Beyond your control: What’s really to blame for America’s underperforming 401k system

By Neil Plein
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This is the transcript from an interview with Darwin Abrahamson, CEO and Founder of Invest n Retire®, whose slogan is “Record keeper of the future.” Darwin is considered a pioneer in the retirement industry and widely regarded as a true champion in the fight to enact industry standards that genuinely serve the average investor’s best interest. Since 1982 Darwin has worked with fiduciaries and pension administrators of qualified tax-deferred retirement plans. Mr. Abrahamson’s company has been mentioned in the New York Times, Washington Post, Wall Street Journal, Forbes Magazine and nearly all other major financial publications.

Neil: If you open any financial magazine, you’ll see an abundance of ads from every major 401k service provider stating that they have something different to offer, is that actually the case?

Darwin: No. Neil, the message may sound unique, but the offerings are not. The reality is, you’re going to get virtually the exact same thing on every platform; the only thing that will change is the person you talk to and the name of your plan. Fundamentally, however, the investments you use, the tools you access and the outcomes those things make possible will remain the exact same.

Neil: You mention that every platform offers basically the same things, which means that the “outcomes” continue to be the same; what do you mean by that?

Darwin: For a long time, the tide has been overwhelmingly against the average retirement plan investor. That is what I mean by a fundamental problem. The outcome as you can imagine, is exactly what we see everywhere; low balances, low participation, low contributions. There are ways to disguise this through catchy, colorful presentations made each time companies meet with their service providers, but the reality is, more and more people across this country are coming to the very rude awakening that they simply will not have enough money saved for retirement.

Neil: Why is this the case? Why hasn’t someone figured out how to really make things work for people on a large scale? It seems like a pretty obvious and major national problem?

Darwin: Neil, the real answer will surprise you and everyone else for that matter, because the real problem is something that’s totally out of almost everyone’s control; employees, companies, advisors; their struggle can be very clearly defined; because the efforts they make are based on a very narrow set of possibilities. The investments they have access to, the education they must deliver, the plan tools they must work with and explain, all are based on one thing; technology. That is the real problem with America’s 401k system, its technology.

Neil: What do you mean by that? People everywhere can go online to access their retirement plan, they have things like retirement calculators, where’s the problem?

Darwin: Sure they can do those things, but just barely. Retirement plans are one of the only aspects of our modern life that has not evolved technologically. The recordkeeping systems in place, the backbone of our industry, the technology, programming language and the like, at the core of nearly every major service provider; were developed back in the 1970’s.

Neil: Explain what you mean by that a little further:

Darwin: This is why plans have so many limitations, there are so very few meaningful changes made to improve things on a large scale, mainly because it just can’t happen at any realistic pace, large scale changes are unbelievably expensive. Can you even think of the last big change to hit your retirement plan? The last big thing that made the process a little easier? A website perhaps? That was significant in the 1990’s, what has happened since?

People have been using the same types of funds, relying on the same types of education and using the same types of plan tools for decades; because they had to! The industry as a whole has been held hostage by its dated technology for too long. And real change won’t come until that backbone is replaced by something modern. Think about your iPhone®, look at what has happened when the technology emerged to make “Apps” available, think about how much you can do now, how much easier things are. You can bet that Apple’s not accomplishing that by sticking with a decades old infrastructure.

Neil: Darwin, people may have a hard time wrapping their head around what you’ve just said, can you give a real life example?

Darwin: An example that comes to mind is with someone I recently spoke to who had their 401k plan with a large life insurance company. They actually had to print and fill out a form, then take that physical form to their HR department, just to get their contribution rate changed! Then think about your retirement calculator, you have to enter all of your own information in, the calculator has no ability to do that for you! Entering your age is not a difficult task, entering the return you anticipate from your investment portfolio is. The quality of the information coming out of retirement calculators is only as good as the information going in; and that information depends on the average person trying to turn themselves into an investment expert to perform all the manual tasks their technology should just perform for them.

The large 401(k) providers are all using legacy software that was developed 20 to 30 years ago before participant directed plans existed. This software is licensed, not owned and developed by the providers. Therefore, they do not have the advantage of designing software for participant directed plans that can use the latest investment options like ETFs or the latest Microsoft software.

Neil: Aside from the many benefits new technology would make available to people using 401k plans, what benefits would new technology offer major service providers who offer 401k plans?

Darwin: Well, new record-keeping technology for major service providers achieves three major goals that every business strives for; to decrease overhead, decreased errors, and increase revenues. The time savings and countless efficiencies will be crucial to remaining competitive in tomorrow’s 401k landscape. Providers should see this as a time for action, the longer you wait, the more behind you’ll be, the more expensive your inevitable transition will become.

Disclaimer: Invest n Retire, LLC does not provide tax‚ accounting‚ legal‚ or financial planning services or advice. Information provided is offered only for general information and education purposes and should not be used as the sole basis for making financial‚ investment‚ or retirement planning decisions. Past performance is not a guarantee of future performance. If you have specific questions you should consult with your advisors.

The Derivative Scare: Fear Mutual Funds, not ETFs

By Neil Plein
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A large, fundamentally false debate has been raging over allegations that Exchange Traded Funds (ETFs) are “derivative” investments; a term steeped in negative press and generally associated with high-risk investing. For this reason, many claim that ETFs are not suitable for your retirement plan, so instead, they advocate the continued use of mutual funds.

Unfortunately, the claim that all ETFs are derivatives is simply false. This is like saying all stocks are energy stocks, when the reality is, only some stocks are energy stocks. The same logic holds true for ETFs. To understand this, you must examine what a derivative is and what is really meant when something is labeled a “derivative.”

According to a recent Security and Exchange Commission (SEC) “Fact Sheet” a derivative is defined as: “a type of financial instrument whose value is derived from another underlying product, include such things as futures, certain options, options on futures, and swaps. A common characteristic of most derivatives, which are among a panoply of investments that a fund may make in managing its portfolio, is that they involve leverage.”

Leverage Remember that last word, “leverage.” Now let’s look at an example to help clarify the SEC’s definition of a derivative. Think of a farmer who grows corn. If you walked up to the farmer and bought an ear of corn from him, you would give the farmer some money and he would give you an ear of corn- transaction completed.

If instead, you approached the farmer and wanted to buy that same corn next year, but only wanted to pay today’s price because you think corn will be more expensive in the future;  you and the farmer (who thinks the price will be less next year) would enter into a contract “derived” from the actual corn.

You would give the farmer some small amount of money for the contractual right to buy the corn in the future at today’s price. If you’re right and the price of corn goes up a little, you have created leverage; your small investment has increased many times in value as a result of only a small change in the price of the corn it is derived from:

Derivative Example

Today	Value
Price of corn on January 1st	$100
Price you pay for contract with farmer	$1
Future	Value
Price of corn on March 1st	$105 (5% increase)
Value of contract on March 1st	$5 (500% increase)

Some ETFs are Derivatives ETFs that are priced based on the value of underlying derivatives do exist. This type of ETF represents an opportunity to profit in the same manner the buyer of the contract for corn profited. With an ETF derivative an investor may reap substantial gains or losses as a result of investing in the derivative portion of the corn contract, which changes radically, rather than investing in the actual corn itself, which changes far less radically by comparison (5% vs. 500% outlined above).

This is the distinction between an ETF being classified as a “derivative” or not- the underlying item; in this case the underlying item is “corn” or “contract.” The ETF itself is not the derivative. In a mutual fund, just as in a non-derivative ETF of say, the S&P 500, you own actual shares in 500 companies; not derivatives of those shares; actual shares.

If the ETF itself were defined as a derivative solely on the basis that it derives its value from another underlying product, then a mutual fund would be considered a derivative as well. But, the fact is, mutual funds are not considered derivatives so ETFs, which invest in a basket of securities, are not derivatives.

ETFs in Retirement Plans I do agree that derivative-based ETFs should be avoided in retirement plans. This conclusion is a no brainer since derivative based ETFs can create a potentially devastating effect, even from owning a very small amount; as their leveraging capabilities can have an exponentially magnified negative effect on the value of the fund as a whole.

On the other hand, including non-derivative based ETFs like (VOO, AGG, VEA) in the investment menu of a retirement plan is a positive step forward. ETFs benefit participants through low cost and improved performance, on average, when compared to actively managed mutual funds.

Raising Awareness Mutual fund proponents raised the bar in making derivatives a topic of concern in retirement plans. Unfortunately, this awareness has taken a wrong turn in misinformation concerning ETFs as a whole, to the point of stating that all ETFs should be avoided.

This misinformation is compounded by the fact that mutual funds also use derivatives. In fact, a recent study presented the top 3 mutual funds in 401(k) plans, all of which use derivatives as underlying investment options. If derivatives should be avoided in retirement plans, buy an ETF of the benchmark index for each mutual fund listed below:

Top 3 Mutual Funds in 401(k) Plans

Source: BrightScope study of over 50,000 plans released 10/3/10

Fund name	Derivatives	Benchmark ETF
American Funds Growth Fund of America (AGTHX)	YES	(VOO) – No Derivatives
Pimco Total Return (PTTAX)	YES	(AGG) – No Derivatives
American Funds EuroPacific Growth Fund (AEPGX)	YES	(VEA) – No Derivatives

Disclaimer: Invest n Retire, LLC does not provide tax‚ accounting‚legal‚ or financial planning services or advice. Information provided is offered only for general information and education purposes and should not be used as the sole basis for making financial‚ investment‚ or retirement planning decisions. Past performance is not a guarantee of future performance. If you have specific questions you should consult with your advisors.

Additional Information on the Invest n Retire Platform

Plans using Ceridian Payroll

Plans with less than $5 million in assets:

401k Plan Information Sheet

403b Plan Information Sheet

Plans with more than $5 million in assets:

401k Plan Information Sheet

403b Plan Information Sheet

Plans not using Ceridian Payroll

401k Plan Information Sheet

403b Plan Information Sheet

Advisors, Investment Managers and Fund Providers

Email neil@investnretire.com for more information

U.S. Patent Office Grants Patent to INVEST N RETIRE, LLC

Contact: Neil Plein                                                                                                                FOR IMMEDIATE RELEASE
Tel. 503-419-2894 x 104
Email: neil@investnretire.com

U.S. Patent Office Grants Patent to INVEST N RETIRE, LLC

System and Method for Managing Tax-Deferred Retirement Accounts

PORTLAND, OR- Nov 15, 2011, the U.S. Patent Office granted Invest n Retire, LLC (INR) patent number 8060428, “System and Method for Managing Tax-Deferred Retirement Accounts.”

INR’s patented technology, among other functionality, allows employees in retirement plans to invest in a portfolio of Exchange Traded Funds (ETFs) according to a professionally designed asset allocation model (AAM). The system also uses regular payroll contributions to selectively buy underweighted ETFs in the portfolio so that the employee’s AAM maintains its balance, referred to as Self-Aligning Portfolios™.

Darwin Abrahamson, founder and CEO of Invest n Retire® and a pioneer in the retirement industry, calls this a “turning point.”

As a significant number of investors continue to leave mutual funds in favor of ETFs, the only obstacle blocking the way for employees in retirement plans was technological limitations which INR has overcome. Now employees can reap the benefits of ETFs, the fastest growing investment vehicle in history.

INR’s technology goes even further with the inclusion of online tools that make the job of managing your retirement account a breeze. If you want to know how much you need to save for retirement, you can find the answer easily using INR’s calculator. By designing a calculator that is integrated with payroll; employee information such as age, salary, and contribution rate prepopulates the calculator.

Even more important, the calculator also prepopulates the employee’s rate of return, based on the asset allocation model selected. Now, with a single click, the calculator tells the employee if he or she is on track for retirement. If the results indicate a shortfall, the calculator offers a few changes to consider implementing in order to get on the road to retirement success.

“Up until now, everyone essentially only offered mutual funds which operate on antique systems developed back in the ‘70s. Realistically, the retirement industry is suspended in a time warp. With our patented technology the industry no longer has to be constrained, moving forward with modern technology and better investment choices – ETFs. Our approach to solving the countless problems facing the retirement industry is unprecedented.” Abrahamson said.

About Invest n Retire, LLC

Invest n Retire‚ LLC (INR)‚ located in Portland Oregon‚ was founded in 2000 by Darwin Abrahamson in response to the overwhelming demand for leading edge technology that can deliver financial tools and services to tax-deferred retirement plans. INR’s uniquely designed patented system addresses and solves numerous problems confronting the retirement industry. http://www.investnretire.com/

To obtain a PDF version of this press release click here

To view Patent deatils from the U.S. Patent and Trademark Office click here and search Patent No: 8060428