Paul Meloan – Vested Interest

“Rake” is quite logically a four-letter word.

“Rake” is a shorthand nickname given by poker players to the amount of money taken out of each pot by the house. The chips in the middle come from the players. Since poker players play each other (and not the house) the game is paid for by a small yet pernicious tax extracted from every pot by the casino.  It pays for the roof overhead, the dealer, and all the other costs associated with running a poker game.  In exchange, players expect a fair game, dealt by a competent dealer, administered under a set of rules to which each player at least tacitly agrees.

So while the rake is money taken out of each pot (and by extension out of the pockets of the players), without it the game would not exist.  The rake is announced and known to all players, and the dealer extracts the funds from the pot in plain view.

The retirement system in the US is also subject to a “rake.”  Funds are drained from the accounts of the participants (the players).  Unlike in poker, the amounts are neither known nor disclosed.  They are deducted in the most opaque fashion imaginable.  Their payment does not assure the participants of a better retirement.

Where does this begin? It begins with companies that are unwilling or unable to meet their fiduciary obligation to their employees to get the best deal for them they reasonably can.  This fiduciary duty comes from a law called the Employees Income Retirement Security Act of 1974.  It is commonly known by the acronym ERISA. A fiduciary standard means that the company (the trustees of the plan) has an obligation to the employees (the beneficiaries of the plan) to seek out lower costs of operation.  It must offer employees investment choices that are not bound to pay excessive or unreasonable costs.  In a world overrun with investment choices that cost 0.25% per year or less, it is becoming harder all the time for companies to show that paying fees 6 to 8 times more than that is reasonable.  Yet that is exactly what many company retirement plans do.

Large companies and their employees are awakening to this reality.  The stakes for employees are huge: each of them only gets one shot to save for retirement!  Consider the following scenario, simplified as it may be: an employee who saves $15,000 per year at 7% will have just under $3.0 million in 40 years.  The same employee saving the same $15,000 per year at 8% will have $3.88 million in 40 years.  That 1% difference in annual compounding solely due to lower fees changed the end result dramatically.  Our mythical worker began retirement with 29% more money to fund the rest of their lives.

Already, big companies like Boeing and Lockheed Martin have paid big bucks to settle law suits that they failed to meet fiduciary obligations to their employees.  They will not be the last.

If you participate in a company 401k, it is important that you understand how much your plan costs and who is paying for those costs.  If you do not understand the fees, you need to find someone who does.

401k plans affect predominantly employees at larger companies with at least 100 employees.  There is a parallel system of retirement plan offerings for smaller businesses.  The news there is not any better. I will write about them shortly.

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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