What is a 26(f) Plan?

Pinnacle Personnel Services LLC  |  Debbie Hatch

Received an easy enough question this morning, “What is a 26(f) plan?”

As is the case in the classroom, the questions are always easy.  It’s the answers that take a while!  Luckily I have a tall cup of fresh coffee in front of me.

It seems there’s a lot of confusion about these 26(f) plans being brought about right now by a lot of hyped-up marketing and a bit of scare tactic to get people to “act quickly”.  We humans have a huge fear of missing out (FOMO) and these money managers are trying to, quite literally, cash in on that.

We can all be rich!!!

I assure you, it’s not as big of a deal as it’s being made out to be:  and some financial planners, with more than 20 years in the career field, couldn’t even give me a clear answer as to what it is.  Isn’t it weird that nobody knows about this miracle program that will make us all rich in retirement?

Not quite as advertised.

So what is 26(f)?  Do you need to be concerned about claims that the US Department of Labor “taking this benefit away in April 2017?”   Is this something you should do?

To start, here’s a link to the United States Code 26(f).  Reading through that, you’ll see 26(f) is merely a dividend reinvestment plan into a whole life insurance policy. Nothing new.  Just a new catchy name for something that’s been around for years.  It’s a “bank on yourself” premise in which you use life insurance and the tax benefits of a life policy to accumulate earnings tax free.

Why are we hearing so much about it right now?  There are two reasons.  First, the ads you’re seeing (and if you do a Google search) are from two places.  Keith Fitz-Gerald and a company called Money Morning.  These are both trying to sell you something.

Mr. Fitz-Gerald’s pitch is there for one sole reason:  to get people to subscribe to his financial newsletter (which starts at $39 but – surprise – then auto-renews annually at $79) and invest into the things he recommends.  Signing up for Money Morning, you get “access to a team of ten market experts with more than 250 years combined investing experience FOR FREE.”  How nice of those people to donate their time and expertise to make sure the rest of us are financially set.  I’m a little skeptical….

We have a Fear of Missing Out (FOMO)

The other reason you’re hearing about it is because marketers are preying

upon that FOMO I talked about.  “Department of Labor is taking this miracle program away from investors in April 2017.  Get in now before it’s too late!”

Reality?  The only thing changing in April is that brokers will be required to disclose their commissions.  They will no longer be able to overcharge retirement plan participants by “hiding” these within the product being sold.  It will require more transparency by money managers.  That doesn’t sound like a bad thing to me.

The Stories:  shared in those ads are so amazing!  What about that?  Here’s what the advertisements quip about 26(f) programs and why so many people are upset about potentially losing this ability to plan for retirement.

  • “26(f) plans Rose to Prominence During the Great Depression, Thanks to President Roosevelt’s Team That Also Created the FDIC and Social Security.
  • 26(f) Programs allow people to ‘enroll’ with one small investment stake.
  • And they give investors the opportunity to earn aggressive monthly income combined with huge lump-sum payouts.
  • You can potentially: Get paid $2,000… $5,000… even more… every month for the rest of your life, and then still grab six figures in one shot.
  • And on top of that, there are 26(f) Programs that can operate as 100% legal tax havens.”

Wow!!  They really do sound amazing.  They’ve been around for a long time and as you’ve probably already guessed since you’re asking the question, they are NOT necessarily the pot of gold at the end of the rainbow, these marketers would have you believe.

The ads say Roy Nair is a “retired a millionaire who went BIG on 26(f) Programs.  He was only kicking in $300 a month.  Now he has enough money to do anything he wants, including travel.”

The Facts:   a little digging, you can find the real story is about Roy NASH.  Nash.  Nash retired at 55 with about $800,000 saved and grew it to a million over the next six years.  On 26(f) programs?  Umm…not exactly.  In his early 20s he started putting 10-15% of his annual income into a 401(k).  As he got older, and had more disposable income, he invested another $300 / month into other things, including a variety of dividend stocks, mutual funds, and index funds.  He reinvested his gains back into his investments.

The ads talk about Dane LaVoy who avoided the mundane task of having to save for years, invested in 26(f) programs for only 8 years and made more than $1 million.  You know.  If it sounds too good to be true…….

The reality?  This is actually a twisted story about Dane Lacey that ran in Kiplinger’s in 2011.  Guess what?  Another story of a person with a high salary that saved a massive amount of his income (in some years, up to $250,000), invested in stocks and mutual funds, and made some money for himself.  No secret.  No magic.  No 26(f).

Retired Army Major Joe McCord?  You guessed it:  actually Joe McLaughlin who was covered by CNN in it’s 1999 story about Mutual-fund millionaires. Miracle?  Nope – just the old fashion method of saving money every single month, and investing it.

If all of this sounds familiar, it’s because that’s EXACTLY what we talk about in the Thrift Savings Program and Retirement classes I teach.

It’s no secret:

  • Start investing as much as you can, as soon as you can for your retirement.
  • When you make more, save more.
  • Diversify your account rather than having all of your eggs in one basket – that will mean you take a little more risk but it will also mean you’re somewhat sheltered if anything happens to one area of the market.
What you can. When you can. With what you have available.

It’s not magic:  

  • Compounding over time is what makes the difference though – and it can seem like magic!  I share a story in class about how foregoing just one tall Starbucks coffee each day, could give me an additional $107K in retirement.  Not magic.  Planning.  Saving.

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7 thoughts on “What is a 26(f) Plan?”

  1. I have learned that whenever Keith is pushing some investment and his staff of analysts start pushing the same product, I go to google search to find out the true story of what’s being pushed. As with anything buyer beware.

  2. He is back at it today. Luckily we have a rule that money spent on advice has to be researched. Sure am happy I found this discussion. Using all the same people plus new ones and every story is the same. Definitely a Buyer Beware situation. THANK YOU!


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