In last week’s blog post, we went over the first three of Tony Robbins’ financial myths, or as I like to call them, retirement plan myths. This week, we will talk about retirement plan myth 4-6.
Retirement Plan Myth #4 – “I’m your broker and I’m here to help you.”
Most brokers operate in a closed circuit environment, which means the tools they use are pre-selected to be in the best interest of the house. The system is designed to reward them for selling and pushing funds that give them the highest management fees and commissions. Have you ever heard the saying, “The chef doesn’t eat his own cooking?” Roughly forty nine percent of managers own no shares in the funds that they manage. They are pushing products that they wouldn’t even put their own money into. Legally, all they have to do is provide you with a product that’s “suitable.” They’re doing their job because they’re providing you with a product that’s suitable to your needs, not necessarily the best product for you.
Retirement Plan Myth #5 – “Your retirement is just a 401(k) away.”
“Baby boomers have been the primary mice used in the great 401(k) retirement experiment.” – Doug Warren, author of Synergy Effect. The available choices in your 401(k) plan are not necessarily the best available choices. They are the ones who pay the broker the most to be offered up on the menu of available funds. Basically, whoever pays the most to be involved with the plan are the ones whose funds are listed on top. The way they recoup their losses to be on the list is high fees. Not only are you failing to get the best performance funds, but also you’re typically paying higher fees for inferior performance. Over half of employees enrolled in 401(k) plans don’t know what they’re paying in fees. In fact, sixty seven percent of people who enroll in a 401(k) think there are no fees and of course, nothing could be further from the truth.
Seventy five percent of 401(k) audits by the U.S. Department of Labor last year resulted in plan sponsors being fined, penalized or forced to make reimbursements. The average fine was $600,000 per plan, a jump from nearly a $150,000 four years ago. Basically, they started doing complete audits on the plans. They’re looking into what fees they’re charging, they’re looking into if there’s something wrong with the plan and they’re actually fining the owners for this issue, which isn’t right.
Retirement Plan Myth #6 – “Target-date funds. Just set it and forget it.”
“I’m increasingly nervous about target-date funds with each passing day.” – Jack Bogle, one of the founders of Vanguard. A target date fund is simply a fund that handles your asset allocation for you. They are supposed to be based on a target date of retirement and a formula which reallocates funds to become less risky as retirement gets closer. The fact that these are supposed to protect you against losses as you get closer to the target date makes these a huge retirement plan myth. Unfortunately, according to MarketWatch, the most conservative target-date retirement funds, designed to produce income, fell on average 17% in 2008. The riskiest TDFs fell on average a whopping 39.8%, according to one report.
Fifty seven percent of people surveyed by a behavioral research association believe they would lose money over a ten year period in the stock market. Warren Buffett says these should come with a warning label. Asset allocation, where you put your money, is the single most important skill of a successful investor and the problem is, a lot of these investors don’t know what they’re doing with this money.