Skeptical of too-good-to-be-true retirement plans

(Money Magazine) -- Question: Are you familiar with something called a Plan B pension? Is it a legit investment and, if so, how can I sign up? --Lloyd, Decatur, Georgia

Answer: Plan B pensions? I have to admit it was a new term to me. But the very name sounds intriguing. So, hoping I might learn about some exciting new pension plan, I began poking around the net for information.

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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It didn't take long for my hopes to be dashed.

I found a reference to Plan B pensions all right. But it was a long and rambling piece that seemed more intent on keeping readers in the dark about this mysterious entity than clearly explaining what it is and how it works.

And as I plowed through this document with its titillating promises of how you can "legally sneak onto the 'payroll' of nearly 1,000 of America's best companies" and "collect a regular 'Plan B Pension' check as often as every 15 days," it became clear that what was being described had absolutely nothing to do with a pension. It was just a glorified come-on for a newsletter about direct stock purchase plans, or DSPs, and dividend reinvestment plans, or DRIPS (although neither DSPs nor DRIPs are ever explicitly mentioned).

Now, I have nothing against DSPs and DRIPs. They're not the first investment strategy I would recommend. I think mutual funds are a more practical way to invest if for no other reason than it's so much easier to diversify with funds. But DSPs and DRIPs can be a decent way to buy stocks over the long term.

I do have something, however, against portraying such plans in what I consider a misleading manner. I'm all for investing in stocks. But when you buy them, whether through a DRIP, DSP or any other way, make no mistake that you are taking on the risks inherent in stock investing. And if you think dividend stocks are exempt from the dangers of stock-market setbacks, take a look at the 60%-plus drop in the value of the iShares Select Dividend ETF between late May 2007 and early March 2009.

The point though, is that you're not getting a "personal pension" in a way that any reasonable person would expect hearing that term.

When I talked to Jim Nelson, the editor of the newsletter in question, he agreed that this program wasn't a pension "in the traditional sense." Still, he defended his use of the term Plan B pension, claiming that it was "an alternative" and "very close" to a regular pension. He also denied that his marketing letter was misleading.

At this point, I knew how poor Alice felt in the scene in "Alice in Wonderland" where she chastises Humpty Dumpty for misusing words only to have him reply scornfully that "when I use a word, it means just what I choose it to mean -- neither more nor less."

Unfortunately, this Plan B mumbo-jumbo is just another example of the sort of marketing gimmickry that's seen all too often in the investment world. As I was reading through the Plan B jabberwocky, I couldn't help but think of a scheme I wrote about earlier -- "infinite banking" -- which purports to show you how to profit by becoming your banker, but is actually an inducement to buy life insurance.

So-called7702(a) Private Plans also came to mind. These are touted as an "IRS-approved" route to tax-free income, but are really nothing more than variable universal life or some other form of cash-value insurance.

What all these pitches have in common is that they try to make you think you're getting in on some special deal. But there is no inside track to wealth. And anyone who suggests otherwise is blowing smoke, or worse.

The lesson here extends well beyond putative Plan B pensions. Any time an adviser (or a sales person posing as one) starts spinning a tale of an investment that has all upside and no downside or a can't-miss strategy with a multi-decade-long track record or some other financial version of a perpetual motion machine, your antennae should automatically go up -- and you should close your checkbook.

These days we're increasingly being told that we can look to the government to protect us from financial abuses. That we can take comfort in the creation of a new Consumer Financial Protection Bureau or the broader imposition of a fiduciary standard now being mulled by the Securities and Exchange Commission. Maybe such efforts will help; we'll see.

But the most effective line of defense against specious sales pitches and questionable financial products is still common sense leavened with a good healthy dose of skepticism that's grounded in your knowledge of how the real world works. Things that sound too good to be true usually are.