Read an Excerpt
CHAPTER 1
Keep Your Money Where You Make Your Money
The biggest secret that the financial services industry doesn't want you to know is that your employer is almost always your best financial services provider. Whether you love or hate your job, even the best financial advisor can't compete with the benefits provided by your company. And your employer provides you with the most important benefit of all — your paycheck, which, if you save and invest it appropriately, is like rocket fuel when it comes to driving your own financial security.
Our Think Tank at Financial Finesse estimates that an employee could leave as much as $1 million on the table over the course of his or her career by not taking full advantage of company benefits. Think about that for a minute. One million dollars — how would that change your life? And why does no one tell you this? You'd think that, with all their expertise, financial advisors would be all over this route to financial security, the same way the pharmaceutical industry would love to find a cure for the common cold.
And what a huge difference this would make to so many Americans. It would change our economy and the prospects for our children and grandchildren. And yet most financial advisors ignore, or at the very least minimize, your employee benefits. Why? How is it even possible that they would overlook something so big?
The answer comes down to money (as most things do). The vast majority of financial advisors serve the retail market — meaning that they don't get compensated at all when you invest in your company benefits. It's not that they want you to ignore your benefits, but you are coming to them with money to invest or protect, and they are paid based on the investments and insurance they sell or manage for you. There is simply no incentive for them to work with you to maximize your company benefits. At best, they would be spending valuable time and not getting compensated for their efforts. At worst, you might discover that your company benefits provide you with sufficient opportunities to grow your wealth and that you actually don't need an outside advisor.
Just like you, financial advisors have to put food on the table. If a task was not part of your job description, you didn't get anything extra for doing it, and it actually took you away from opportunities to excel at your job, would you do it? Probably not. And as a general rule, neither will most financial advisors.
There's another reason most employees don't think about their employer as their best financial services provider and the easiest means to financial security. I call it the Happy Hour Phenomenon, and I fell into it big-time when I was in my first job just out of college.
Who doesn't love Happy Hour? It's a workplace necessity, a reward at the end of a long workweek, a ritual through which lifelong friendships are sealed. But what an oxymoron! Because anyone who has been to a Happy Hour (at least a good one) will tell you that the conversations are anything but happy. I can't count all the Happy Hours I've spent with coworkers bashing everything from our salaries and bonuses to our benefits to the mean security guard who pretended he didn't know us even though we signed in every day.
I'm certainly dating myself with the signing-in bit, but it seems like the security in workplaces is about the only thing that has changed when it comes to Happy Hour gripes, which still include working conditions, anal bosses, dated software, go-nowhere meetings, flimsy pay, too much work demanded, and too little to show for it. This chapter not only addresses what you will never hear over the clinking of beer bottles but tells you one of the most fundamental things about your finances that your financial advisor won't tell you: the very workplace you spend time groaning about is actually the place where most of your wealth can come from.
In my first job as an investment banker, I worked for a great guy and a wonderful mentor whom I will call Michael. Even the Happy Hour crew gave him the thumbs-up and were jealous that I'd lucked out in getting one of the good bosses. Michael didn't always present his advice in a way that got through to me at the time, but in retrospect, I can see that he was almost always spot-on. Here is what I didn't hear him say:
1. I was eligible for a 6 percent match on my 401(k) plan, which meant that the company was paying me to invest in the plan. That match was actually larger than my raise — but I didn't even know it existed. Had Michael turned to me and said, "Davidson, do you want a 6 percent raise?" I would never have turned him down and probably would have thought he was crazy for offering. Of course I wanted a 6 percent raise! I wanted an anything-percent raise! But by not investing in my company's 401(k) plan, I was turning that raise down.
2. I was losing money because I had chosen the wrong health care option. Wanting to keep as much money as I could in my paycheck, I had ticked off the cheapest possible health care box — the high-deductible plan. This choice makes sense for people who are young and healthy and don't have a history of visiting doctors as often as they visit the gas station, but I did. Suffering from chronic sinusitis, I was dealing with allergies, sinus infections, or complications from sinus infections year-round and doing a lot of doctor-hopping, looking for the one who could finally make me better. On the high-deductible plan, I was paying out of pocket for the full cost of most of those visits (especially the out-of-network ones). I would have been better off choosing the company's more expensive plan, which would have covered a sinus surgery to fix my sinus problems for very little out-of-pocket cost. And then, after surgery had cured my sinus problems, I could have stuck with in-network doctors for annual physicals and rare illnesses. This mismanagement of my health care option cost me $30,000! Again, what would I have said if Michael had asked me, "Davidson, do you want to waste $30,000 and have a low-grade sinus infection for the next 20 years of your life, or do you want to get a fully funded operation that will fix your problems, make you healthier, and reduce your medical expenses by about 90 percent?" Do I even have to answer this question? Bottom line: to compare health care plans, don't just look at the premiums. Add in what your estimated out-ofpocket costs would be, depending on your general health. If you have an option with an HSA (health savings account), also be sure to factor in any contributions you would receive from your employer and the tax breaks you would get from your own contributions.
3. I worked most of my first year without realizing that, if I stayed past 8:00 P.M., the company would reimburse me for dinner and pay for my transportation home, including a car service if one was available. Once I figured it out, I pulled together as many receipts as I could find, only to discover that there was a time limit around billing — 30 days from when the expense was incurred. After spending over $3,000 on dinner and transportation, I ended up with a reimbursem*nt check for $174.92 or only about 5.8% of what I actually spent on hundreds of dinners and cab rides home after late nights at work.
4. My employer could have helped me with my dispute with my landlord. This was one of my favorite topics to throw a tantrum about as my coworkers and I gorged ourselves on half-price wings. I'd give him my rent check on time every month, but he would wait to cash it and then charge me late fees. It was criminal, but because I couldn't afford an attorney to make him stop, I chose to move out of the place, which cost me a lot in moving expenses and just overall mental anguish. Little did I know that all along my employer had offered free legal support as an employee benefit. I could have resolved this dispute by simply using that service — and maybe I could even have negotiated a lower rent in the process.
Coulda, shoulda, woulda. My experience is no different from the millions of other experiences out there that people call us about on our financial helpline. So many callers who want to work with financial advisors are looking into that option way before they have taken advantage of what is already available to them through their employer. All of these cases in which I left lots of free money on the table by neglecting to look into my employee benefits were as ludicrous as not just turning down the bread basket at a restaurant but also offering to pay the server money for it. Before working with a financial advisor, be sure you tap everything that is rightfully yours.
But there's no need to smack yourself on the forehead for not cashing in yet. It's not too late to set off on your own workplace treasure hunt! Whether you are employed by a large company that offers higher pay and richer benefits or a smaller company that offers fewer monetary incentives but more lifestyle benefits, such as flextime or free on-site day care, you can start mapping out ways to increase your wealth in your own workplace. (Just be sure to follow your company's expense policy.) To find the potential benefits that are yours for the taking in your workplace — your likeliest source of wealth-building benefits but also the place most people leave unexplored — you just need to know where to look and how to activate them.
HOW YOUR PAYCHECK PAVES THE WAY TO WEALTH
We tend to not look under our own noses for solutions to our problems, and as I've just related, I didn't think to look to my own employer as my greatest source of wealth until I ran the numbers much later. Lured by promises of the great advantages and gains to be had on the open market, we often forget that we don't need to look any further for our wealth than our own cubicle.
Wealth begins with how much you earn and how much of that you are able to save, which is why it makes sense to start with the employer that is responsible for your earnings. Love your job or hate it, it pays you money that you can spend, save, and invest — all to the end of having a better life for yourself and your family. Your employer may be effectively paying you to take advantage of its benefits by:
Offering to match what you invest in your 401(k) up to a certain amount. Also known as free money, this benefit has the same financial impact as an annual raise.
Offering favorably priced group health insurance and/or paying a set amount each month into your health savings account (HSA) or health reimbursem*nt account (HRA). HSA or HRA funds can be applied to your out-of-pocket health expenses.
Purchasing life, disability, and long-term care insurance on your behalf. At the very least, some employers offer group pricing so that you can save money you would otherwise spend on the open market for this insurance, which you also might be unable to secure owing to preexisting health reasons.
Negotiating discounted rates for auto and homeowner's insurance. This is a benefit some employers offer through payroll deductions. Some even offer pet insurance.
Not even included here are company profit sharing, employer stock incentives, bonuses, and financial education and advice that are free to employees and paid for by employers. Also missing from this list are the employee assistance programs (EAPs) offered by many employers. EAPs provide access to free legal support and help with substance abuse, domestic violence, or mental health issues. We are also starting to see emerging service providers that support employees in navigating the health care system to find the best doctors at the best rates.
What your financial advisor isn't telling you is that, with very rare exceptions, there's no way he or she can compete with what your employer already offers. You should fully maximize your employee benefits before you even consider hiring a financial advisor.
HOW TAKING ADVANTAGE OF EMPLOYEE BENEFITS PLAYS OUT IN REAL LIFE
Sisters Kate and Emily both make $50,000 a year, save the exact same amount of money (10 percent of their salary), and use the exact same investment strategy. They even start investing on the same day. (Yes, this is hypothetical, but we see variations of it all the time.) The only difference is that Kate decides that she's going to invest the money in her company's 401(k) plan and Emily decides to use an outside advisor instead.
You would think that they will end up with the same amount of money, but flash forward 30 years: Working with her financial advisor, Emily has $460,908 in her IRA. Kate, on the other hand, has almost double that amount in her 401(k) plan — $807,278! Kate can retire from her job and live the life she's always wanted to live. Emily will have to work eight more years to attain the same level of financial security.
And all because of where the two sisters have invested their money — one using the services of an advisor, who puts her funds into a traditional IRA, and the other investing the same way in her employer's 401(k) plan. How is it even possible that one single decision 30 years earlier could lead to two such radically different outcomes?
Here's the story behind the story:
Kate's employer actually pays her to invest in her 401(k). By investing 6 percent or more of her salary, she gets an extra 3 percent from her employer every single year. That brings her investment total up to 13 percent of her salary versus the 10 percent that her sister invests. Kate's employer, being a very large company, also gets discount rates on those same investments — and the difference could be as much as 1.5 percent per year when we account for the fees Emily has to pay.
Emily not only has to compensate her advisor but also has to pay full retail for the mutual funds she and her advisor choose to invest in. While Kate earns a return of 8 percent each year on average — thanks in large part to the favorable pricing structure in her 401(k) and to not having to pay an advisor — her sister gets only a 6.5 percent return because she has to pay 1.5 percent more in fees each year. That 1.5 percent difference alone adds up to over $160,000 at the end of 30 years. The cost of Emily's "advice" comes to almost $350,000 and eight extra years of her life working in a job that she likes well enough but that is not her passion.
Sure, there are plenty of people who have it worse. But the point is that all of us can have it so much better — simply by changing the way we make seemingly simple decisions so that our money works for us, not against us.
But That's Only Part of the Story
Keep in mind that Kate's and Emily's investments provide just one example. We have seen hundreds of people who ended up in Emily's situation, often when it was too late, but my hope is that we have prevented a similar scenario for thousands of others by changing the way they look at their employee benefits. It's not just your company retirement plan that you should be prioritizing. Your employer probably offers tons of other benefits, either free of charge or at a discount. Before you hire any financial advisor, find out what you have available at work and max out those opportunities.
Here we outline each of these benefits and its true financial value. You should take advantage of all of these benefits that make sense for you based on your financial goals and needs. Otherwise, like Emily, you could end up leaving a lot of money on the table and regretting it later.
One thing to keep in mind: your employer may also offer a financial wellness benefit! Find out if your employer offers you the benefit of helping you make the best benefits decisions, and what type of guidance is provided. According to a study by Aon Hewitt, 93 percent of large employers provide or plan to provide some form of employee financial wellness program in 2015, and an increasing number of small and medium-sized companies are jumping on the bandwagon. This service is usually paid for in full by your employer, with no charge to you, and includes financial workshops, one-on-one financial planning sessions, and phone-based financial coaching on both your personal finances and your company benefits. Just be wary of conflicts of interest — you want access to planners who are educators, not financial services salespeople disguised as educators.
WHAT IS FINANCIAL SECURITY WORTH TO YOU?
So now you are well ahead of where I was when I made costly benefits mistakes in the two years I worked at my first job, leaving tens of thousands of dollars on the table. You can use this as your guide to finding and securing all the "free money" your employer makes available in addition to your paycheck and walk away with much more than you expected.
The next step is on you. In addition to gaining savings from free benefits and matching dollars into your retirement plan, you have to decide how much additional money you want to sock away, using your benefits as leverage. This is a way to grow your money faster than you could with outside investment opportunities.
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Excerpted from "What Your Financial Advisor Isn't Telling You"
by .
Copyright © 2016 Liz Davidson.
Excerpted by permission of Houghton Mifflin Harcourt Publishing Company.
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