I’ve discovered 3 fatal flaws with most traditional retirement plans.
Before I discuss these 3 flaws, let’s get a working definition for “traditional retirement plans.”
For our discussion, I’m talking about your straight up and down varieties as follows:
- Pension
- Sponsored retirement savings plan (e.g. 401k, superannuation)
- Individual Retirement Account (IRA)
Did I miss any? If so, lump them in the pile as well.
Now, what could possibly be wrong with these garden variety retirement vehicles? After all, they come with some powerful built in features as follows:
- Backed, supported and encouraged by both governments and large corporations.
- Provide certain tax advantages.
- Everybody’s doing it; must be alright; can’t be that bad; must be safe.
Well, I’ve found at least 3 major flaws with these type of retirement plans. Who knows, maybe there are more. If you discover any, let me know.
So, what are the 3 flaws?
They are as follows:
- You – the investor – have virtually no control.
- The plans are designed and built to benefit the plan owners and manager – not you, the investor.
- These investment plans have no intrinsic value. In other words, the true value of your investment is NIL, NADA, NOTHING or, if you prefer, ZILCH, ZIP, ZERO!
Let’s look closer at each one of these flaws.
Fatal Flaw 1: Virtually No Control
Just what levers and knobs can you turn, twist or pull to guide and direct your retirement plan? Well, let’s see, you can …
- Stop the investments.
- Increase your investment amounts.
- Decrease your investment amounts.
- Change the investments to a new plan.
- Diversify your investments across several plans.
I don’t know about you, but I find this list extremely limiting.
How so?
Well, how do you increase the return on your retirement plan? What control do you have to do that?
Oh, I see, you can move some money to another retirement investment vehicle that’s showing some incredible returns. Then wait and see if turns out to be a good move.
Good luck with that strategy. To me, that’s like moving your money around on the roulette table hoping for a luckier number. “Oh, I’ll move my chips to number 16 because it came up twice tonight already!”
I know, I used this strategy … not the roulette table, but moving my retirement plan money around chasing the latest “hot ticket” investment idea.
That’s just not my idea of control.
Essentially, for most traditional retirement plans, your control levers are severely limited.
So, if you don’t have control – who does?
Well, let’s answer this question with a question as follows:
How do you feel when you review your retirement plan performance and see it’s taken a nose dive but as your read further into the report you find the owners and managers allocated themselves huge bonuses, yacht trips and other company paid benefits like health insurance and travel?
Do you feel good about that?
Didn’t think so.
And, let’s say you read even further into the report and discover your plan administration fees have jumped by .1%. It’s not a huge jump but it just means your loss is compounded by higher fees as well.
Suppose your curiosity has got the best of you and you decide to dig deeper; crunch some numbers. You want to figure out what this small administration fee increase would mean to the fund owner’s bottom line. You ran a few easy and quick calculations and uncovered who really has control over your retirement plan … and it ain’t you!
Your math challenge uncovers the unholy amount of extra money the plan pulls in every month by this modest admin fee increase. It’s a very small amount of money for the individual investors; but a huge amount for the owners and fund managers.
Let’s say you shared these numbers with us as follows:
- Number of Plan investors: 100,000
- Average Plan amount per investor: $20,000
- Total Fund Value: $20,000 per investor X 100,000 investors = 2 BILLION DOLLARS!
- Revenue per year from admin fee increase of .1% = $2 billion x .001 = $2 MILLION
- Revenue per month from admin fee increase = $167,000!
Not a bad little additional cash flow hey?
Course this is not cash flow for the investor; it’s additional cash flow for the managers and owners.
And, let’s say you were upset about this admin fee rise. As an investor, what control do you have to block it?
That’s right – NONE! You just get to read about it in the annual report and then see the deduction on your plan statement.
What happens when the profits from the plan are reduced significantly because the fund owners and managers give themselves a huge bonus? What control do you have to block such a move?
Now we’ve discovered where the control lies … with the plan owners and mangers.
Retirement plans are very much like casinos in that the odds are severely stacked against the investors/players; the house (owners and mangers) always win!
So, that wraps up fatal flaw number 1 – lack of control.
And, it leads us nicely into fatal flaw number 2.
Fatal Flaw 2: Retirement plans are NOT built, designed and setup to benefit you, the investor!
To think, believe, and/or perceive that most traditional retirement plans are set up for the benefit of the investor is as irrational as thinking casinos are set up for the benefit of the gamblers.
If you think the casinos on the Las Vegas strip were purpose built so you and I can make lots of money, then I have some land on the dark side of the moon I’d like to sell you.
This may come as a surprise, but casinos are conceived, designed and built to make money for the owners.
Retirement plans are no different; they’re set up to make money – lots of money – for the owners.
So, am I suggesting that traditional retirement plans are a lot like the gambling casino?
YES!
Permit me to expand on why I feel this way.
Let’s start by asking, how do you make money at the casino? How do you win at the casino? How do you get the casino to hand you money?
There’s only one way. If you want to win – long term – at the casino, then …
YOU MUST BE THE OWNER; YOU MUST OWN THE CASINO!
That’s right, the owners and bonus driven executive managers are the ones who make money at the casino.
And, what about the gamblers?
They play their role as the money losers. It has to be that way for the business to work. Without large numbers of people losing money, the casino can’t survive.
Now, is there anything wrong with large numbers of people losing money at the casino?
I would say no. As long as people view the casino experience as entertainment, then I would feel comfortable saying it’s ok to lose money at the casino. I look at it like going to a pro baseball game; you pay to get in and watch. At the casino you pay to play. It’s only when people go to the casino and expect to win that things start to turn ugly. To me that would be like going to a pro baseball game and expecting to get paid for watching; not a realistic expectation.
And, why is it that the gamblers always – over the long term – lose?
Well, folks, it’s no secret that the odds are stacked in favor of the house. That’s right, as more and more bets are placed, the odds go to the point where it’s virtually impossible for the house to lose. The probability curve sits to the right of zero in favor of the house. It’s guaranteed, the house wins.
If you called a poker game at your house using the same rules as the casino, how many people do you think you could get to show up? That’s right – None! Nobody would play in a game where the rules are stacked so high against them. But, that’s exactly what folks are up against when they sit down at the casino card table.
If the odds weren’t stacked, there would be no casinos. Why open a casino if there’s a chance you might lose? Forget it. The owners are too smart for that. Instead, they stack the odds in their favor, fling open the doors then let the games begin!
Well, I would suggest your retirement plan is the same. You take the risk; the owner takes the money -virtually guaranteed. And, the owners – just like at the casino – have stacked the odds in their favor.
You see, the retirement plan owners have set things up so they get the biggest benefit. They determine their salaries, bonuses, benefits, fees and charges. The retirement plan owners have set up the deal so they win. Their only risk is getting customers through the doors – the same risk the casino owners face. But, once the customers start coming through the doors, the money starts to roll.
You, on the other hand, get no guarantees. You’re hanging out there taking the risk that maybe some profit will drop out of the fund into your account. You may or may not make money. But, even if you do make money – and the value of your portfolio rises from year to year – you’re still taking a huge risk.
What is that risk?
Well, it turns out that most traditional retirement plans are really just money. The value of the investment is calculated as a money amount and if you want payout it will also be in money or currency.
What’s wrong with that?
Plenty.
And, to answer why, we move to fatal flaw number 3.
Fatal Flaw #3: The true value of most traditional retirement plans is ZERO!
And, finally, the 3rd – and most deadly – fatal flaw for most retirement plans –
THEY”RE NOT WORTH ANYTHING! Their true value is ZERO!
Yes, the secret is out. Most retirement plans are worthless.
I can almost hear you through the broadband cable yelling, “No way! Get lost!”
Well, it’s going to take a bit of mind shifting to see how this deception has been carried out over the years. It took me a long time to see it.
Does Money Have Value?
Let me start by asking a simple question – does money have real value?
Careful how you answer …
The answer I’m looking for is “NO!” Money doesn’t have any value in and of itself. It is a symbol of value but it has no real value itself.
To see why, let me ask some pointed questions as follows:
- Can you eat money? Will it provide you with nourishment your body needs?
- Can you wear money for clothing? Will it keep you warm on a freezing winter night?
- Can you live in your money? Will it provide shelter from rain, snow and/or extreme heat?
Can we agree, the answer is NO in all three cases? Let me proceed on the basis that we agree.
Based on the above discussion, may I assert that money – in and of itself – is essentially worthless.
Then why does money play such a central role in our society if it has no real value?
Well, it turns out it does have a major role to play – we use it as a symbol of value. It merely represents value. But, this representation has been sabotaged to the point where today people seem to believe that money itself has value; they’ve been tricked.
I think the best way to clarify where I’m going is to ask another pointed question as follows:
If the value of money went to zero, what would happen to your net worth?
For most people, their net worth would also drop to zero. But, for some people, their “real” net worth would not drop at all.
The people that own and control real assets would not lose. People who own farms and produce food would simply start accepting other forms of payment. After all, the need to eat doesn’t stop because the value of money changed!
But, what about the folks who only have money … they’re sunk. When the value of money drops to zero, they’ve got nothing of value to exchange.
Now, we know the value of money is not zero, but we also have historical data points that tell us the value of money can drop amazingly low and amazingly fast.
Need some examples?
How about Germany between world wars? How many wheel barrows of German marks did it cost to buy a loaf of bread? How about the United States during the civil war? How would you feel about getting paid in confederate dollars in 1864? The northern currency “greenbacks” were also under tremendous inflation pressure. I read about this recently in, “The Battle Cry of Freedom” by James McPherson.
Who says the US dollar – or any currency – is immune?
And, that – in my opinion – is the biggest risk with most traditional retirement plans. These plans are essentially “cash/money equivalents.” They’re not tangible assets; not assets you can use for barter. They’re essentially money and as we discussed earlier, money has no real value on its own. And there could come a time when nobody is willing to take money; they’ll demand real assets for payment.
I’m reading a biography of Abraham Lincoln and it talks about him accepting “groceries, vegetables, produce, poultry or clothes” as payment for his legal services. (Abraham Lincoln a biography by Benjamin P Thomas, pg 92). No money, no problem. What else have you got?
What do you have besides money for bartering?
Do you have a farm?
Great! That’s a source of real wealth because even if the value of money goes to zero, people will still eat. If you have food, they’ll pay for it. Maybe not with money but with things that you may need or want. For instance, if your barn needs a light put in, you hire an electrician and pay the invoice with 2 sacks of fresh picked corn. You’re happy – you had a bumper crop – and the electrician is happy and no longer hungry!
Let’s get back to traditional retirement plans. Let’s say your plan is huge. Worth millions. And, it’s growing rapidly. You need lights for your barn. You call the electrician and he asks how you’re going to pay for it. You tell him, “I’ll give you cash.” He says, “No thanks. What else have you got?”
You weren’t ready for that answer.
And, that is the problem with your “cash equivalent” traditional retirement plan … it’s true value is zero. It’s essentially worthless.
The financial risk the investor takes with a traditional retirement plan is huge. You see, the investor is tricked into thinking he’s investing in a tangible asset. But, instead is just storing up hoards of money – at least that’s the goal! And, unfortunately, the faith in accepting money as payment can vanish. It’s happened before.
So, what to do?
If not traditional retirement plans, then what? Have I got a better idea?
I do.
And, that leads me to my next article … Traditional Retirement Plans: Other Options