Rescuing our retirement plans
When is the last time you went to the store and bought something without knowing the price? Never? You may have laughed at the absurdity of the question when you first read it – who would buy anything without knowing how much it costs first?
It turns out most Americans do. Over 70% of people who invest in 401(k) plans have no idea how much they pay in fees to their plan providers. That means more than half of Americans are paying to invest in a 401(k), without first knowing the price!
Why are so many Americans unaware of the fees they pay? Why don’t more people ask to review the fees, before agreeing to a plan? Sadly, most people wouldn’t even know what to ask. For over three decades, the companies offering these 401(k) plans weren’t required to provide any information to you about how much they charge you in fees. Even now, when they are legally required to do so, 401(k) providers use convoluted documents to hide their fees in plain sight. How can you ask about the cost of fees for your plan if you didn’t know there were any fees in the first place?
In Chapter 4 of Unshakeable, Tony Robbins and Peter Mallouk break apart the complicated industry of retirement plans, and the fees they try to hide from you. More than 90 million Americans invest in 401(k) plans. For most of us, it seems like a no-brainer. Your employer takes the contribution straight from your paycheck, which helps you save on your taxes every year – plus you get to save for retirement. Even if you do pay some fees, it’s not that much money… right?
It turns out that paying even 1% more in fees than you need to can dangerously slash your nest egg. Take the example of an average American worker, making $30,000 a year and putting 5% of each paycheck into a 401(k). Over the lifetime of this investment, an extra 1% in fees will result in a loss of almost $154,000 – and that’s not even including what you would have earned, with compound interest, if that money had been invested in your plan. For each 1% in unnecessary fees, you lose potentially 10 years of retirement income. So much for the “golden years.”
Making matters worse, most well-meaning business owners are just as unaware of the fees as their employees. They may think they’re providing the best for their employees, but the convoluted nature of the industry makes it just as difficult for them to see the true cost of fees. When it comes to 401(k) plans, employers and employees are on the same side – as most business owners are also heavily invested in the company’s 401(k) for their own retirement savings.
In this episode of The Unshakeable Podcast, Tom Zgainer and Josh Robbins of America’s Best 401k speak with Richard Bradley, Editor-In-Chief of Worth Magazine, to shatter the misconceptions in the complicated world of 401(k) plans. Advocating for yourself – and your investments – may be more important than you realized; it may make the difference between thriving or barely surviving retirement.
[00:34] Introduction – Richard Bradley, Editor-In-Chief of Worth Magazine
[00:40] Contributing to an employer-sponsored retirement plan is the most common investment for Americans, outside of home ownership
[00:50] 90 million Americans contribute to a 401(k) plan
[00:57] For many Americans, it’s the only retirement plan they have
[01:05] Tony Robbins discovered enormous problems with the 401(k) industry while writing Money: Master the Game
[01:17] To write Unshakeable, Tony took a deeper look at the 401(k) industry with Tom Zgainer of America’s Best 401k and Tony’s son Josh Robbins, Chief Marketing Officer for America’s Best 401k
[01:50] What is the number one problem with most 401(k) plans today?
[02:11] Needless fees, hiding in plain sight
[02:37] For over 3 decades, the 401(k) industry was not required by law to disclose how much they charged in fees
[03:30] Newer disclosure laws have changed that.
[04:27] There can be more than a dozen different fees inside your 401(k), chipping away at your returns
[04:41] When did 401(k) providers become required to provide fee disclosure?
[05:00] Tom discusses required disclosure documents
[05:24] While these documents should provide clarity, they actually cause more confusion
[05:30] Providers make it difficult to find or access these documents
[07:30] What do these fees mean for the average worker?
[08:00] Josh: Remember, fees sound small, but people need to fully understand the impact of these fees over time.
[08:44] Josh discusses how much the average worker will lose to fees.
[09:11] This can mean the difference between being able to retire, and not being able to
[09:17] With all other things being equal, a person paying 2% in fees will run out of retirement money 10 years earlier than a person paying 1% in fees
[10:07] For Baby Boomers, the number 1 fear is not death; it’s running out of money too early.
[10:22] There’s an epidemic in our country in the 401(k) space of overpaying for underperformance
[11:19] Comparison of 403(b) to 401(k)
[13:16] Richard: Your company, America’s Best 401(k), has done a lot of research on fees. How can people access that information?
[13:37] Tom: We built a fee checker: americasbest401k.com (also available on a participant driven site called www.showmethefees.com)
[13:50] How the free fee checker works
[15:12] Richard: How can people find out what their 401(k) provider isn’t telling them?
[15:24] Josh: We built a report called “The five things your 401(k) provider doesn’t want you to know.” Available on the homepage at americasbest401k.com.
[16:12] Employers have every incentive to help their employees, they just typically don’t know about all of the fees, either.
[16:43] Recent changes to laws and politics around 401(k) plans
[16:57] In 2015, the Obama Administration started pushing towards legislation around the fiduciary standard
[17:38] Hidden fees and backdoor payments are costing Americans more than $17 million per year (According to report from White House Council of Economic Advisors)
[17:50] Have things gotten better since that report?
[18:20] The problems are the inherent conflicts of interest
[20:46] The law says providers in the retirement space have to act in your best interest, but there are a lot of “buts”
[23:38] Under ERISA law, if a business owner doesn’t appoint a fiduciary, then the business owner is expected to carry out those functions as if they had that professional knowledge.
[25:45] High fee plans from the perspective of the employee
[26:19] Passively managed funds (index funds) and how to access them
[26:24] Many of the largest plans of big companies have low-cost funds.
[27:09] The vast majority of plans, for small businesses, don’t offer those types of index funds in the plan
[27:47] Index fund markups for plans that do offer them
[29:25] So while low-cost index funds are a step in the right direction, you typically have to look under a few layers to find a truly low-cost fund.
[30:05] What do business owners need to be aware of? And, what can employees do if they’re stuck in an expensive plan?
[30:12] Tom: Importance of benchmarking
[31:07] Examiners, from the Department of Labor (DOL), do plan examinations for businesses across America.
[31:30] In 2014, the DOL determined that 75% of the plans it examined were illegal.
[31:37] The average fine to the business owner (as a personal liability) was $600,000.
[32:28] Participants are in a sensitive spot.
[33:17] This doesn’t have to be an adversarial conversation. The business owner often is the biggest investor in that 401(k) plan.
[33:37] The business owner not only has a legal self-interest in making sure they act as a fiduciary, but also a financial self-interest.
[33:50] Tom tells the story of a business owner who examined his plan
[34:57] What America’s Best 401k free cost comparison looks like
[38:16] How difficult is it to change plan providers?
[38:51] Tom: It’s actually easy to change, when you have experts involved.
[40:17] You worry about maintaining your business. We’ll manage the 401(k) plan.
[41:20] Most Americans don’t get pensions anymore. They depend on their IRA or 401(k) plans for the money they need to live after retirement.
[41:40] How much money Americans lose in fees can have a profound impact on their ability to retire, and their quality of life during retirement.
[42:00] If you want to learn more, visit americasbest401k.com
Legal Disclosure: Tony Robbins is a board member and Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity based on increased business derived by Creative Planning from his services. Accordingly, Mr. Robbins has a financial incentive to refer investors to Creative Planning.