Ask an author: David Loeper here to answer your retirement planning questions!

[David Loeper]

Originally Posted by redstone

Thank you so much David.



At my company many decision makers get "wined and dined" by outside vendors. For example, our IT guys who are responsible for making server purchasing decisions are often invited to go to luncheons and conferences at expensive, exotic locations. Theoretically they are there to learn about the latest industry offerings. But unofficially, they get free comps at golf courses, restaurants, resorts, etc just for watching slides from companies trying to sell us equpiment.

Do plan administrators go through the same thing? I'm not saying they directly take kickbacks, but do they get influenced by the prospect of free meals and gifts?

There is definitely some of that happening but on a much lighter scale and I really doubt whether a nice lunch, a free coffee mug or even green fees at the local country club would have that much influence.

But, there is a bigger conflict of interest I see, and it is blantently marketed. It is known as "revenue sharing" and is more common than not.

Here's how it works. Say the going rate for administration & recording keeping for a small plan (say 50 employees) is $2,500. (That's actually about $1000 more than it should cost.) Assume the plan has $2,000,000 in total assets.

Assume the company is paying the administration costs and has cost effective funds in the plan (often referred to as institutional share classes.) The company has the choice to pass this cost on to the participants, but many companies pay this cost.

Another 401k vendor comes in and says to the company, "we can save you $2,500 a year by offering the same funds but with higher expenses that offer revenue sharing (usually 0.25% a year on assets or so)."

Sounds like a good deal for the company. But, the employees are normally paying 0.20% to 0.50% more on this class of revenue sharing funds. So, the company saves $2,500 but participants end up paying an additional $4,000-$10,000 in higher expense ratios. Nice huh?

Sometimes, the kickbacks from these funds are so much that they actually get credited back to participant accounts. The problem here is they are not usually credited back in proportion to what you paid, normally they are credited back to participant accounts based on account balance.

The net result here is if your CEO with a large balance uses an index fund with no kickbacks for his 401k, and other participants use expensive funds, they are in essence making a contribution to their CEO's 401k because his higher account balance gets the brunt of the revenue share "kickback."

[David Loeper]

Originally Posted by prosper2

I just made a sale for you David. My aunt is the personal assistant of a small biotech company's HR director. We had dinner last night and I mentioned this forum. She called me this morning to tell me that she was so impressed with your answers that she is going to recommend the book to her boss!

Thanks again for your answers!

I do want to follow up on something:
Do you have any good rules of thumb for figuring out whether you have invested too much or too little money in your 401K plan?

The most objective rule of thumb I can give you is don't use a rule of thumb. I know there are plenty of "advisors" and authors that are more than willing to spew an easy answer, but it is your life and there are a lot of variables that go into calculating this.

For example:

1) The asset allocation

2) The savings rate

3) The planned spending policy

4) Estate goals

5) Tax treatment

6) Other resources (savings outside of the 401k, inheritance, pensions from past employers, home equity for downsizing, social security.)

7) Market uncertainty- THIS ONE IS HUGE

8) Your current balance

All of these things have an enormous impact on whether you are over or under funded.

In my last whitepaper Measuring Temperature with a Ruler - Is Your Wealth Manager Really a Return Manager in Disguise?" I show the impact of just one of these variables in a case study.

The case is simple. It is 1926 and a widow receives $100,000 from her husband's life insurance (about $1,000,000 in today's spending power.) She wishes to withdraw $5,000 a year adjusted for inflation (about $50,000 of today's spending power.)

Measuring JUST THE UNCERTAINTY of markets, if she lived to age 100 she has a 10% chance of being broke before age 54 and a 10% chance of having more than ONE BILLION DOLLARS. THAT is a lot of uncertainty.

The back of my book has a series of tables for different ages, asset allocations, current balances, spending rates, etc. where you can look up the closest thing I've been able to do in coming up with an easy rule of thumb.

The white paper I mentioned above is available at:
http://www.financeware.com/f_frame.asp?load=advisors/whitepapers.asp

[David Loeper]

Originally Posted by mama4jc

Hi David: Thanks for coming on to answer our questions! My quick question is as follows - I'm still just learning about managing my finances and realized that I don't even know enough about 401Ks to ask a good question. Where can I get a good intro into 401Ks, whether online or offline? There are so many guides out there and I would love some reputable 401K 101 resources. Thanks a bunch!

There is a lot of good (and bad) information online. We just released a new website for my book (www.401ripoff.com) and if you click on the "learn more" link you will find a series of short articles covering many of the basics like:

1) The top five things you can do to make the most of your retirement

2) False promises of greed (talks about what to be careful of from the product vendors)

3) Regulations

4) Are your fees to high?

5) An excerpt from the book (the introduction- which covers a fair amount of the background and issues in 401Ks and what you need to do about them)

Also, when evaluating funds for selection check out www.fundgrades.com. We released this free last October, the Wall Street Journal ran a nice article on it. It grades funds from a fiduciary perspective that should be used for retirement planning instead of the normal fund hyping ratings systems.

Once you get past some of the free online content and you are comfortable with it, I'd suggest a few good books like "A Random Walk Down Wall Street" by Burton Malkiel, "Fooled by Randomness"- Taleb, and "The Little Book of Common Sense Investing"- John Bogle.

Finally, if you are an online reader and advance in your understanding, there are some online resources that you can grow into that are designed for investment professionals like my whitepapers available at:
http://www.financeware.com/f_frame.asp?load=advisors/whitepapers.asp


Also, we have our complete library of over 200 educational emails to financial advisors available free online. Understand sometimes these are fairly technical, but they are generally pretty brief and with over 200 articles covering everything from estate planning, taxes, asset allocation, etc. it is a good free library to access.
http://www.financeware.com/homepage....emarchive_full


I hope this helps! Good luck!

[David Loeper]

Originally Posted by Desdemona

Hi David, thanks for answering questions here. I've read through the thread and I have a question I don't think has been asked yet:

My husband is about to quit his full-time job in order to become a full-time student. If we can afford to pay the taxes in order to put his 401(k) money into a Roth IRA, would you recommend doing so?

Like most of my answers, we have to recognize that there are a lot of unique variables that go into this question based on your personal situation. I don't know how old you are, what you have in resources (obviously enough to pay the taxes on the 401k), how far you are from retirement, how much you save each year and into what vehicles, your retirement income goals, tax rates, etc.

However, the future of taxes is very uncertain. I think all of these planners that make projections about a better long term tax strategy are selling snake oil.

Personally, I would think that paying 100% certain taxes now on the 401k to convert that to a Roth in hopes of having tax free withdrawals later, in all liklihood is a bad idea.

This is particularly true if you are planning to start funding a Roth each year (the taxes you would pay would could probably fund a year or two of Roth contributions, so why not take the money you would have paid in taxes and contribute it to a Roth IRA?)

I understand you probably don't want to post your personal information here in the forum, so if you would like an answer that considers more of your unique circumstances, maybe you could private message me or contact me through email from the email the author link on my book website at: http://www.401kripoff.com/contact.htm

[Will]

Hi everyone! This week, the lucky winners of David's book are mama4jc and Megan!

We have three more copies left which we will be giving away in the next 2 weeks.

[Brandonsc]

Fantastic service you're providing here David. Thank you for answering our questions. Your website sells financial software to financial planners. Does that mean you have a lot of experience dealing with financial planners?

There are so many different types of financial planners out there with various designations and certifications. I've seen so many different ones and upon research some of them look like scams. Which ones do you think are legitimate?

My wife's 401(k) is a mess. I'm definitely buying her this book!

[Megan]

Originally Posted by Will

Hi everyone! This week, the lucky winners of David's book are mama4jc and Megan!

Thanks for the book, David! Can't wait to read it and figure out how I can better manage my 401(k)!

[mama4jc]

Originally Posted by Will

Hi everyone! This week, the lucky winners of David's book are mama4jc and Megan!

We have three more copies left which we will be giving away in the next 2 weeks.

Also wanted to say thanks for the book!

[redstone]

Originally Posted by David Loeper

The net result here is if your CEO with a large balance uses an index fund with no kickbacks for his 401k, and other participants use expensive funds, they are in essence making a contribution to their CEO's 401k because his higher account balance gets the brunt of the revenue share "kickback."

That's incredible. And here I am worrying about free lunches and t-shirts. Two more questions if you don't mind.

How can I tell if my plan is under one of these "revenue sharing" schemes? I'm assuming plan administrators will hide this under with innocuous names?

Besides writing the book, have you tried blowing the whistle on this practice by bringing this to the attention of the mainstream media? Have you seen articles or news stories about this?

Thank you for bringing this to everyone's attention. That's what I love about the Internet. No falsehood stays alive for long!

[sethlcd]

I bought a copy over the weekend after reading David's warnings about hidden fees. He sounded like a really sincere guy in the forum so I thought what the heck. The book gives a lot of concrete action steps. Thanks for a great resource Wise Bread.

I do have a specific question about the book. It comes with three post cards addressed to David's company. The book says you can fill out the cards with the name and address of your company's 401k admin and he or she will get a free copy.

I have three questions:

1. Can I only send this book to my company's plan admin? Can I use the post cards to send free copies to someone else, like my parents or a friend.
2. Will the recipient of the book receive advertisements or have their names or information sold to another party?
3. How long does it take for the other person to receive the free book?

Actually I have one more question. How do you make money by giving away so many copies?