The ‘cost of the problem’ in your law firm retirement plan account

I have been providing investment advice for law firm retirement plan participants since 1999. My experience leads me to conclude that legal professionals suffer from the same investment management dilemma that plagues my CPA, doctors’ group, and Fortune 500 company retirement plan participant clients.

In spite of years of buy-and-hold, asset allocation, diversification, target term and auto enrollment marketing materials provided by company retirement plan providers, the overriding investment management problem faced by all law firm retirement plan participants comes down to the same question: What do you buy?

Looking at options
Every individual retirement plan participant currently owns a handful of laggards; mutual funds that go up in value in a good stock market environment, but not up in value as much as the overall stock market averages. Even worse, these poor mutual fund choices fall in value at a much faster rate during stock market corrections.

Bad mutual fund choices in your firm’s retirement plan account place your investment management decisions in a very precarious position. You take all the risks associated with stock market investing, but you don’t receive nearly the commensurate investment returns.
Underperforming on the way up and outperforming on the way down is a very bad combination for a timely and comfortable retirement.

There exists a huge investment performance gap between the firm’s retirement plan mutual funds you currently own now versus the mutual funds you should own in your retirement plan account. That investment performance gap is the “cost of the problem.”

Considering the impact
Over your working career, there is huge dollar amount of financial impact of owning the wrong mutual funds. The “cost of the problem” analyzes the financial consequences of those mutual fund decisions.
Most law firm professionals don’t realize they have this mutual fund problem. So, they don’t take the time to seek a solution to fix the problem. Worse, they don’t know that the solution costs only a fraction of the total cost of their mutual fund problem.

Your answer to the following question will help determine if further analysis of your retirement plan account mutual fund problem is critical and must not be delayed.

Consider, then: “What dollar amount would you be willing to invest on an annual basis in order to close the gap between your current retirement plan investment performance and the investment performance that has been available elsewhere in your retirement plan menu?”

In the investment management world, investment performance is measured in dollars. Therefore, the “cost of the problem” provides the dollar costs of continuing to manage a retirement plan account guessing at “what to buy” versus a customized investment management solution.

Once you have diagnosed the financial impact of a retirement plan mutual fund problem, there are three possible outcomes:

1. You could find that the financial impact is large enough to justify the investment required to access a personalized retirement plan investment advice solution.
2. You could find that the financial impact is not as great as other issues you are facing. In this case, this company retirement plan mutual fund problem moves off the priority list.
3. You could find that the financial impact is not enough to justify looking into a retirement plan investment advice solution.

Run the numbers
The result of a “cost of the problem” calculation is a specific dollar amount of how much it has cost you to buy-and-hope versus a smarter way to buy-and-hold. The dollar amount proof is right in front of your nose.

The dollar value of lost investment performance owning the wrong mutual funds pays for your annual retirement plan investment advisory fees many times over.

Ric Lager is president of Lager & Company, Inc., a registered investment advisory in Golden Valley, Minnesota. In 2020, Ric produced an online CLE course titled, “An Expert’s Perspective: Individual 401(k) Management for Attorneys.”  Ric is also the author of the book, “Forget the Pie: Recipe for a Healthier 401(k).”