Preview of what we’ll cover today:

📉 DIY Penalty: The cost of going alone

🧠 Behavior Gap: Emotions hurt investor returns

💧 Cost Leaks: Small expenses compound over time

✈️ SDBAs Explained: More options inside your 401(k)

📋 Case Study: Personalized planning in action

🚀 Pilot Advantage: Retirement planning beyond average

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More About This Episode:

If you’re a pilot, there’s a good chance your retirement savings are sitting in a target date fund you selected years ago and haven’t thought about since. The problem is that the fund doesn’t know anything about your pension, your spouse’s income, your retirement timeline, or the unique challenges pilots face. In this episode, Ryan explores a little-known feature inside many 401(k) plans and shares research that may change the way you think about retirement planning.

Go Deeper Into The Episode:

0:00 – Intro

2:03 – Target Date Funds

3:11 – Vanguard 3%

4:39 – DIY Penalty

5:50 – DALBAR Behavior Gap

8:10 – Flying Blind: U.S. Dept. of Labor TDF Study

10:08 – Cost Leak (Vanguard)

11:15 – Advisor Alpha

12:27 – Market Panic Behavior

13:47 – SDBA101

18:09 – Benefits of SDBA

22:21 – How to Not Miss Out

Resources:

Retire Pilots – https://retirepilots.com

Get your FREE Retirement Toolkit – https://bit.ly/3ZmZsaX

Pilot Tax – https://pilot-tax.com/

The Pilot’s Advisor Podcast is also on video. Watch & Subscribe on YouTube: https://bit.ly/3EIEBW2

Connect with Pilot-Tax: https://pilot-tax.com/

Episode Transcription:

(Note, this is an automated transcription. Please forgive any errors.)

Ryan Fleming 0:00
Welcome to another episode of The Pilot’s Advisor. Unfortunately, if you’re a pilot, you probably got most of your retirement savings sitting in one target date fund. You got through basic in doc, you said it, you forgot about it, you haven’t looked at it since from the day you were hired. The problem here is that fund doesn’t know that you’re a pilot, it doesn’t know about your spouse’s income, it doesn’t know if you have a military pension, it doesn’t know about your health, it doesn’t even know that you have a hard stop at 65 years of age, and we haven’t even talked about medical issues, it doesn’t know whether you could stomach a 30% drop in the market without panicking, it was built for the average American worker, and hate to say it, you’re not the average American. You’ve arrived, and you’re at a legacy carrier at the top of your career field. So, nothing that you do is average. You make good money now, and it’s time to get professional help. Today, I’m going to show you about something inside your 401 k that most pilots don’t even know exists. It’s something called the self-directed brokerage window. I’m going to show you what the research actually says from Vanguard, the Department of Labor, from a study of 700,000 retirement savers about how going it alone, the do-it-yourself, the Type A, versus get professional help, and the differences stick with me today on the show, and we’re going to tell you how this could be a massive difference in your retirement.

Walter Storholt 1:32
Hey, it’s time for the Pilots Advisor, Walter Storholt, back with you, as always, alongside the Pilots Advisor himself, Ryan Fleming, and it’s a great topic today as we dive into this SDBA conversation in a couple of moments. We’re going to talk about what an SDBA is, how target date funds really work, and peel back the curtain of that a little bit. Ryan’s got a case study for you that’s going to illustrate some of the things that we’re going to talk about today, and really help you understand some of these options that are available to you that so many pilots just don’t quite understand, and don’t quite have the awareness of Ryan. I’m looking forward to talking to you about this, and we’ve got some power stats that we’re going to talk about on today’s show to kind of lead things off a little bit, and I think this will be eye opening and kind of set the stage for our conversation. So, this should be great. I’m really looking forward to this conversation with you.

Ryan Fleming 2:17
I’m excited too, and I hate it, because it’s so hard when you don’t know what you don’t know, and many times we’re doing something that actually hurts us, and we don’t realize it. And the best way I like to think of it from the flying world is many times you might be flying into an airport, and if you have experience, you know that you’re about to get slam dunked, whereas an inexperienced pilot sitting over there, and he’s fat, dumb, and happy because he just doesn’t know what he doesn’t know, and I feel like today’s episode is so frustrating to me, because it’s all about looking at target date funds or looking at pilots that just set something up and in basic in doc when they first got hired, and they’ve just ignored their 401 case, where it’s probably one of the most important things that you could ever do, because it’s the future, it’s your retirement, it really matters, and so we talk about the stats and what some studies out there have shown why doing it yourself or putting it on autopilot, you’re really actually hurting yourself.

Walter Storholt 3:11
All right, well, the first stat is from Vanguard, and it’s known as the 3% number. Break that one down for

Ryan Fleming 3:18
us. Yeah, first Vanguard, great company to love them. Vanguard’s all about being very, very diversified, low expense ratios, passive investing, and even Vanguard has done studies, and they say you need to have an advisor, you can’t just buy a bunch of our funds and not have an advisor, and so this one is called the Vanguard Advisor Alpha, and it was actually an amazing study, because once again it was almost counterintuitive. Hey, we have passive funds, you could do it yourself, buy them, and set it. And then they did this study, and it said you need to get an advisor, get professional help. And basically, what it said was, so.. and I’m just going to read this. Vanguard, the large, largest low-cost fund company in the world, the company that makes its money on the funds inside your target date fund published research showing a good advisor can add up to and even exceed 3% per year in net returns. That’s not a number, that’s Vanguard’s, and the funny part about that 3% is that 3% is net a fee, and if you look at a 3% difference compounded annually over the course of your career, that is a massive difference, that’s a totally different retirement picture, and we’ll talk about a little bit later, but that 3% is mostly behavioral, is having somebody having a coach making sure that you’re not going to make those emotional mistakes, make those short-term decisions that are going to probably hurt you in retirement,

Walter Storholt 4:38
and it’s a very eye-opening number, it leads nicely into our second power stat. It’s known as the DIY penalty, and this is from a big study. Over 700,000 people were involved in this particular study. Right, Ryan?

Ryan Fleming 4:51
Yeah, it was. And this one’s Anne Hewitt and Financial Engines. So, these are actually, you know, financial engines. If that doesn’t perk up your ears, they’re affiliated with a lot of. Airlines right away, they try to get you to sign up on one of those. When you go through the hiring process, you click one button, the next thing you know, you’re paying them to manage your 401 k, and you never look at it again. So, this was over 700,000 workers amongst 14 different employers, and here’s what they came up with. This study of over 700,000 retirement savers found that the ones who got professional help beat the ones versus going it alone by 3.3% a year after fees, once again 3% compounded annually, totally different retirement. So it actually says exactly what I’m always touting, compound that over a pilot’s career, and you’re not talking about a nice car, you’re talking about a totally different retirement picture.

Walter Storholt 5:43
Yeah, that one aligns very nicely with a completely different viewpoint, and that’s from Vanguard in our first stat. So that is huge. Dow Bar – we’ve talked about them in past episodes before. Great research kind of institution and resource for financial information. They have our third power stat, and it defines what’s known as the behavior gap.

Ryan Fleming 6:02
Yeah, I love Dal Bar, and I actually talk about them when I, when I talk to somebody one on one. Dow Bar is a company out of Boston. All they do is study investor behavior, and I love behavioral finance. I think it’s the biggest difference that’s out there. And here’s what Dow Bar says: the biggest threat to your 401 k isn’t a market crash. It’s what you do during that crash. Research shows that the average investor gives up three to 4% a year to their emotions. A target date fund won’t stop you from panic selling at the bottom. A plan and a professional will. I look at this, and then the questions I get from my clients every single year, we probably have at least on average we have a 10% pull back almost every year. People just don’t remember it, they don’t realize it, and you know people wanting to get out of the market, it happens all the time. So I really read into this, and I talk about Dow Bar stats on the mistakes that pilots make. So this one speaks to me as well, and this is why I want somebody at a minimum. If you’ve ordered the toolkit, or even if you haven’t, order the toolkit, but set up a meeting, and let’s just look at what you’re doing. When I actually talk to a pilot, where they take the time to set up a meeting, I would say 90 plus percent of them end up going and becoming a client, because they start really seeing the true value after we have a conversation,

Walter Storholt 7:22
yeah, it’s important, and it’s why we often encourage folks to reach out to Ryan and set up that time to visit. If you’ve ordered the toolkit, you’ve had the opportunity to schedule that meeting and that visit with Ryan, so you know the ways to get in touch. We’ve got contact information in the description of today’s show on your screen if you’re watching on YouTube, so it’s easy to touch base and talk about these elements, these things that we’re exploring today. If you’ve been a DIY or, but you feel like you’re leaving something on the table, especially after hearing some of these stats, it’s a great reason to reach out and talk more specifically about your situation. If you haven’t ordered the toolkit yet, do it again. Link in the description of today’s show, it’s free to get packed with Ryan’s books, resources, all specifically built for pilots by a fellow pilot and somebody who’s been helping people achieve financial success throughout their lives. Let’s talk a little bit about the next stat in our Power Stat series. Here, this one comes from the US Department of Labor TDF study, and it kind of hits on the fact that you don’t know what you own. Is this the equivalent of flying blind? Ryan,

Ryan Fleming 8:22
well, so much of what we’re talking about is flying blind, you know, flying through that thunderstorm, and you don’t even have a radar. No pilot in their right mind would be flying at night through a bunch of thunderstorm cells without a radar. But here we go, looking at our retirement. So, US Department of Labor, talking about target date funds. The Department of Labor studied target date funds and found two funds with the same year on the label can carry completely different levels of risk. Most pilots have no idea whether their 2045 fund is aggressive or conservative, they just trusted the date, that’s flying blind.

Walter Storholt 8:56
Yeah, yeah, you pick the date, it’s supposed to be customized to you, right? That’s my date, I’m picking it, so the fact that two funds that say the same date can be completely different risk levels is kind of.. I don’t know that the whole.. the whole thing kind of falls in on itself at that point. The whole theory, so that’s interesting.

Ryan Fleming 9:10
Yeah, and I analyze these all on a day-to-day basis, whether it’s one of Fidelity’s target date funds, whether it’s one of Schwab’s, whether it’s one of Vanguards, they’re all completely different. The other aspect that I look at too is that I see as a major mistake is many pilots out there flew in the military, they have a military pension, if they’re at one of the carriers that still has a pension, like UPS or FedEx, they have a pension on top of that, so a target date fund is going to start pulling back the throttles when really you don’t want it to pull back the throttles if you’re, if you’re up at cruise flying an airplane, and all sudden, the throttle will start pulling back to idle, unless you’re ready to descend, that perks your ears up, there’s something wrong. Okay, and that’s exactly what’s happening inside your 401 k. You’re about to stall this airplane.

Walter Storholt 9:57
Yeah, again, we’re going to switch and talk specific. Basically, about these SDBAs, and how target date funds work, and compare the two. Coming up in a few moments, couple more power stats to drive things home. Vanguard also identified something as the cost leak. Is this like an oil leak in the airplane, or a gas leak in the airplane, or something like that? I

Ryan Fleming 10:16
don’t know. We’ll talk about it. Let’s see here. So, the Vanguard research shows that just moving to a lower cost investment can save you half a percent per year, every year. That’s easiest money in your 401 k, and most people leave it sitting on the table. I’ll look at this one as being where sometimes we cut off our nose to spite our face. Expense ratios 100% matter, like we, you know, we don’t want to invest in stuff that costs a lot of money, but what’s more important is your net if you return after fees. What’s your actual return? So many pilots don’t work with a professional because they are too cheap, and pilots are historically cheap. I am one, I know it, I know the way it works. Pilots are very, very cheap, but you don’t want to work with a professional, and all you’re doing is accepting less return over the long term. That’s hurting yourself. That’s not good. I mean, imagine if you had a leak on one of your engines and that slow leak keeps going, and next thing you know, that engine flames out. We don’t want that.

Walter Storholt 11:12
Yep. All right. There is another Vanguard element here, where they talk about where the 3% actually comes from, and the surprising thing here is people would think it’s like, oh, I’m just not very good at picking stocks, I’m picking the wrong investments, and they kind of identify that that’s not really the crux of that 3% number we talked about earlier.

Ryan Fleming 11:31
Yeah, so they talk about digging into the data. Dalbar talks about one of the biggest mistakes that people make is stock picking, and I see that all the time, because you are speculating and gambling with your money with your retirement, you know, taking leverage positions in one company, but the Advisor Alpha study goes into that. It’s not the stock picking, is where that 3% comes from, it’s the behavioral coaching, tax efficiency, lower costs, disciplined unemotional rebalancing, and then also smart, smarter withdrawal strategy, so we and I see this a lot too, where the accumulation phase of saving and building pilots, you know, they know they have to save for retirement, but they have no clue how the distribution phase works, they have no clue how to invest money outside of a 401 k to give them that liquid security, and once again this study goes back to talking about how a target date fund does exactly none of that and actually hurts you.

Walter Storholt 12:26
Something that you always promote and talk about is our final sort of power stat here, Ryan, and that is when the market is going through turmoil, panic sets in, and Vanguard had an interesting take on what the impact is during these market turmoils, crashes, and people’s behavior.

Ryan Fleming 12:45
Vanguard found that investors who stay in a single managed fund are about five times less likely to panic trade than everyone else. Disciplines the whole game, and that’s what a real strategy gives you. What I would say about this, from what I find, there’s a lot of pilots out there that want their hands inside their 401 k, and they’re watching TV all the time, they’re buying Kiplinger’s magazine or Money magazine, whatever it is, and I find those that are more actively involved in their 401 k actually hurt themselves more than they help themselves. When I start analyzing a portfolio, those pilots that are constantly fiddling around with it, they make those bad short-term emotional decisions and are actually in a much worse position than than somebody that has not not fiddled with it. So, I do see that often. So, transitioning, though, what are we talking about today? We’ve talked a lot about target date funds, we’re talking about the difference between professional help versus just choosing a few of those funds that your 401 k plan offers. So, we’re going to talk about something called an SDBA. What is it? SDBA stands for self-directed brokerage account. So, inside your 401 k there’s actually a little window that you can open up, and then you can get access to anything on Fidelity’s platform or anything on Charles Schwab’s platform. What is this called for Fidelity? It’s called a brokerage link window. What’s it called for? Charles Schwab, it’s called a personal choice retirement account. But what it does, it opens up the whole universe of stocks, ETFs, funds, instead of that short little menu that they might have agreed to with their 401 k, so it’s still your 401 k, it’s still a qualified plan, but now you have every option to you out there, the stba, and there’s studies about this to people that use the st ba, how much more ahead they are in the game, and a lot of that’s just because you have a bigger menu of what to select from, you know. We talked about the SGBA, that helps a lot of pilots. That’s how I help pilots manage their 401 k. But let’s just talk about retirement funds, like let’s talk about those target date funds, because I see this a lot. If I start analyzing a portfolio and I see a target date fund, and we. Have a meeting. I started asking them about their target date fund, and they really don’t know anything, and they selected it and forgot about it. So I’m just going to read kind of a little bit about target date funds. A target date fund, what is it? It’s a fund that’s on autopilot in a 401 k. It’s a set and forget it. It runs on a glide path, a present formula shifts you from stocks to bonds as your target year approaches. The key word is preset. It’s a formula, it’s not a decision made for you at all. It actually doesn’t even know you’re a pilot. These target date funds are presented to anybody out there, any American that’s out there, and they just choose one and it knows nothing else about you, it’s a one size fit all by design. Everybody retiring in 2045 gets the identical allocation, whether you’re a single income earner, a pilot, whether you’re married, whether you’re married to somebody with a pension, whether you’re military with a pension, it has no clue. The fund can’t know your situation. Most are also fund to funds, which can stack extra layers of fees on top, so that target date fund. What I mean, pick a, pick a carrier that 2045 All it is is stacking funds from that company inside that fund of funds approach. Now, to be fair, a target date funds are generally good default, you know? If you’re not going to do anything else, it’s better than doing nothing. It’s a good default for someone who’s never going to look at their plan, but if you care about your plan and you care about your retirement, that’s the lazy man’s way to set it up.

Ryan Fleming 16:28
And once you want a better path, so the real question is whether you’re, you know, if you’re a high incoming earning pilot with a complex financial picture, you don’t want to just put it on autopilot for the next 30 years and never, never look at it. It almost be like turning on the autopilot in an airplane and not monitoring it. Like, we don’t turn on the autopilot and go sleep in the back.

Walter Storholt 16:48
You didn’t become a pilot just to put it on autopilot and do nothing. Like that takes all the fun out of it, right? Yeah,

Ryan Fleming 16:53
you don’t. You don’t turn on the autopilot and then just get up and walk away.

Walter Storholt 16:57
Yeah, the

Ryan Fleming 16:57
whole point. So, anyway, but that’s what a target date fund does, I attention

Walter Storholt 17:04
aviators. When you’ve spent years in the cockpit managing the complexities of flight, isn’t it time you navigated your retirement with the same precision? Introducing Retire pilots.com Right at your touchdown zone on our homepage, there’s a beacon flashing “Get My Free Tool Kit. Click that, and you’ll be cleared for a direct route to Ryan’s retirement toolkit, tailor-made for pilots like you. Inside, you’ll find two of his important works: The Pilot’s Advisor and Pilots Retire Early. Between these two books, you can decipher the nine critical decisions when retiring before 65 and discover the seven lessons to help pilots land safely in retirement, but that’s not all. This toolkit is packed with altitude high value, including extras to get your retirement plans off the runway and light the afterburners on your 401 k. Vector on over to Retire pilots.com to grab your toolkit, and let’s embark on this journey together. We talked a bit about the SDBA, why that you know, how that exists, what that looks like, how the target date funds really work. How about an example of why you might want to do this SDBA strategy inside of your 401 k inside of this work plan instead of just picking the target date funds.

Ryan Fleming 18:26
Well, Walter, I’m going to let you take this one. I mean, you’ve seen all the data, you see the stba, you know it’s a more personalized approach. We have a ton more options. You might, you have probably most likely you don’t have to work with an advisor if you have an STBA, but I’d recommend it based off of all the data that we just showed you. But once you, once you take this one, Walter, with the STBA.

Walter Storholt 18:48
Well, I think my biggest takeaway from hearing what you’ve instructed today, Ryan, is that the target date fund doesn’t account for me, it doesn’t account for you as a pilot, it doesn’t take into account what’s going on in your spouse’s life, it can’t see outside of those narrow accounts that it’s dealing with, so it doesn’t know if you’ve got an account over here and another account over here, it doesn’t know if you have an inheritance coming through, it doesn’t know anything about your risk tolerance. So, how personalized can that strategy truly be? If it’s just a number, just a date in thin air saying, yeah, I think I’m going to retire on this date, but does it know all of these other 75 plus other variables, and so if you’ve got money scattered in different places, I suppose if everything you own is in that one account, then maybe it’s got a better picture of you, Ryan, but even then, there’s still a lot of other moving parts, and that’s also just an unrealistic scenario, so that’s why to me I see a really big argument for taking a little bit more control of what’s in your plan. My big question for you, Ryan, as you know, we try to think about the different and competing pieces of advice, so it’s saying, like, don’t pick stocks, makes me think, well, I should just take this off the shelf, done for you option, because I don’t want to make those mistakes. Weeks, but at the same time we’re saying don’t just take the off the shelf thing, make some decisions, be a little bit more sophisticated in your planning. So, is that where the advisors, that where you come in and you say this is where we’re going to do this safely, this is where we’re going to pull in these different elements, and we’re going to have a more sophisticated plan, but we’re not going so far. It’s that balance, we’re not going to go so far in the risk level that we’re just picking risky stocks to try and hit the biggest gains, we’re trying to make all of these things kind of work with one another, is that kind of the big difference here?

Ryan Fleming 20:28
Well, I think so, and I hate to always bring up Dave Ramsey, but years and years ago I was the same, I was listening to Dave Ramsey’s podcast, trying to learn about investing, and you know, some of his advice is great advice for that average investor that just we don’t want to make those big mistakes by stock picking, market timing, track record investing. He also has

Walter Storholt 20:49
entertaining clips online, so it’s easy to like see him and be visible and, like, you know, get wrapped up into that world. So that’s understandable.

Ryan Fleming 20:57
Yeah, and it’s basic information, so you don’t hurt yourself, but I look at it, you know, we’re looking at like a seventh or eighth grade level of here’s the basics of investing, and where we’re trying to get is we’re not only trying to graduate from high school, we’re not only trying to get past college, we want to get a master’s degree in what we’re doing, and a pilot’s career is so different from any other profession out there. When I actually talk to other advisors, and I tell them that some of these airlines are putting 18 to 19% of anything that a pilot makes inside their 401 k, they are blown away by that. A pilot situation is drastically different than any other career field out there. And then when you add on a lot of the military service that many of these pilots have, which, of course, I speak that language as well, of having done it for 22 years. My wife did it for 22 years. I speak all of that language. It’s a completely different scenario that we really need professional help and put it together if you want to be in a better position in retirement. I mean, Walter, does your company put 19% of everything you make into your formal K every year,

Walter Storholt 22:02
not not automatically, you would have to do it on your own, right?

Ryan Fleming 22:07
I know we’ve had that conversation before, and I start talking about what these airlines are doing, it’s a great profession, it’s a great career, and you know, I just want to help pilots get in a better spot, that’s why I’m passionate about what I do, and, and if you do get an extra one to 2% per year compounded annually, completely different retirement picture. So, at a minimum, it doesn’t hurt you, just set up a meeting and let’s go through it, let’s talk about it, let’s, let’s see what those different variables and options are inside your 401 k plan that you may not even know about, and another thing I see, what’s wild to me. Most pilots don’t understand the difference between a Roth 401 k and a Roth IRA, and I get this all the time after 1015 years at an airline, and they’re like, “Oh, I make too much money to do Roth contributions, and I’m just like, “Oh my god, this is so.. you know, the benefit that they’ve missed out on, they’ll never recover from.

Walter Storholt 23:03
Yeah, that goes back to that tax planning part, being part of that 3% slippage. And I, and keep in mind, too, this is one important thing, right? That 3% number was an average, so that means that in that, in that group, there are a lot of people that are experiencing much higher than 3% slippage in their portfolios, that 3% you know, area of opportunity is really maybe even better represented as a range. Probably I would like to see those numbers, maybe from Vanguard someday, to see what that range really looks like for folks, because that’s, that’s, that’s very intriguing to think about, too, that you might fall on that other side of the spectrum of it being even more than that, something to think about. Well,

Ryan Fleming 23:39
and sadly, that’s why I’m so passionate about this, because I get to see the good, bad, and the ugly. I get to see it all, and it’s disheartening. It’s no different than, like, seeing a retirement plan from a military, you know, they call that the TSP, the Thrift Savings Plan. And I’ll see somebody that’s been in the military for 22 years and it’s been sitting in the G fund. Oh my gosh, that should be that’s criminal. Okay, but it happens, and so I’m just very passionate about wanting to help people and get them in a different position. And unfortunately, when you see some of the stuff that’s happened out there, you really want to help somebody out.

Walter Storholt 24:14
Well, said all across the board, Ryan. Lots of good takeaways on today’s episode. So you might be watching, thinking, okay. What do I do next? Where do I go from here? There’s one really easy way to get in touch with Ryan, especially if you’ve ordered the toolkit before. You probably have this number somewhere, but go ahead and text Ryan, or give him a call at this number. It goes directly to him: 843-475-3038 and you can schedule that time to visit. Talk specifically about your plan. We can talk broadly here on the show, but getting into the specifics is the best way to go about it. Again, 843-475-3038 We’ll put that in the description of today’s show, so you can find it easily as well. Or you can go to Retire pilots.com Lots of great information on the site for you, ways. To get in touch, and if you haven’t ordered that toolkit that Ryan’s talked about, and we’ve mentioned a few times, you can get it there on the website, Retire pilots.com your place to go for all sorts of great resources, studies, more information, all sorts of good stuff. Other podcast episodes, go check them all out there, or get in touch with Ryan, schedule your review, and see if these paths, if these decisions are a good route for you to take, and in many cases they are, but you won’t know unless you go through that review process. So, Ryan, thanks for breaking this important topic down for us on the show today. Enjoyed it, and we’ll look forward to catching up with you again soon.

Ryan Fleming 25:33
See you soon, Walter. Take care.

Walter Storholt 25:35
Sounds good. We’ll see everybody next time on The Pilot’s Advisor.

Speaker 1 25:42
This episode is for educational purposes only, and is not individualized investment advice. The Pilots Advisor, LLC, is an SEC registered investment advisor. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results, and investing involves risk, including the possible loss of principal.