How my Retirement Fund ripped me off – Part 2
This is a continuation of a post series which started yesterday. Part 1 provides the background and also starts to describe how the scam is setup. You can find it here: How my Retirement Fund ripped me off – Part 1
We finished off yesterday on the subject of "Documentation". Today we start on the real meat of the deceit!
Annual Cost
[I haven’t used the actual payment, fee and fund values figures here. Instead I’ve rounded up to more easily workable and relatable figures. All figures have been kept in the correct ratios and are valid as examples.]
They call it “Annual Cost”, and it’s expressed as a percentage. Annual Cost (as seen in Part 1) has a document dedicated specifically to it. The rational man - at least in my opinion - would turn to this document when looking to see how much the administration and fees of his policy are costing him on a monthly or annual basis.
Without going into the complexities of this document, it does present you with a fairly simple table from which you can determine the costs of administering your policy. Or at least, you THINK you can determine the costs from it...
Before I go on, let me quickly explain how the policy works: you pay a contribution to it every month. Fees are deducted from your contributions, and what remains goes towards your overall policy value. The policy grows month by month due to the contributions, and also due to the way the money is invested. Monthly contributions are usually increased at a fixed above-inflation rate on an annual basis.
Let’s say I pay $100/month. That means I pay $1200/year. My Annual Cost document says that my effective Annual Cost (the fees) are about 2%. In a not-so-great country like mine, 2% is not the large percentage that it would be perceived to be in the US - our interest rates tend to be far higher (as do our inflation rates). 2% is fine. If they take $24 of my $1200 as fees for the year, I’m still happy with that.
And that’s what I thought was happening. Without auditing the figures, I relied on these Annual Cost documents to keep me informed as to how much I was paying per year. I thought I was paying about 2% of my contributions as fees. Imagine my shock when I DISCOVERED THAT I WAS LOSING 56.2% OF MY CONTRIBUTIONS TO FEES!
That’s no joke and it’s no exaggeration. That’s the ACTUAL effective cost which I paid in Q3 2021.
Standby, it’s about to get a whole lot worse!
If you go to the document that explains the Annual Cost breakdown document, it explains it with (and I see this in retrospect) one noteworthy omission: it SAYS that the Annual Cost is 2%. But nowhere - in the Annual Cost document OR in the Annual Cost explanation document - does it ever state that THAT ANNUAL COST IS CALCULATED NOT ON MONTHLY CONTRIBUTIONS, BUT RATHER ON THE VALUE OF THE ENTIRE INVESTMENT!
That they can even consider working it out this way never even occurred to me. They’re not calculating based on my $1200/year in contributions, they’re calculating based on a $15000 total policy value!
Bit Brain! You must be an absolute IDIOT! How is it possible that you don’t notice a 56% monthly deduction instead of a 2% one?
Perhaps I am an idiot, but if I am, then I’m not alone. Thousands of people have policies just like this one, perhaps millions. The thing is, this massive fee is not immediately obvious. Let me explain to you how they manage to hide this enormous ACTUAL Annual Cost, and how they get away with their published “2%” figure with (literally) nobody noticing it.
It starts off fine
At this point one may understandably point the finger at Bit Brain and ask: “how come you didn’t run this past an authorised professional Financial Advisor?”. Well - I did. That’s exactly what I did each time I reviewed and updated my policies. The people I dealt with were all legitimate government and industry sanctioned Financial Advisors. Financial Advisors sold me this policy, and its predecessors. They worked hard to convince me that I was making the right decision for my financial future. And remember what I said earlier: I would never sign straight away, I went through all the documentation very carefully before signing.
So how DID they hide this in the documentation?
The main way they sneak it past the start line is to make it look like a non-issue. Once again, they do so cleverly and in a multi-pronged manner. You won’t believe the extent that these companies go to to hide and obscure information!
The first thing they do is to phase the fees in over a period of two years. So your initial fee is zero, and gradually this figure rises. In the initial documentation they state an example of what this may rise to once the fees reach “full price” after two years. That figure is $4. You don’t worry about it. It’s negligible, you don’t care. You don’t give it a second thought because it seems like a good deal. You don’t realise that it’s just an example... In fact, you never glance at it again.
So when your policy kicks into effect, you start off paying $0 in monthly fees. Perhaps you check this the first month, perhaps you don’t. Perhaps you check it the second month, and perhaps even the third month. The more cynical and wise among you may even check it the following quarter, or six months later. You won’t see much if you do that - at least - nothing that will jump out at you. Remember: you’re not looking at one figure here; you’re looking at pages and pages of tables and figures spread our over several documents. You’re not going to spot a needle in a haystack, especially when you don’t even know that it’s there!
... which brings me back to documents...
Documentation - continued
Since discovering this issue, I have personally warned my nearest and dearest, lest they fall prey to the same trap. Some are already in the trap, but others - and this is why I’m revisiting the subject of “Documentation” - simply don’t know if they’re in it or not.
The reason they don’t know is not (directly) because of anything stated above. Take my stepfather for instance; he’s an intelligent and meticulous man. An engineer by trade, he works slowly through every document word by word, ensuring that he understands everything. After hearing my warning, he revisited his documents to check them. Yet - he still doesn’t know if he is affected or not. How come?
Because he doesn’t have all the relevant policy documents!
Remember how I said that I downloaded most of my documents from an online portal? Well it turns out that most people don’t bother with this. In fact, most people probably aren’t even aware that such things exist! The traditional way is to rely on one’s broker/financial advisor to supply the necessary documents. Combined with the odd policy overview emailed to you maybe once per quarter, it seems to me that most people are satisfied that they then have all the documentation they need. This is especially true of older generations (my step-dad is a Boomer) who are less likely to browse the internet for information and who are more likely to trust legitimate-looking people who make face-to-face contact (like an insurance broker).
The reality (as seen in “Documentation” - the first part) is that the documents a financial advisor gives/sends one are wholly inadequate. In no way can you asses the state of your policy from those documents alone.
Furthermore, even if you DO access the online portal, you must - as I said earlier - hyperlink your way through several semi-unrelated menu options in order to gather up everything you need. It took me a good while to find all my documents!
And so it is that people like my step-dad simply never come across all the documentation they need. They don’t even know that it exists. And he’s just one example, I have encountered others...
You get a BONUS!
That’s RIGHT folks! If you sign up now, we will give you a BONUS! For FREE! And please, don’t read the fine print! The fine print shows that all calculations use the final value of the “bonus” at the end of the policy period, while every other figure is taken at current value. That would allow you to see that the “bonus” is much smaller than we make it appear, and we wouldn’t want that, would we? Jokes aside: what the fund does is to hide costs behind a “loyalty bonus”. The bonus is used as an incentive to lock you in. If you stop paying monthly contributions, then the bonus ceases to grow - yet they will still deduct all monthly costs. If you keep paying monthly contributions, the monthly costs still get taken off, but your bonus partially offsets those costs. Even in a best case scenario, you STILL end up losing a third of your money to admin costs! Because as your policy grows, so the admin costs will grow. The bonus does not grow with policy value, it grows with monthly contribution value. So as the policy becomes worth more and more, so the bonus offsets less and less of the admin costs. This is no doubt why they always use they extremely dodgy practise of calculating the bonus based on its final value (the value it would be when you finally retire and the fund starts paying), as opposed to current value (which they literally use for every other figure). I suppose that by the time you get to the position where the bonus becomes negligible, it’s already too late for you. By then you have too much invested in the fund to do anything about it. If you do wake up at that stage, it’s not worth trying to do anything about it. How sad is that? How corrupt is that?! That's it for Part 2. Let me know in the comments if you would like Parts 3 and 4 over the weekend, or if I should rather publish them on Monday and Tuesday. To those who've made it through the series so far – thank you for reading, and I hope that this helps SOMEONE out there! "The secret to success: find out where people are going and get there first" ~ Mark Twain "Crypto does not require institutional investment to succeed; institutions require crypto investments to remain successful" ~ Bit Brain DISCLAIMER: I am neither a financial advisor nor a professional. This is not financial advice, investment advice or trading advice. Unless otherwise stated, all my posts are my opinion and nothing more. Crypto is highly volatile and you can easily lose everything in crypto. You invest at your own risk! Information I post may be erroneous, incomplete or construed as being misleading. I will not be held responsible for anything which is incorrect, missing, false, out-of-date or fabricated. Any information you use is done so at your own risk. Always Do Your Own Research (DYOR) and realise that you and you alone are responsible for your crypto portfolio and whatever happens to it.
Because if you let us steal 56.2% of your monthly contributions, WE WILL PAY 40% of that back to you and call it a LOYALTY BONUS!
But that’s better than 56.2%, right? Not really...
Yours in crypto (because fiat is obviously crooked!)
Bit Brain
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