The Fiduciary Cafe - Special Edition
OK…this is where I lose my mind…but before I explain why I lost my “head gasket” for the umpteenth time with our increasingly prominent “Nanny State Government”…let me inform you, I am a Keep It Simple Stupid (Kiss) person. So, as you read my blogs (and hopefully there is someone out there reading them), I like to write in a way that my 12 year old son could read and understand for the most part. OK…simple writing style disclosure provided.
Last week the Department of Labor (DOL) announced its new Fiduciary Rule, and if you are looking for a good summary please see http://fredreish.com/an-overview-of-the-fiduciary-rule/. When this rule was announced, I thought it would only be a matter of time before the discussion of government run retirement plans was reignited. Well, we are there…and this will be a disaster. Mandated government anything is a bad idea, (think Affordable Care Act). If these plans are such a good idea, why mandate them?
So what is wrong with these plans? Let’s look at the plan that is most likely to pass first and happens to be in the largest state in the Union, California. The good people of California are going to be forced to hand over 5% of their pay (under certain circumstances…for now…these conditions will change and be more encompassing) to the state which has demonstrated great skill in managing budgets (this is sarcasm, the state is in debt to the tune of $778 billion and growing). OK, so California is going to take the people’s money and invest it in U.S. Treasuries? Why? Probably, because California doesn’t have its own currency and cannot artificially support its own debt. Does this sound like a different program that invests in Treasuries for the benefit of the people, (think Social “In”-Security)? Well this has worked well for everyone.
How will this work out for the individuals forced into this program:
- 10 Year Treasury Yield is around 1.75%.
- Inflation…don’t get me started on this farce of a statistic. The government informs us that there really is no inflation or benign (as they like to call it)…but let’s factor in the shrinking size of the products we buy (yes there is significant inflation…your dollar is buying less stuff). The average inflation rate (as measured by the Consumer Price Index, CPI) from 2000 through 2009 was roughly 2.5%. We will use this artificially low number to be kind!
- Fees…the estimated fees associated with California’s Secure Choice (love the name…just love the name of this program) is 1%.
Based on this data, what will the estimate “real earnings rate” be for the people of California in this program:
|10 Year Treasury Yield||1.75%|
|– Inflation Affect||– 2.50%|
|Net Real Return||– 1.75%|
And they are going to mandate this with a straight face!!!
So if a 25 year old is forced into this program at 5% of compensation in year one, then has their “legal theft” increased 1% per year until the total contribution (sorry…mandated theft) reaches 10% and continues until age 70…what benefit can the person expect? Now I did take a couple of simplistic liberties. First, I assumed the individual’s annual compensation was $25,000 per year and, second, and continues to earn the negative 1.75% each year. Total contributions to this program would be a little over $111,000. However, the account value for the individual would be a little over $76,000. That my friends is Government Math 101.
Now, there are some of you out there thinking surely ERISA and/or the DOL would step in to make sure this travesty is not forced upon the people…NOPE…(wait for it, wait for it) these plans would not be subject to the government regulations designed to protect us from all other retirement plans in this country. To quote The Church Lady, “Well isn’t that special”. That is right folks, they are not going to follow the laws they wrote for everyone else. Well what do you expect, they exempt themselves from everything else “we the people” are subjected too. Ohh…and no financial advice, services or education will be provided for the individuals. I hear The Church Lady again.
I agree, we have a retirement issue in this country. Not sure about the fear mongering moniker of “crisis” is applicable and it is so overused. The retirement issues are not because of 401ks, keep in mind, 401ks are brought to you by the government…it is a reference to the tax code where you can find the provisions for these plans. Anyway, the issues faced by individuals are multi-faceted. People talk about the risk associated with a 401k plan. It is not the plan causing risk…it is in the investments chosen by the individuals in the plan. Your average 60% Diversified Stock / 40% Diversified Bond portfolio over the long-term will generate an average annual return of 6 to 7%. That is a lot better than the negative 1.75% offered by Secure Choice.
People, we need to open our eyes and learn that our government is not the solution for the problems they have and will continue to create. We need to face our problems head on and find solutions to solve them ourselves. We need more self-reliance and much less government-reliance. The more control we give to the government, the more they will gladly take and at some point we will lose everything and never be able to get it back.
Inspiration for this blog came from the following:
- The 401(k) Plan Blog – Monday, April 11, 2016 – The Real Threat-State Run Plans, by Jason Gantz
- Secure Choice: For Whose Benefit? By Rich White
Thanks for reading!
Coffee of the Month (April 2016) suggestion: Gevalia Columbian – this is your basic get up and go coffee in the morning. A nice smooth cup of coffee, not too strong…so for our diehard “Turkish Coffee” folks, this is not the cup for you. But for someone who is OK with a middle of the road strength and enough kick to get you going, give it a try.