Contents Preface Acknowledgments Introduction: Make the Most of Your Life! Chapter 1: Why Fees Matter—The Coming “Retirement Plan Sticker Shock” What’s a Little Fee Between Friends? Do You Have an Extra $1 Million You Could Spare? Think of Your Retirement Plan Savings and Expenses Like a Mortgage Not All Fees Are Bad The Biggest Expenses Have the Least Value The Missing Link Chapter 2: Types of Expenses Dragging Down Your Retirement Funds Expense Ratios Revenue Sharing Custodial Costs Administration and Record-Keeping Costs Wrap Fees, Consulting, and Advisory Fees Mortality and Expense Charges Surrender Charges Fund-of-Fund Fees and Life-Cycle Fund Fees Chapter 3: The Price to Your Lifestyle of Needless Expenses Uncertainty Is CERTAIN Soup Lines and Scare Tactics Uncertainty Is Manageable but Not Controllable The Comfort and Confidence Zone Chapter 4: Complaining Without Sounding Like a Complainer You Can Determine Your Retirement Plan What Do You Do with These Numbers? Chapter 5: Rallying Your Troops—Just One Coworker Can Help Water Cooler/Lunch Room/Happy Hour with Peers Subordinates and Immediate Superiors Chapter 6: What Happens If My Employer Ignores Us? What Is Reasonable? Paying $75,000 for a Camry? Contact the Labor Department Chapter 7: Now That My Retirement Plan Is Fixed, How Can I Make the Most of My Life? More Bait and Switch The Benefits of Stopping the Retirement Rip-off! The Only Thing Constant Is Change The Markets Are Not the Only Things that Are Uncertain Chapter 8: Resources, Investment Selection, Asset Allocation, Tools, and Advice Investment Selection The Risk of Underperforming Is Higher than the Chance of Outperforming Asset Allocation Questionnaire Scoring “Age”-Based Investing, “Life Cycle,” and “Target Date” Funds Life-Relative Allocation How Do We Know that Fees More Than 0.75 Percent Are Too High? Using the Appendix A Tables to Estimate the Price of Excess Fees in Your Life Chapter 9: How Much Is That Guarantee in the Window? Stealing Your Bucket List from You Emotions and Reason Avoid Needless Risk Chapter 10: Hidden Expenses in Government Union and Some 403(b) Plans Teacher Abuse New Regulations, Old Conflicts NEA and AARP Chapter 11: Summary Control What Is Controllable Appendix A: Lifestyle Prices of Excessive Retirement Plan Expenses Appendix B: ABC Plan-401(k) Plan Fee Disclosure Form About the Author Index Praise for Stop the Retirement Rip-off “401(k) plans are costly, inefficient clunkers Fortunately, there is a way out, and Loeper’s book provides us a great map.” —Evan Cooper, Senior Managing Editor of Investment News “If you want to know what’s lurking inside of your 401(k), read this book.” —John F Wasik, author of The Merchant of Power and Bloomberg News columnist “Loeper’s new book shows plan participants how to actually something about these [401(k)] costs.” —W Scott Simon, J.D., CFP®, AIFA®, author of The Prudent Investor Act: A Guide to Understanding “This book should spur an entire new industry of 401(k) police This is just too important an issue to be ignored.” —Len Reinhart, Former President of Lockwood Advisors (an affiliate of Pershing) and Past President of Smith Barney Consulting Group Copyright © 2012 by Financeware, Inc All rights reserved The first edition of this book titled, Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money, was published in 2009 by John Wiley & Sons, Inc., Hoboken, New Jersey Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Loeper, David B Stop the retirement rip-off : how to avoid hidden fees and keep more of your money / David B Loeper – 2nd ed p cm Includes index ISBN 978-1-118-13304-0 (pbk.); ISBN 978-1-118-17784-6 (ebk); ISBN 978-1-118-17786-0 (ebk); ISBN 978-1-118-17785-3 (ebk) Pensions—United States Banks and banking—Service charges—United States I Title HD7125.L59 2011 332.6—dc23 2011038885 This book is dedicated to my children, Brian and Megan I am incredibly proud of both of you for the unique personal qualities you possess Remember, it is your life and to be happy you need to fearlessly pursue your passions You have but one life, and it is up to you to make the most of it Don’t let anyone push you around or tell you how you should live YOUR life! “I swear by my life, and my love of it, that I will never live for the sake of another man, nor ask another to live for the sake of mine.” —Ayn Rand, Atlas Shrugged About the Author David B Loeper is a Certified Investment Management Analyst®, a Certified Investment Management Consultant®, and the CEO of Financeware, Inc An SEC-Registered Investment Adviser with more than 25 years’ experience, Loeper has appeared on CNBC, CNN, and Fox Business and has been a featured contributor on Yahoo! Financevision and Bloomberg TV Born in Milwaukee, Wisconsin, Loeper began his career in finance as an investment representative with Century Companies of America in 1984 In 1986 he joined Richard Schilffarth & Associates as an investment consultant and also served as an officer of their broker/dealer, Investment Account Services Corporation Loeper joined Wheat First Securities as vice president of investment consulting in 1988, where he served for 10 years He was promoted to managing director of investment consulting, and then eventually to managing director of strategic planning for the retail brokerage division He left his position at Wheat First Securities in 1999 and founded his current company, Financeware, Inc., which operates as Wealthcare Capital Management® Active in industry associations throughout his career, Loeper has been a member of the Investment Management Consultants Association (IMCA) for more than 20 years, serving on the advisory council for more than years, most recently as chairman He also served as a founding member of the Asset Consulting Roundtable, an independent group composed of the heads of investment consulting groups from numerous brokerage firms Loeper has also served on the Investment Advisory Committee of the nearly $30 billion Virginia Retirement System He received his CIMA® designation in 1990 by completing a program offered through Wharton Business School, in conjunction with IMCA Drawing on years of experience in the finance industry, Loeper’s book, Stop the Investing Rip-off: How to Avoid Being a Victim and Make More Money, Second Edition (John Wiley & Sons, 2012), reveals how so much of the financial services industry may cause you to become a victim and how to protect yourself by asking the secret questions that will expose potential problems beforehand Index Administration and record-keeping fees, of retirement plans Advertising promises Advice and monitoring (custom), as optional expense Age-based investing See Lifecycle (target date) funds Alternative investments, funds-of-funds fees and American Association of Retired Persons (AARP), earnings from product promotions Annuities avoiding needless risk and compared to balanced portfolio returns emotions, reason and Asset allocation See also Investment selection scoring model questionnaire scoring model questionnaire, using information from Brinson, Hood, and Beebower studies Broker/dealers Bundled fees Center for Retirement Research study Certified Wealthcare Analyst™ Comfort and confidence zone, for retirement plans Commodity funds, funds-of-funds fees and Contingent deferred sales charge (CDSC), of mutual funds Correlation coefficient, performance prediction and Co-workers, employer plan reform and Custodial costs, of retirement plans Defined-benefit pension plans Department of Labor contacting, as last resort Form 5500 of Diversification access to diversified funds correlation coefficient and fiduciaries and Dodd/Frank Financial Reform Bill Employee Retirement Income Security Act of 1974 (ERISA) float and prohibited transactions standards for reasonable fees Employer, working with to reduce costs contacting Department of Labor about determining facts about plan expenses ERISA standards and good intentions of plan selectors presenting facts about plan expenses to recruiting co-workers to help reform plan Exchange-traded funds (ETFs) Fees and expenses, of retirement plans See also Employer, working with to reduce fees; Lifestyle entries administration and record-keeping compound interest and benefits of reducing custodial costs expense ratios financial consequences of funds-of-funds fees for government and teachers’ unions legal standards for reasonable fees lifecycle (target date) funds market performance and advisors, versus index funds mortality and expenses charges mutual fund hidden expenses new disclosure rules as predictor of performance revenue sharing surrender charges taking control of thinking about like mortgage interest value, but lack, of personal advice wrap fees, consulting, and advisory fees Fidelity Spartan S&P 500 Index Fund Financial advisors serving their interests, not yours Financial Industry Regulatory Authority (FINRA) Financial services industry See also Financial advisors Float, as hidden mutual fund fee Form 5500, of Department of Labor 401(k)plans lifestyle costs of excessive fee by age and savings balance plan disclosure form 403(b)plans fees and expenses of 457 plans fees and expenses of Four Pillars of Retirement Plans, The (Loeper) Fundgrades.com Funds-of-funds fees Google Finance Government Accountability Office study Government unions See 457 plans Guaranteed income See Annuities Hayward, Justin Health, retirement planning and uncertainty about Hedge funds, funds-of-funds fees and “In balance” plans See Comfort and confidence zone, for retirement plans Index funds diversification with market performance and advisors contrasted Insurance companies See also Annuities mortality and expense charges surrender charges International index funds Investment advisory fees Investment selection See also Asset allocation helpful data elements past performance and Lifecycle (target date) funds Lifestyle, current choices impacting comfort zone to avoid too much uncertainty and needless sacrifice examples by age and savings balance market uncertainty and market uncertainty as manageable but not controllable scare tactics to increase savings rate Lifestyle, in retirement: choices impacting current as well as cost of excess fees to Lipper Market uncertainty as manageable but not controllable past performance and future results performance reports versus advisor’s advice Material underperformance risk Miller, George Morningstar ratings Mortality and expense (M&E) fees, of retirement plans Multidiscipline accounts (MDAs), fees and Multimanager accounts (MMAs), fees and Mutual funds: hidden expenses of material underperformance of past performance and future results surrender charges National Education Association (NEA), earnings from product promotions Ohio, unions and Participant-directed retirement plans, generally See also 401(k)plans; 403(b) plans; 457 plans Past performance: versus advisor’s advice future results and investment selection and Priorities, changes in and retirement planning Private equity funds, funds-of-funds fees and Rating services Record-keeping costs, of retirement plans Retirement See Lifestyle, in retirement; Time horizon Revenue sharing, retirement plan fees and Risk tolerance: in asset allocation scoring model avoiding fees to determine questions from advisor about Savings: comfort analysis for rate of questions from advisor about Securities and Exchange Commission (SEC) Self-directed brokerage accounts Statement of additional information (SAI), mutual fund hidden expenses and Stop the Investing Rip-off (Loeper) Surrender charges, of retirement plans Target date funds See Lifecycle (target date) funds Taylor, Don Teachers Insurance and Annuity Association–College Retirement Equities Fund (TIAA-CREF) Teachers unions See 457 plans Time horizon: in asset allocation scoring model questions from advisor about Track records See Past performance Unions See 403(b) plans; 457 plans Variance, asset allocation and Wall Street Journal Wealthcare Capital Management® asset allocation and Certified Wealthcare Analyst™ contact information Wisconsin, unions and Wrap fees, of retirement plans Yahoo! Zero Alpha Group study ... Congress Cataloging-in-Publication Data: Loeper, David B Stop the retirement rip- off : how to avoid hidden fees and keep more of your money / David B Loeper – 2nd ed p cm Includes index ISBN... they perform well for you, we will keep them in your plan If they underperform one year, we will in all likelihood give them the benefit of the doubt and keep them in place If they underperform... because THEY would get the benefit of doing so The benefit they promised was fixed, the variable of the COST of that benefit saved the company money THEY could avoid increasing THEIR contribution for