The 401k Conspiracy: How Companies and Employees are Being Robbed by Wall Street as the Government Looks the Other Way

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Preface

If you are a 401(k) plan sponsor or participant, most likely you picked this book up because the title caught your attention. If you have an uneasy feeling that something may be wrong with your current 401(k) plan design, rest assured, you are not alone. In fact, many people have almost given up on 401(k)s altogether. There has even been talk of the government taking over retirement plan assets.

Chances are also good that your life is busy and finding time to read a book of this nature may seem overwhelming. We understood this possibility while in the planning stages of this material. That’s why we made the information very clear, concise, and easy to understand. Our goal was to bring you, the plan sponsor or participant, everything you need to know about the problems within 401(k) plans while also providing the solution, or the action steps you need to take, in order to develop an optimal retirement plan.

In addition, throughout this book you’ll find additional resources put together by Bryan Binkholder, The Financial Coach, designed to enhance your learning experience. Many readers will find his 7 Deadly Traps of Investing CD and book, Six Pitfalls of Retirement Planning CD and book, along with 401(k) ActionPlan CD helpful in developing a successful investing experience.

With increasing concern, both authors have witnessed the financial profession mutate into a trash heap of young advisors, still naïve and duped by their higher level managers or more tenured financial advisors, who have abused their relationships by pushing high compensation 401(k) plans on their golfing buddies, fellow church members, and other connections. The greatest concern has been the shift from traditional ‘defined benefit’ pension plans to the ‘defined contribution’ plans of the 401(k). Many individuals fail to understand their 401(k) investments in the first place and when they try to educate themselves to determine a strategy, they find themselves bombarded with a steady stream of ‘financial pornography’ from the media.

Workers are confused and searching for truth, but many are too busy to take the time to learn. Plan sponsors find themselves in much the same predicament, but are required to act in a fiduciary capacity. Due to the fiduciary standard of care, sponsors are under even more pressure to make sense of the mixed messages coming from the media and financial advisors. This is exactly why we developed this book, to target and educate the plan participant and also the people who can have the greatest impact—plan sponsors.

Warning: You Can Take the Blue Pill or the Red Pill

In the movie, The Matrix, Morpheus informed Neo, who was searching for the truth, that he had a choice to make. He could take the blue pill, in which case the story would end, he’d wake up in his bed and believe whatever he wanted to believe. The second option was this, You take the red pill—you stay in Wonderland and I show you how deep the rabbit-hole goes. The red pill, of course, represents the undiluted truth. Unfortunately, the truth about the financial industry and the ways in which it dupes investors, and frankly many advisors, has a pretty deep rabbit-hole of its own.

A Word of Warning: Prepare Yourself

If you proceed to read this book you will discover what the authors have discovered over their combined 45+ years in the industry—Wall Street and financial advisors are not out to help you prosper, but to effectively transfer wealth from your pocket into theirs. As Fred Schwed wrote in the 1940 classic, Where Are the Customers’ Yachts? Wall Street continues to prove they cannot be trusted, and as plan sponsors you have a duty to kill the wolves before they kill the sheep. The following pages will not be carefully worded or politically correct because you deserve to know the plain truth about what really happens in the financial service industry with regards to 401(k) plans and investing. A 2011 survey conducted by Cerulli Associates revealed that 33% of investors were not even aware how their financial advisor was compensated, while a whopping 31% thought they worked for free! In addition, 64% (probably the same people) thought their financial advisor was required to look out for their best interest. Nothing could be further from the truth! In fact, as Jim Winkelmann who co-authored this book likes to say, these so called financial advisors are actually ‘imposters’ who are selling products while pretending to be on the customer’s side. They are not advisors at all—only salesmen.

For more information about what happens in the personal side of investing, request Jim Winkelmann’s free report entitled: Is Your Financial Advisor Lying To You? You can receive it instantly by visiting www.401kConspiracy.com/Report or by calling 1-800-449-2237.

Introduction

I believe strongly in the basic principles of capitalism, despite how this belief might be viewed in light of the current state of the economy. 

Capitalism, at its very core is the concept in which a private owner of capital (stocks, bonds, real estate, equitable interests in other businesses, etc.) lives off of the income the capital, or property, produces. This is the most foundational and simplest definition of the term. In other words, a true capitalist makes his or her money from the assets they own. On the other hand, we have laborers. These individuals must toil hour-by-hour, using the energies of their mind, body, and time to generate a wage. In most instances, the wages they earn come from capitalists. 

There isn’t any rational person in the world that would prefer grueling labor over substantial passive dividend payments from a portfolio of stocks. Yet, most individuals in the world today are laborers—this includes the United States.

When two capitalists, equally familiar with the industry and knowledge of the other party, begins negotiations to buy or sell an asset, they do so believing they are on an even playing field with the other. If they truly are, each party possesses equal knowledge and understanding of the asset, and can feel confident about entering into a buy or sell transaction.

On the other hand, if the seller is a capitalist, who knows (or should know) everything there is about the asset being sold, while the buyer is a laborer, who knows next to nothing about the asset, what then?  In other words, if the buyer isn’t knowledgeable about how the asset produces value or income, who the managers of the asset are, what the financial statements mean, what factors influence the value of the asset, etc., then an in-equality exists which can only produce one outcome; the capitalist will win and the laborer will lose.

Regrettably, our 401(k) system is, by-and-large, a system of capitalists selling financial products to laborers. There is an egregiously unfair disparity marking the understanding between the two; and the laborers almost always get the short end of the stick—by design.

As I mentioned, I am a firm believer in capitalism. There is an elegant beauty inherent in the good faith negotiations between two equal capitalists. Yet, when the knowledge gulf between capitalists and laborers is exploited, as in the case of many 401(k) plans, capitalism can seem ugly.

401(k) plans are not the problem. 401(k) plans are one of the great modern inventions of society. The problem rather, is in the way many 401(k) plans are delivered to consumers (laborers). Bryan Binkholder and Jim Winkelmann articulate the problem I have described above in a masterful way, explaining how the unfairness pervasive in the 401(k) can be eliminated permanently. It is simple: change the negotiation process between two experts (two capitalists if you will); one with the interests of the 401(k) product in mind and the other with the interests of the consumer (laborer) in mind. This will bring fairness, equity and better results into the 401(k) industry. 401(k) plans have always had the potential of being a great social foundation. Binkholder and Winkelmann explain how to make this a reality.

MATTHEW D . HUTCHESON, CPC, AIFA®, ERPA

Professional Independent Fiduciary

Certified Pension Consultant

Accredited Investment Fiduciary Analyst®

Enrolled to Practice before the Internal Revenue Service

matt@erisa-fiduciary.com

www.erisa-fiduciary.com

Wall Street is Fleecing Small

Business Owners & Their

Workers with 401(k) Plans

"When buying and selling are controlled by legislation,

the first thing bought and sold are legislators."

P.J. o’rourke

You’re Being Nickel-and-Dimed to Death with Hidden Fees—costing you tens of thousands of dollars over time

DILBERT © 2002 Scott Adams. Used by permission of Universal Uclick. All rights reserved.

Employee retention, especially of your best, most desirable employees, is a critical factor directly tied to the long-term financial success of your business. According to studies conducted by the American Management Association, staff turnover can cost a business up to 250% of the employee’s annual salary. One of the top ways to retain key employees is by offering a quality retirement savings plan; but you’re already doing this, right? Maybe not.

Unfortunately, the truth is that countless small business owners are offering 401(k) plans that are actually robbing them of a large portion of their retirement. The insurance and mutual fund companies, stock brokerage firms and others that offer 401(k) plans are nickel-and-diming small businesses and their employees to death with fees that are often hidden, buried, or undisclosed to fiduciaries. If you’re in charge of your company’s 401(k) plan, this book will save you and your employees thousands of dollars in the company plan—and put tens of thousands of dollars, perhaps even hundreds of thousands of dollars—in your and your co-workers’ pockets at retirement. It will also explore some of the long held notions and ideas that have come to populate the marketing materials and sales presentations presented to plan sponsors. In fact, throughout this book you’ll be amazed to learn that many of your long held beliefs—fed to you by the financial industry—are categorically wrong. You’ll also discover that many of the ideas presented to you currently are not only wrong from investment theory but also wrong from a legal view of your responsibilities as the fiduciary of the plan.

Here’s an example of just how costly these fees and mistakes can be, over time. Take a hypothetical 40-year-old employee that has $50,000 in the 401(k) you are offering, which is probably typical of many of the people that your plan covers. Let’s pretend that they never put another dollar into the plan, and it sits for 25 years. If that dormant plan earned a 9% rate of return, after fees and expenses, that money would grow to $470,000.

Not bad—but let’s look at what would happen if the plan had just a 1% higher-than-normal fee. We’re seeing more and more plans with 1%-2%—and sometimes even 3%—excess fees that they’re paying. But, for the sake of our example, let’s say this one just has a 1% excess fee. Instead of earning 9%, your employee is only earning 8%. Instead of earning $470,000, that worker would only have $367,000 after 25 years—over $100,000 less!

With this example you can plainly see how even a 1% excessive fee drags the overall return down over time. When you consider the typical 401(k) plan has double or triple that fee, you can see how excessive fees can cost you tens of thousands—even hundreds of thousands—of dollars by the time you and your coworkers reach retirement. Couple the excess fees with participant behavior of chasing returns and results end up being 75% less than they should. We will be discussing participant behavior in-depth in chapters 7 & 8, but suffice to say the research has shown that investor behavior of buying and selling at the wrong times decreases investment success substantially. Before we get into that, let’s examine the outrageous fees in 401(k) plans.

The problem is that most of these fees are buried in the fine print, not disclosed at all, or they’re not all listed in the same place, making it difficult, if not impossible, to accurately calculate the total fees. Most of the insurance companies, mutual funds brokerage firms, and financial advisors want to keep it this way—they want to keep the plan sponsor and employees in the dark as much as possible about their fees. Fees are tacked on in small, seemingly innocent doses. You may, for example, see that a plan has a .005% bookkeeping fee added on. You may simply ignore the fee; reasoning to yourself that .005% isn’t all that much. This is exactly the kind of thinking the insurance companies, brokerage firms, and financial advisors are counting on. More than likely, you have other similarly small fees tacked on. When added together, these fees are eating away an alarming portion of the nest eggs of you and your co-workers. As the above example makes abundantly clear, there is no such thing as a small fee. You need to go over the fee structure of your plan with a fine-tooth comb, eliminating or reducing any fees that are unnecessary or excessive.

How do you know what’s ‘unnecessary or excessive?’ In Chapter 3, we’ll show you how to evaluate these fees and understand which ones are reasonable, too high, or totally unnecessary. That’s crucial, because if you are reading this and you are a plan sponsor, failing to keep up with fees can cause your employees to suffer financially as a result …

You and Your Company Could Be Sued!

Sued? That’s right. If you’re in charge of your company plan, you have what the lawyers call a ‘fiduciary responsibility’ with the employees in that plan. The word fiduciary comes from the Latin words fides (faith) and fiducia (trust). A fiduciary duty is a legal or ethical relationship of confidence or trust regarding the management of money or property between two or more parties.

According to a 2008 U.S. Supreme Court decision, there are now legal risks for fiduciaries who are lax in their approach to handling and evaluating plans. In LaRue v. DeWolff, Boberg & Assoc., Inc., decided on February 20, 2008, the Supreme Court held that an individual participant is entitled to sue his employer for failure to monitor, assess, and offer timely changes to his investment choices, if failure to do so results in a loss in the participant’s 401(k) account. This