401(k) Deception

We have all been in a situation where we have received completely conflicting information when shopping for products from different companies.  It can sometimes be easy to determine the right choice – other times its much more difficult.

It happens in other areas of life too.  For example, after our daughter’s birth, one of the nurses working with my wife told her that her mobility would be very limited – it was likely she wouldn’t be driving and moving around actively for three to four weeks.  A few hours later, the physician dropped in for an update and told her that she would be fine in a couple of days and encouraged her to resume her schedule as soon as possible!

Many fiduciaries at smaller employers are not well-versed in the ins and outs of 401k administration and compliance.   They are at the mercy of industry practitioners (like me). Understandably, it can be difficult to distinguish the truth from the BS.   It’s hard for large firms and even more difficult for smaller firms.  Unfortunately, in the small retirement plan industry, the BS is rampant.  Here are three examples I just recently came across:


I was reviewing the fiduciary liabilities and obligations with the office manager of a small firm. She had been tasked with the responsibility of exploring 401k options.  As a part of our discussion, I introduced her to the fiduciary codes 3(21) and 3(38).

I explained how these two types of fiduciaries are different and how advisers can share or take some of their liability.  Some advisory firms like PlanVision are willing to accept the liability of the 3(38) Investment Manager for plans.

She had discussed this issue with another consultant.  The consultant explained that they didn’t want to hire a 3(38) because they would not be able to change the investments in their 401k lineup on their own if they hired a 3(38) adviser.

In a literal sense, this is correct.  But how often is a smaller employer interested in making changes to their fund lineup based upon their own research?  Does it make any sense at all for a plan sponsor to do this?   NO.  It’s ridiculous.  Why would an employer, who has more than enough to do already, want to take on the liability of making changes to their 401k fund lineup based upon their own selection of funds?  Also, if they went insane for a while and decided they don’t want the 3(38) service from their adviser, they could just take it out of their contract.


I was contacted by an employee of a plan sponsor with a relatively smallish plan.  Not tiny, but small.  About 350 participants and $5 million in the plan.   She was doing research and, smartly, was hoping to include index funds in her plan.

Her employer’s plan adviser, however, told her they were not available for her plan – it was too small.   What???  Nonsense!  Their plan is not too small.  Plans of any size, including start-up plans, can use Vanguard Admiral Share Class index funds.

The real reason they can’t offer these funds is because many low-cost index funds won’t support revenue sharing! Too small?  Pathetic.

With low-cost index funds there will be administrative and support costs.  However, the record keeper can clearly separate out those costs so the employer can include low-cost index funds and the employees or employer can pay for all plan support services separately.


Similar to example 2.  An overseas employer with American expats inquired with PlanVision.  They are interested in implementing a 401k or 403b plan for their American staff.  During the evaluation process, they have become educated about the benefits of low-cost index funds.  They have a relationship with a large, well-known broker-dealer.  When they asked their broker if they could include index funds, they were told they could not.

Why not?  Why can’t their broker simply offer index funds and bill the plan sponsor directly for their guidance?  Because this would be too transparent!  It is simpler for the broker to hide their overall revenue if they can build it into the investments in the form of revenue sharing.  And, once again, it’s harder to share revenue from low-cost index funds.


I’m an advocate of innovation and competition and believe they help consumers receive more value.  In the marketplace of ideas and services, there are legitimate differences in philosophy and process from firm to firm.  Understanding these distinctions is a buyer’s responsibility.

Yet many financial service firms intentionally deceive plan sponsors.  Yes, intentionally.  They know better.  In many cases, unfortunately, their business model relies on this deception.

Vanguard is a great success story.  John Bogle attribute much of their marketing success to candor. It’s easy to see why candor works so well in an industry with so little of it.


The Truth About Investment Consultants and Advisers

I have been looking for a way to describe most of the guidance provided by those in the financial services industry. I’ve struggled with the best way to put it.

However, the quotable Warren Buffet provided a great take on how investors waste money on investment advice.  In this case, he is referring to “sophisticated” investors.  However it applies to everyone.  It’s happening as well with those we work with – middle class individuals and smaller organizations.

Here it is:

“Supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you ‘just buy an S&P index fund and sit for the next 50 years.’ You don’t get to be a consultant that way. And you certainly don’t get an annual fee that way. So the consultant has every motivation in the world to tell you, ‘this year I think we should concentrate more on international stocks,’ or ‘this manager is particularly good on the short side,’ and so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in the American business without cost. And then those consultants, after they get their fees, they in turn recommend to you other people who charge fees, which… cumulatively eat up capital like crazy.”

And he had more:

“And the consultants always change their recommendations a little bit from year to year. They can’t change them 100% because then it would look like they didn’t know what they were doing the year before. So they tweak them from year to year and they come in and they have lots of charts and PowerPoint presentations and they recommend people who are in turn going to charge a lot of money and they say, ‘well you can only get the best talent by paying 2-and-20,’ or something of the sort, and the flow of money from the ‘hyperactive’ to what I call the ‘helpers’ is dramatic.”

I haven’t come across a better summation of what I have learned about the value of investment advice.  Keep your money.  Set up a well diversified portfolio of extremely low-cost index funds and…that’s it!


Why I Recommend Vanguard

BY USING VANGUARD FUNDS, I think my clients will have a higher likelihood of having more money in their accounts in the future than if they use comparable investments from other mutual fund companies.  Sounds like something Captain Obvious might say.

OF COURSE NO ORGANIZATION IS PERFECT.  Within Vanguard I am sure there are large and small disagreements on company direction. However, there are specific long-term aspects of the Vanguard approach which should help my clients achieve the best results.  The following are the top four reasons, in no particular order, that Vanguard helps me help my clients:

PROMOTION OF LOW-COST INDEXING.  Behind the legendary efforts of John Bogle, Vanguard has been the major driver in promoting the benefits of low-cost indexing, also known as passive investing, as the smartest way for people to invest.  They are not the sole provider of index funds, and there are many other champions, however they are clearly the leading proponents of this approach.

CONSISTENT MESSAGING.  By and large, the Vanguard message has been the same throughout the years.  Set-up a well diversified portfolio of low-cost investments and, thru the ups and downs, let the markets work for you.   Sure, they offer active funds and ETF’s.  However, their active funds are significantly less expensive than most and this has not diminished their advocacy of indexing.

VANGUARD DOESN’T PAY ADVISERS.  In an industry full of conflicts of interest, this is critical.  I receive no compensation or commissions from Vanguard to promote their investments.  Nothing. Zero.  Zip.  Nor do they assist my firm by sponsoring events or paying for our marketing efforts.  It has been liberating to provide my services to clients in a direct way.  My clients know exactly how much I make and who pays me (they pay us on a flat fee basis).  The guidance that I provide is no longer compromised by how I am compensated.

NO HYPE.  In all of my dealings with Vanguard, they have never hyped returns or products or “new” angles on investing.  This is very refreshing.  In my experience, I have come to believe that the more an investment is hyped by the financial services industry, the less good it is for the investor.  Of course education and guidance are important and part of the process in helping people become better investors and aware of their options.  But hype is something entirely different.  And I don’t get hype when I interact with Vanguard.

IT’S QUITE SIMPLE.  With my 20 years of experience, when I consider the factors important to investor success, I am confident that recommending Vanguard will give my clients the best chance to get the most return on their investment.

Can a 77 Year Old Have Dreams?

Is this an interesting or provocative question?  When do people concede their hopes for the future? How does it happen?  Certainly how a retiree, or an aging person, views their future will have a big impact on their quality of life.

Ken Dychtwald, founder of AgeWave, is a thinker on aging in America that I have been following for some time.   I enjoy his work immensely.  It has helped shape how I think of both my life and career.

In one of his talks, he relates the story of John Glenn’s effort in 1998 to go back into space at age 77.   At the time, this was met with some controversy.  There were those who thought it was a publicity stunt.  Dychtwald explains how, at a press gathering, Glenn was asked about this by a younger reporter.  Glenn’s response was: “Just because I am 77 doesn’t mean I don’t have dreams!”

Dychtwald relates this story in a very emotional and meaningful way.  I recall how he paused after sharing Glenn’s reaction to let the impact of his statement sink in.  It had a profound affect on the audience as it did me.

As you go through your day and life, don’t you find yourself thinking of the future?  Maybe the next 6 months or year.  Or maybe the next three, five, or ten years.   Sure, you may not want to travel in space, but you probably imagine yourself in a better place.  Your curious about what you will be doing and how you will relate to the important people in your life.  You wonder what might have happened and how things will have worked out.  What will you have accomplished?  What will you be like?

When does this end?  At what point do people spend more of their time reflecting on their past instead of looking towards their future?

This story reminds me of a sad moment over the Thanksgiving Holiday years ago.  I was visiting my dad’s Family in central Illinois.  My grandmother, in early 90’s at that point,  had given up on her future.  As we were talking, she said “I hate my life.”  She had lost her husband of over 60 years and her health was failing.   Her spirit and energy were gone – there was nothing to look forward to.  She was at the point where all hope was gone.

As you think of your future, and the future of the older people in your life, remember that having hopes, goals, and/or dreams is a great way to get as much out of life as you can.

What do you want to accomplish?  What is in your future?



How Do Your Employees (en)Roll?

Enrolling in a workplace retirement plan is an important event for many people. The decisions they make will have an impact on their lives today and well into their future.  One way you can have a great plan is to offer your employees an excellent enrollment experience.

What is your process right now?  Is it anything special, or unique?  Have you even given it much thought?  Do you give them a packet of information or a link to a website or 800 number?  The following is a checklist for an enrollment process which would be better than most:

1)  Provide concise information about the plan.  This should be made available in either an on-line or printed format.  Be smart about the volume of information you provide – most employees will never read a 40 page brochure or review multiple pages of a website.  Information would include a description of the plan features, the investments, and additional services that might be available during enrollment. Employees should be given the option to review this information at their convenience prior to enrollment.

2)  The enrollment should be completed on-line.  Most of the information should be pre-filled for the employee at the plan administration website – the employer uploads the information as a part of the payroll process.  Each employee would verify the accuracy of the information.  Then they would identify their beneficiaries, indicate the amount they want to contribute, and select their investments. If an employee has limited access to a computer at home or on their own, employers should offer a workstation.

3)  Guidance from a human.  This is a critical link.  Most employees struggle to determine the amount to contribute and the investments that make the most sense for their situation.  They are not well equipped to make these determinations.  Some have no idea where to start!  Professional human guidance can make a difference in a few different ways.  An adviser can help each employee assess how their contributions fit into their budget and how to prioritize saving for retirement.  They can also provide an educational overview of the asset classes and funds offered by the plan.  They can provide this guidance based upon each employees’ experience with investments.

4)  Meeting times should be variable.  Employees should have the option to receive guidance either during work hours or non-work hours.  Some people are fine getting this done at work while others prefer doing this at home or in another setting.  This flexibility will enable some to focus better during the process.

5)  Guidance should be optional.  Some employees are comfortable enrolling on their own.  They just need a listing of their investment options and returns and an explanation of how to complete the process.  They should not be required to visit with an adviser or a website or watch a video about how to enroll if they can do it themselves.

6)  Advisers should not use the enrollment encounter as an opportunity to sell other products and services to the employees.  It is common for many retirement plans of smaller employers to be used as a venue for advisers to grow their personal book of business.  This is nonsense.  Advisers should be justly compensated for their time and effort in supporting the plan, but should not use their interactions with staff to sell other products or services.

7)  The encounter should take anywhere from 15 to 45 minutes.  While this may vary from person to person, most employees can have a successful enrollment session relatively quickly.  A good educational and enrollment session can take 20 to 25 minutes.  Some may take longer if they have more detailed questions or issues that need to be addressed.

8)  Use enrollment as a starting point.  Some of your employees may want more personal guidance down the road, either in the form of additional education or planning.  Let them know that the enrollment is just a starting point.  You can provide additional personal guidance down the road, when they are ready for it, and when they are not distracted by setting up their account.

What is your process?  Is their anything special you do for your staff?  How could you make yours better?


My Parents, Retirement, and How Much Retirees Spend

For the Holidays, my parents came to visit.  They are both in their early 80’s and are of generally good health.  I consider them to be middle class people who have always worked hard to support and provide for their Family.  We spent some time discussing their current standard of living and their finances.  During the discussion, I asked if they would share with me their monthly expenses so I could write about it for my work.  They were happy to come up with the number.  In fact, they did it in about 10 minutes.

After some back and forth discussion about different bills, their total cost on their monthly fixed expenses are about $1,500.  This includes all of their bills and insurances and property taxes.  And it includes cable TV and mobile phone service as well.  Of course, they have some discretionary spending not included in that number.  Food, travel, other household purchases, and well, whatever else comes up.  (They are fortunate to receive health care coverage through the Veterans Administration – my Father served in the military in both Korea and Vietnam with more than 20 years of service.)

Using some conservative estimates (and I think these are really, really, really conservative), I add in another $25,000 in annual expenses.  This brings their total to $43,500.  How  similar is this to other people?  In my experience with other people like my parents I would say it is very similar.  My parents have the benefit of having their health care fully paid, but other than that I see their expenses as being quite in line with most of the middle class retirees I counsel.      

Their main goals at this point are to continue to live independently and enjoy and support (when necessary) their Family.  By and large, that’s it.  They have a large Family with four children and many grandchildren and great-grandchildren.  They agree that they do not have nearly the same consumption, or close to it, as when they were raising their Family and in early retirement.  They are now enjoying their days with their Family in a much slower pace.

My point in this exercise with my parents was to validate my view of how people live in their mature years.  If you listen to many financial services firms or retirement commentators, you hear of an impending retirement disaster.  However, this is built upon the expectation that retirees have growing annual expenses in their retirement years.  It is assumed that people have the same “standard of living” for the remainder of their life and, with inflation, their costs go up every year. Sure, that might be the case in their first few years of retirement, but I have never observed that. Over time, as people slow down, their expenses settle down.

Of course, we are all different and have unique goals and motivations.  And any retiree faced with a significant long term care event can see their financial world turned upside down.  This is a risk that cannot be denied.  But many people will be able to get by, and enjoy their life as it is, simply because their lifestyle moderates over the years.  If you want to know how much you need, you need to know how much you will spend.  And looking to how other retirees are doing and how they get by can be a great place to start!


PlanVision’s Predictions and Outlook for 2015

Based upon the events of the last year, our research and monitoring of worldwide political and market events, and reviews of the available economic and financial information, we have a forecast for the upcoming year:

We have no idea what will happen!

We anticipate that our forecast will be 100% accurate.

Algorithms vs Nothing

Robo Advisors are the most recent development in investment management for individual consumers.  Robo Advisors provide on-line investment management services as an alternative to a personal investment advisor or firm.  They promote the use of sophisticated modeling techniques and algorithms in portfolio construction.  Initially I didn’t pay much attention to their introduction to the marketplace.

In the last year or so, as it has become obvious to me that investment management is essentially a commodity, I have become more intrigued in their role in helping consumers (investors) receive low-cost guidance.  The addition of the robo advisor is an excellent step in the evolution of the asset management market.  They assist consumers by reducing expenses, in many cases dramatically, and also by introducing more discipline into the process.

What I am not certain about though is whether or not using algorithms in ongoing management will provide any additional value over simply using an option like a Vanguard Target Date Fund or Lifestrategy Fund.  Or even using something like the No Brainer 4 fund portfolio recommended by Dr Bill Bernstein.

The models are designed to provide superior allocation by identifying predictive behavior among asset classes.  The argument is that by using engineering and math better, more efficient portfolios can be constructed in the short run, leading to better results in the long run.

I wonder how predictive this behavior is in reality.  Are the trends or behaviors used to model the portfolios really helpful in short term reallocation decisions? Are the efficient portfolios going to end up producing better returns than a well-diversified portfolio of low-cost index funds? I am not sure I am buying what they are selling.

By and large, I like what the robo-advisors are doing to help consumers receive investment management at a much lower cost, but if I had to bet, I would put my money with the No Brainer portfolio.  Adding complexity to money management for most people may not produce a better outcome.

What to Expect from Your Investments

Recently, a friend inquired with me about the quality of advisement he was receiving on his investments.  He uses a conventional investment firm, a household name in the financial services industry, and pays an assets under management charge.  He is clearly familiar with the concept of using low-cost index funds, however has opted to use an advisor to generate returns that are greater than what he could get with a portfolio of low-cost index funds.

Since he asked for my opinion (I rarely talk investments with Family or friends), I told him that he should leave his advisor and index his mix and provided some comments on why I believe that would be the best approach.  While he is not ready to make this change I think he has a better sense of an alternative approach he can take which would be much more low cost and simplified.  In the course of our e-mail and phone discussion, he shared with me the e-mail chain with his advisor.

It was a good exchange about the approach that they were taking.  However, I found two explanations to be bogus and discouraging, though quite typical.  The first was simply an explanation that 2014 was a hard year for investors to outperform due to unusual issues and circumstances. Really?  Couldn’t that be said about almost any year?

The second was more troubling.  My friend had taken a portion of the portfolio and decided to be more “aggressive” with it.  Obviously, the intention was to generate higher returns.   However, as is the case many times when an investor does something like this, the returns were not satisfactory so far.  The advisor suggested that they give it a few more months or until the end of the year to see what happens and evaluate.  I can tell where this is going.  This approach is destined for failure.

You cannot micromanage a long-term strategy on a quarterly or even annual basis.  The advisor is creating a trap for himself.  If he has established the notion with the client that they can “juice up” returns in the short run with certain investments, and the client expects that, I see almost no scenario where this ends well.  “Aggressive” investments, whatever they happen to be, simply do not behave this way.  More than any other type of investment, they need to have a very long-term time horizon for success.  If we could all get get better returns with more aggressive investments, wouldn’t we just use aggressive investments for everything?

But there are no end to advisors that will imply that they have these type of opportunities!

Using a Roth IRA as a Retirement Plan-College Savings Hybrid

Should you save for retirement or for a child’s college education?  This can be a dilemma for many middle class people with limited funds who have an interest in saving for both.  One way you can kinda do both at the same time, with one account, is by using a Roth IRA.  Here is how it works:

Assuming you can fund a Roth IRA (most middle class people can) in 2015, people under 50 can contribute $5,500 and if you are 50 or over you can contribute $6,500.  The benefit of a Roth IRA, as you might recall, is that the interest you earn can be taken out tax-free if you keep the funds in there until age 59 1/2 or 5 years, whichever is later.  This is a good thing.  Start a Roth at a young age if you can.

One of the most important and unique features of the Roth is that you can access your contributions, any time, with no taxes or penalty.  Keep in mind that the money you put in was after-tax – you have already paid taxes on it.  So, the government does allow you to withdraw your contributions – no questions asked. Some people think this is a drawback to the Roth, but I think it is a good feature. And this is how you could use a Roth for both college and retirement savings.

As you save money for your retirement, or your future, in your Roth, and your child or children get older and closer to college, you could end up using your contributions to help pay for college expenses!  For example, let’s say for 18 years you put in $4,000 a year in your Roth and it has grown, with interest and earnings, to $139,000.  You could take out any amount up to the $72,000 with no penalty!

In this example, you would still have the interest in your account to be used in the future.  Also, if both spouses put in $4,000 a year for 18 years, then they would have a total of $144,000 to access for their children.  Got it?  Not bad.

With this approach you have flexibility and some discretion over what you want to do based upon how your life unfolds and how your needs and your values might change over the years.  It is a given that we all experience change and unexpected circumstances and having flexibility in your investments can help you better address your financial needs in the future.  While I generally believe it is better to save for your retirement than for college if you have to save for one or the other, this flexible investment could help you with both goals.

One other note is that the Roth can also work for people that have children later in life.  If you need to withdraw from your Roth IRA after 59 1/2 and the account has been open for more than 5 years, the withdrawal is tax-free.  It can be used for anything at that point.

By the way, I would recommend that you keep a simple spreadsheet of your contributions each year and any withdrawals that you make from your Roth. Ultimately, it is your responsibility to accurately report any distributions you take from your Roth IRA to the IRS.

What do you think?  Could this work for you?