MONEY Master the Game: 7 Simple Steps to Financial Freedom (24 page)

Assumptions: $1 million beginning plan balance, $100,000 in annual contributions, 5% growth rate.

Over $1.2 million going back to my family and my staff by making a simple switch! And by the way, this calculation is based only on fees and doesn’t take into account that we are beating 96% of mutual fund managers because we are using low-cost market-mimicking mutual funds.

MEGAPHONE

My staff and I were so impressed that six months after Tom and his team installed my company’s plan (and after I had referred him to a ton of my good friends), I decided to partner with America’s Best 401k and help it get the word out. I knew this story
had
to be told in this book. And because the company charges so little, it can’t afford to run Super Bowl ads or have its sales reps take you golfing. Tom’s grassroots efforts are gaining momentum, and I hope to amplify his voice.

NOW IT’S TIME TO PULL BACK THE CURTAIN

Tom and his team have built a powerful online “Fee Checker” that can pull up your company’s plan (from the company’s tax return filing), and within seconds, it will show how your company’s plan stacks up against others and what you are
really
paying in fees. And like the table above, it will show you what the cost savings means to you over time. It’s not uncommon to uncover hundreds of thousands of dollars in potential savings! Visit the Fee Checker on the following website:
http://americasbest401k.com/401k-fee-checker
.

NEED EXTRA MOTIVATION?

As if high fees destroying your retirement weren’t enough of a motivation, business owners should be very concerned and employees should be “armed with the truth.” Why? Because the US Department of Labor (DOL) is out in full force to defend employees against high-fee plans. And who is liable?
The business owner!
That’s right. Not the mutual fund managers. Not the broker. Not the administrator of the crappy 401(k) plan. It’s the business owner who can get in serious hot water.

According to the
CFO Daily News,
in 2013
“[s]eventy-five percent of the 401(k)s audited by the DOL last year resulted in plan sponsors being fined, penalized or forced to make reimbursements for plan errors. And those fines and penalties weren’t cheap. In fact, the average fine last year was $600,000 per plan.
That’s a jump of nearly $150K from four years ago.”

And the DOL just hired another 1,000 enforcement officers in 2014, so
we can all expect 401(k) plan audits to increase. I don’t know about you, but this certainly got my attention.

Thanks to class action attorneys, numerous corporations are being sued by their own employees. Caterpillar, General Dynamics, and Bank of America, just to name a few.
Even Fidelity, one of the largest 401(k) providers in the industry, recently settled two class-action lawsuits for $12 million after being sued by its own employees over excessive fees in its plan.
Sure, these are big companies with a lot to lose, but it’s really the small business owners who are at greater risk because smaller plans (those with less than $10 million in plan assets) have the highest fees of all.

So What Do You Do as a Business Owner?
First,
it’s the law
that you have your plan “benchmarked” annually against other plans. The new law began in 2012, so it might be news to you. Once a year, the DOL requires that you compare your plan against other “comparable” plans to make sure your plan has reasonable fees. Nearly every business owner I ask has no clue about this! I sure didn’t. Do you think the person who sold you that expensive plan is going to call you about it? Of course not!

America’s Best 401k will not only provide you with a free fee analysis but also provide this complimentary benchmark. If the DOL walks into your office on a Friday afternoon, don’t let it ruin your weekend by standing there like a deer in the headlights. You want to be able to confidently hand over your plan benchmark.

WHO TO HOLD TO THE FIRE?

The DOL is on a rampage and can hold the business owner over the fire. I had no idea that as a business owner, and plan sponsor, I am the legal fiduciary for the 401(k) plan. There are numerous cases where business owners have become
personally
liable for an egregious 401(k) plan. By your using a firm like America’s Best 401k, it will “install” a professional fiduciary, which
will dramatically alleviate your liability (and yes, this is included in the 0.75% annual fee). And it provides ongoing benchmarking as a
free
service.

What to Do If You Are an Employee.
First, visit the Fee Checker on the America’s Best 401k website (
http://americasbest401k.com/401k-fee-checker
) and forward the report to the owner (or upper management). Truth is, the highest income earners in any business tend to have the highest account balances, so they too have a lot to lose. You are doing your entire company a wonderful service by educating management on its own plan. High fees are a drain on everyone’s hard-earned cash, and a possible change will affect everyone’s chances of financial freedom. Remember, we all need a tailwind, not a headwind.

You can also march down to the HR department and make certain they read this chapter. If fees aren’t a motivator, remind them that they are the fiduciary to you and your fellow colleagues. They
legally
owe it to you to make sure they have a plan that is competitive and in your best interests. That should grab their attention!

If your employer does not switch to a low-cost option and to the extent that your employer isn’t matching your contributions, it may make sense to opt out.

If you decide to opt out but still plan on staying with the company, a good plan will allow for an
in-service distribution,
allowing you to roll your current 401(k) account into an individual retirement account. Just check with your HR department. An IRA is simply a retirement account held in your name alone, but you will have much more freedom to choose the investments. And from there you can implement some of the solutions we will review in section 3. Also, your personal fiduciary can review this account and explain your best options.

Now that we know how to free ourselves from high-cost plans riddled with underperforming mutual funds, how do we best utilize a low-cost plan and the tax benefits that the government gives us?

UNCONVENTIONAL WISDOM

If you haven’t noticed, our government has a spending problem. Like an out-of-control teenager with a Platinum Amex, Uncle Sam has racked up over $17.3 trillion in debt and close to $100 trillion in unfunded (not paid for yet!) liabilities with Social Security and Medicare. So do you think
taxes will be higher or lower in the future? Did you know that following the Great Depression, the highest income tax bracket was over 90%?! The truth is, you can tax every wealthy individual and corporation at 100% of its income/profits and still fall way short of the government’s promises. Take a look at this video I made for an eye-opening presentation:
http://training.tonyrobbins.com/exclusive-video-tony-robbins-deconstructs-the-national-debt
.

Conventional logic, as most CPAs will attest, is to maximize your 401(k) (or IRA) contributions for tax purposes because each dollar is deductible. Which simply means you don’t have to pay tax on that dollar today but will defer the tax to a later day. But here is the problem:
nobody knows what tax rates are going to be in the future, and therefore you have no idea how much of your money will be left over to actually spend.

I met recently with one of my senior executives on this topic, and I asked him how much he had in his 401(k). He said he was approaching $1 million and felt comfortable that he could live off of this amount if needed. I asked him in a different way:

“How much of the million dollars in your 401(k) is
yours
?”

“All of it, of course,” he replied.

“
Half,
my friend! Half! Between state and federal income taxes, you will be spending only half that amount.”

The truth sank in. He sat back realizing that $500,000 is
not
his. It’s Uncle Sam’s. He was simply investing the government’s money alongside his own.

But then I asked, “How much is yours if the tax bracket goes up to sixty percent?” A little mental math, and he replied, “Only four hundred thousand dollars, or forty percent, of the million will be mine.” Ouch. But that’s not possible, is it? If you look at tax rates on the wealthiest Americans over the last 20 years (between 1990 and 2010), they are near the lowest they have ever been. The average for the three decades from the 1930s through the 1950s was 70%! When taxes were raised by Bill Clinton, he raised them on
all
wage earners, not just the wealthy. With the record-breaking levels of debt we have accumulated, many experts say taxes will likely be raised on everyone over the course of time. In short, the percentage of your 401(k)
balance that will actually be yours to spend is a
complete unknown.
And if taxes go up from here, the slice of the pie you get to eat gets smaller. And it’s a spiraling effect because the less you get to keep and spend, the more you have to withdraw. The more you withdraw, the quicker you run out.

SENATOR WILLIAM ROTH: THE BEST LEGAL TAX HAVEN?

A Roth IRA
—and more recently the addition of the
Roth 401(k)
—is often overlooked, but it is one of the best and yet legal “tax havens” in the face of rising future tax rates. And we owe a big tip of the cap to Senator William Roth for their introduction back in 1997. Let’s look at how they work.

If you were a farmer, would you rather pay tax on the seed of your crop or on the entire harvest once you have grown it? Most people seem to get this question wrong. We are conditioned to
not
want to pay tax today (and thus defer into the future). They think it’s best to pay tax on the harvest. But in reality, if we first pay tax on the seed, that’s when the value of what’s being taxed is smallest. A big harvest means a big tax! If we pay our taxes now on the seed, then whatever we have come harvest time is ours to keep! A Roth account works this way. We pay our tax today, deposit the after-tax amount, and then never have to pay tax again! Not on the growth and not on the withdrawals. This arrangement protects your pie from the government’s insatiable appetite for more tax revenues and, most importantly, allows you to plan with certainty how much you actually have to spend when you take withdrawals.

And here is an incredibly exciting piece of news!

With your 401(k) contributions being Roth-eligible (by checking the box), you can pay tax today and let your growth and withdrawals be free from the IRS’s grabby paws. And you can give substantially more because
while a
Roth IRA is limited to $5,500 annually, the Roth 401(k) allows for $17,500 per year.
(And you can do both simultaneously).
⁶

And for the high-income earner (making more than $122,000 per year), although you can’t use a Roth IRA, there are
no income limitations
on the Roth 401(k). Anyone can participate. This is a relatively recent change in our tax code and can provide quite a benefit for higher-income earners.

SAVE MORE TOMORROW

So the secret to the 401(k) is simple: you have to do it. But you have to do it within a cost-efficient plan
and
take advantage of the Roth 401(k) (especially if you believe taxes will go up for you in the future). And if you take advantage of one the greatest breakthroughs in finance: the system we covered earlier called Save More Tomorrow. Most people won’t make the commitment to save more today, but they will make the commitment to save more tomorrow. So in essence, you are agreeing in advance that your savings rate will increase each year. For example, let’s say today you save 3% of your salary. Then next year you agree to go up 1% (for a total of 4%). And then you keep “auto-escalating” your savings amount until you reach a certain cap. America’s Best 401k has this auto-escalation feature built into the system. So not only do you have the lowest possible fees, but you also have an opportunity to set yourself on an accelerated path to financial freedom.