The Great (Inadvertent) 401(k) Ripoff

If your company has a qualified retirement plan (QRP), such as a 401(k), profit-sharing plan, SEP-IRA, or pension plan, chances are this article could make you and your employees money.

But first a little warning: Your author is a tax guy, not an investment advisor. Yet the nature of my professional work—estate planning, business succession planning and the many related areas—has allowed me to review personal financial statements of about 1,500 business owners over 50 years of practice. You’d be amazed at what I’ve learned over the years about my business-owner clients.

This article is based on the answer to one of the questions I ask every client: “What is your average annual rate of return on your investments—personal funds, QRP funds, excess funds in your business and other funds you control?”

The shocking answer: 80% earn less than the general market (measured by the Dow Jones Industrial Average or S&P 500) average percentage growth (about 10% per year). About one-third average only 6.5% or less. Ah, but what’s even more interesting is that almost all of those in the 80% group do their own investing.

Great business people. Lousy investors.

What about the other 20% who, most of the time, beat general market growth? Almost all of them have a professional money manager. When this 20% group used professionals to manage their QRP funds, their employees enjoyed the same investment success. My client files are bulging with hundreds of examples.

So, over the years, I’ve done some extensive research to show you the best way to improve your (and your employees’) investment results. Let’s start with a chart of what the impact of a better rate of return can do for your retirement nest egg over time. (I’ll bet you’ll want to join the better-rate-of-return club.)

The following chart shows what happens to a $1,000 contributed to a QRP and invested over a 36-year period (the typical length of employment time for the business owner or a long-time employee in a QRP) at various rates of return.

Rate of Return	Years to Double	Times Doubled in 36 Years	Growth of $1,000 in 36 Years
6%	12	3	$8,000
8%	9	4	$16,000
9%	8	4.5	$24,000
10%	7.2	5	$32,000
12%	6	6	$64,000

Hold on to your chair. The differences are astounding. (Note: The chart is a simple application of the rule of 72, which tells you how long a specific amount of money takes to double, depending on the rate of return).

You don’t have to be a rocket scientist to see the results. It’s easy to see if you put about $10,000 into a QRP (every year) for about 36 years and earn just 10% per year on average (a good money manager consistently earns more), you’ll have many millions of dollars by retirement age.

So why do about 80% of you mess up? You sign up your QRP with a “cookie-cutter” (CC) type plan. CC plans focus on two things that sound terrific (but in practice put you in that unwanted 80% group): (1) low cost and (2) lots of investment choices.

My research continues to show the costs (we’re talking about 100s or 1,000s of dollars per year, depending on the number of employees) are miniscule compared with the potential investment results (in the millions), or with many employees, in the 10s, or even 100s of millions of dollars).

Actually, I could write a small book about the pros (not many) and cons (a long list) of why a CC plan almost automatically puts you and your employees in the low-return 80% group. Why does this happen? Because you and your employees are expected to become investment gurus (and beat the pros).

A few do. Most fail. Let’s face it, if your QRP has 142 (more or less) investment choices, you are locked out of every other possible investment. Worse yet, it is a rare employee (or business owner) who knows which of those 142 investments to pick in the first place or when to switch to another investment. Many of the employers (including the boss), overwhelmed by the investment choices, invest a large portion of their funds in cash... a disastrous long-term investment choice.

Think about this example to drive the point home: Every year about 81% of mutual fund managers (remember, they are paid professionals) fail to do as well as the general market (DOW and S&P). Why? They too are locked into a limited choice of investments, because almost all mutual funds specialize in something. For example, some of the popular funds invest only in emerging companies, energy stocks, large-cap, small-cap and about 6,000 more funds. You want a fund or a money manager that can select any and all of the wide range of investment possibilities.

Here’s the suggestion I’ve made to everyone who has a CC plan or is in the poor-performing 80% self-investment group: Go professional.

First, hire a professional QRP consultant to create the best plan (there are many important decisions not available in CC plans) for you (the boss) and your
employees.

Second, hire a professional money manager. Surprisingly, the costs are competitive with CC plans. They are easy to evaluate. Just check their rate of return (after fees) for the years they have been in
business.

One more point: As a business owner, you probably have the largest account in the entire QRP. So, having a professional money manager to manage your account is a terrific tax-free perk.

This is a big deal! How big? Well, you judge. Stop for a moment and write down the balance in your account and add just 1% increase in growth, on average, that your account would enjoy for each year your account might be in existence. Take one more minute and estimate what that 1% (or more) would mean to all the employees in your company QRP.

Exciting? I invite you to call me and share your enthusiasm or ask any questions you may have.

This is an important subject to you and all of your QRP employees. So, if you think you are one of the many companies that are (inadvertently) being ripped off, here’s what I’ve arranged for readers of this column: Professionals who specialize in the QRP area will review your QRP and investment return potential. To get started, fax me (847-674-5299) the following info: 1) your name, company name and address; 2) all phones/work, home, cell; 3) approximate number of employees in your QRP 4) type of QRP.