on to rightfully criticize all of the unnecessary hype and unfair criticism of financial advisors from journalists who promote a do-it yourself approach that can be reckless at worst and irresponsible at best that promotes active trading which has an inverse relationship with growing your portfolio.

I also liked the behavioral psychology insight about how people have such an aversion to and fear of losing money that it will outweigh their desire to make money.  This type of behavior is evident when people sell at the bottom – the worst possible time to sell.

2.  I enjoyed the empirical evidence Murray provides to support the idea that investing in equities is actually a safer way to protect your wealth in the long-term than investing in cash and bonds.  I have made this claim as well, but it’s nice to have more evidence to back it up.

3.  His discussion as well as empirical evidence of the value of dollar cost averaging was useful.  When you look at investing this way, bear markets are great because now you can purchase investments on sale!

4.  It was nice to see that Murray took a balanced and unbiased approach to the active vs. passive debate.  Murray correctly pointed out that index funds (depending on the fund) can be more volatile and expensive than some actively managed funds that focus on long term returns and minimizing trading and volatility.  He also points out time periods when most actively managed funds outperformed the S & P 500 as well as thinly traded asset classes like small cap that are more likely to outperform the index benchmark.  On the other hand he warns against accidentally creating your own overly expensive index fund by investing in several large actively managed funds that collectively replicate the market.

5.  While Murray pointed out the pejorative way in which the media refers to financial advisors as “brokers”, he completely ignored the distinction between a broker and a registered investment advisor who acts as a fiduciary and is legally required to act in a client’s best interest as opposed to a broker who is subject to the suitability standard and does not have to act in a client’s best interest.  The main difference is that a registered investment advisor cannot take any kickbacks from a third party whereas a broker can only earn percentage-based kickbacks from financial products known as 12b-1 fees.

For more information on the subject, I would suggest watching the two videos along with reading the article below:

Butchers v Dietitians Brokers v Advisors Suitability v Fiduciary:

Retirement Gamble:

Suitability vs. Fiduciary Standard:  It’s a Big Deal:

6.  Murray does give a brief mention to various organizations one can contact if he needs to find a financial advisor, one of which was an association of fee only planners.  However, the focus of his book was on the idea that it is generally a good idea to pay an approximate 1% ongoing fee to a financial advisor while ignoring the fact that you could get the same level of service for a flat annual fee or hourly fee that would not necessarily be every year, as a portfolio doesn’t necessarily have to be reviewed literally every year.  The two attached articles go into more detail about this issue.

Furthermore, there are still conflicts of interest with an asset-based fee, even if it is charged by a registered investment advisor.

This article elaborates:

There are Conflicts of Interest Inherent in Assets-Under-Management Pricing –

Here are some highlights:

Charging clients on an AUM (assets under management) basis, however, presents more-serious conflicts of interest than those faced by brokers, because the conflicts may involve much more money than the value of a trade.
Here are some typical situations where asset-based fee compensation poses conflicts for advisers:

• When advising a client to roll over a 401(k) for the adviser to manage, even when the client has equivalent and less costly options if they leave their funds with the employer’s fund manager.

• When advising not to pay off a mortgage (thus diminishing assets), even when the mortgage carries a high interest rate.

• When advising against making a large charitable contribution to get a tax deduction (but decrease assets under management).

• When advising not to give large gifts to children to avoid estate taxes.

• When advising not to buy a larger home.

• When advising not to buy an annuity or set up a charitable annuity.

• When advising not to invest in real estate.

He also should have mentioned how significant a 1% can be, as the Department of Labor explained:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
7.  Murray also ignores the vast body of research that suggests not that passive is better than active, but that broker sold funds on average significantly underperform direct sold funds because the funds in the broker channel invest far more heavily in sales and marketing activities vs. the direct channel which invests more in the expertise of the fund managers.  This article elaborates:

Does New Study Seal the Deal for Fiduciary Standard – or Just Warn Plan Sponsors? (about broker sold funds):

8.  When discussing the benefits of a financial advisor, Murray should have also mentioned perhaps the most significant reason to use a financial advisor – tax loss harvesting.

For your non 401(k)/IRA investments, I would consider using Betterment –  They do charge based on a percentage, but it is low – only 0.35% and only 0.15% for assets over $100,000.  They focus on using low cost ETFs which are similar to index funds.

I do not earn any compensation if you use this firm.  I just like their approach.

For your IRA investments, however, there is not as much value to using a firm like Betterment because the tax loss harvesting does not apply.  I would consider an index fund such as the Vanguard Total Stock Market Index Fund (VTSAX) or replicating one of Betterment’s portfolios.

This article shows how firms like Betterment are changing the industry:
The Rise of Robo Advisors:

Are Health Sharing Ministries a Better Alternative to Traditional Health Insurance?

I normally write about issues pertaining to qualified retirement plans, but health care also plays a major role in our retirement, so I believe I need to address this issue.  I recently learned about health sharing ministries at an event put on by the Heartland Institute, a Chicago based think tank promoting public policy based on individual liberty, limited government, and free markets.

I was immediately interested upon reading the description of the event which mentioned how self-pay patients can find more cost effective healthcare alternatives.  Since I try to avoid solving medical problems through unnecessary and potentially harmful prescription drugs and prefer to take a more holistic approach to health and wellness, I was eager to hear what Sean Parnell, the event speaker and author of The Self-Pay Patient had to say, and I wasn’t disappointed.

For one thing, I was surprised to learn about the extent of the potential difficulty in getting reimbursed by an insurance company.  Parnell relayed a story about his wife’s terrible experience with her health insurance company because of migraine headaches she had been having, which resulted in years worth of wasted time, energy, and exasperation along with mounds of paperwork several feet high!  While a story like this may not necessarily be the rule, I wondered how many other people had this type of experience.

When he finished speaking, I had the opportunity to ask about what someone like me, a healthy 36 year old who does not wish to participate in the corrupt and conflict ridden medical system, could do to protect myself in a cost efficient manner.  At the time, I was paying $163 per month for an individual policy with a $5,000 deductible that covered very little with the exception of emergency care.  And because of the Affordable Care Act, I knew my premiums were going to continue to increase significantly.  In fact, I learned that my policy was soon going to be phased out because it did not meet the requirements of this new legislation, and that I would soon be forced to purchase a more expensive policy and therefore more fully participate in a health care system that I didn’t believe in.  So I was pleasantly surprised when Parnell responded that I could consider a health sharing ministry as an alternative which would be exempt from the fines levied by the Affordable Care Act.

I did some research on health sharing ministries and came across the following information:

Here are some highlights:

U.S. News article:

“A health care sharing ministry (HCSM) provides a health care cost sharing arrangement among persons of similar and sincerely held beliefs,” the Alliance of Health Care Sharing Ministries states on its website. “HCSMs are not-for-profit religious organizations acting as a clearinghouse for those who have medical expenses and those who desire to share the burden of those medical expenses.”

According to the HCSM, health care sharing ministries currently cover 300,000 people in all 50 states.

Instead of deductibles, participants are subject to annual unshared amounts. For example, some plans pledge to cover medical expenses after a family spends $1,500 out of pocket for their own medical care, while others don’t begin offering benefits until you spend $5,000. However, unlike health insurance plans offered through the ACA, health care sharing plans are not required to cover some medical procedures – including certain procedures the group finds morally objectionable. 

Of course, there are other differences between traditional health insurance and sharing plans. For example, health care sharing ministries reserve the right to deny applicants due to pre-existing conditions, which is in stark contrast to new guarantees offered by the ACA. Sharing plans also often come with lifetime caps on coverage that range from $250,000 to as much as $1 million depending on the plan you choose, and participants are required to pay for their own well visits and preventive care.

Washington Times article:

Typically, a hospital patient paying out of pocket for major surgery needs a long-term payment plan, so when Gary L. Edwards‘ friend paid off his $30,000 emergency hernia operation tab in about a month, it left hospital officials flabbergasted.

Mr. Edwards and his pal are members of Samaritan Ministries International, a “health care sharing ministry” in which Christian members pay for each other’s health care needs through monthly shares.

While most Americans next year will have to grapple with the intricacies of President Obama’s health law and the “individual mandate” requiring residents to have health insurance, Mr. Edwards and more than 160,000 others who use health-sharing ministries will be exempt.

They’re one of nine exemptions built into the health care law, covering everyone from illegal immigrants to prisoners; those who have religious conscience objections, such as the Amish; and health care sharing ministries members like Mr. Edwards.

USA Today article:

Ellery Hunsley doesn’t have health insurance. But eight years ago, when his daughter went through treatment for a brain tumor, the assistant pastor at a local church didn’t worry about the medical bills.

Hunsley paid every bill out of pocket, largely thanks to the help of strangers — people who, like himself, participate in an alternative to insurance, a health care sharing ministry.

Reading this was great news to someone like me, and finding out about Liberty HealthShare –, a non-denominational organization, was even better news as I am not Christian.

Here is a sample of what Sean Parnell wrote about Liberty HealthShare:

One of the interesting things about Liberty HealthShare is that they are organized around ethical beliefs and not religious beliefs. Most people don’t know that the Obamacare exemption for sharing organizations must be composed of members who “share a common set of ethical or religious beliefs…”

By establishing a set of ethical criteria that members must subscribe to, Liberty HealthShare has found a way to expand the number of Americans who can opt for this low-cost alternative to conventional health insurance.

Liberty HealthShare isn’t just unique in its expanded membership eligibility. Unlike the other three ministries, they handle payment of medical bills directly. The other three ministries distribute the shared funds directly to the patient (or their family), who then pay medical bills directly.

Because health sharing ministries like Liberty HealthShare have lifetime caps and membership restrictions, they are able to control their costs so members won’t see significant annual cost increases.  As someone who is young and healthy, I am willing to accept a lifetime cap in exchange for a lower monthly sharing amount.  Furthermore, my network spinal analysis chiropractic treatments are very important to my health and personal development, because Liberty HealthShare does not have networks,  it fully shares the cost of 12 annual chiropractic treatments, regardless of which chiropractor a member uses – and unlike having a $5,000 deductible, each Liberty HealthShare plan has a $500 annual unshared amount (like a deductible).  This type of structure is valuable to me because I would not have received any cost sharing at all with a traditional health insurance provider because I would not have met my deductible and my chiropractor was not within the network of my old plan.  And Liberty HealthShare even pays a $50 referral fee for each new member you refer!

Health sharing ministries may not be a fit for everyone, but our health care is too important not to include them as part of our evaluation when making health care decisions.  Here are two excellent resources for those who are looking for information that will allow them to make more informed health care decisions:

How Law Firms (and organizations whose primary business is serving the legal community) Can Control their Investment Advisory Fees and Avoid Paying any Non-investment Related Fees for Defined Contribution Plans

All law firms are eligible to participate in the American Bar Association Retirement Funds Program.  This program (for defined contribution plans) allows participants to avoid paying any record keeping, administration (with the exception of minimal cross-testing fees), custodial, or investment advisory fees to the extent they use the brokerage account option offered through TD Ameritrade – and there is no limit to how much money participants can invest in the brokerage account.  The reason participants can take advantage of this opportunity is that the program also offers core investment options that include percentage-based fees that are paid to Voya and Northern Trust for record keeping, custodial, administration, and investment advisory services (if plan sponsors require more advanced plan design services such as cross-testing, they still have the option of retaining their administrator and paying this provider separately).  Since the vast majority of the money is invested in these core funds, the program is able to survive as both ING and Northern Trust are able to generate a sufficient amount of revenue to make up for the revenue they don’t receive from the funds that are invested in the brokerage account. TD Ameritrade also makes a payment of 8 basis points (0.08%) to the plan’s collective trust in order to lower Voya’s fee.  TD Ameritrade is willing to make this payment because it typically receives more than 8 basis points worth of revenue in trading fees.

Furthermore, most (and perhaps all) of the funds that most plans have available are also available through TD Ameritrade.  All mutual funds have the same expense ratio regardless of where you buy them, so participants can purchase most (or all of the same funds) at a lower price.   Granted, the core fund options are part of a collective trust, so they are not available through TD Ameritrade.  However, given that they are loaded with record keeping, administration, custodial, and investment advisory fees, it seems far more reasonable to purchase comparable funds in the brokerage account without these additional fees.

In addition, if you were to use the ABA Retirement Funds Program, the only way the advisor could get paid would be for the firm or company to write a check or for the advisor to come to an agreement with each individual participant.  Under most plans, the advisor (along with the record keeper and custodial and possibly the administrator) gets a percentage of the of account value and gets paid regardless of the utilization of the services.

If you view the program’s website (, you will not see any of the above information advertised.  However, if you contact a representative from the program, you can confirm that this information is accurate.

So if all of what I have written is true, it would seem that all law firms and those that serve law firms that continue to pass on record keeping, custodial, administration, and advisory fees to their participants are missing out on a great opportunity, especially since in addition to the enormous cost savings, the ABA Retirement Funds Program acts as a discretionary trustee and therefore assumes a higher level of fiduciary responsibility than almost any other retirement program in the marketplace.