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A Small Employer Gets Sued

I suppose it had to happen. LaMettry’s Collision in Minnesota, clearly a small employer, has been sued by a couple of its employees (not sure if they still work there) for excessive plan fees.  This is not the precise reason, but it’s effectively the situation.  From what I can tell, the fees are truly ridiculous. Not sure I would call it a scam but…ok, it’s a scam!

While not a tiny plan – it has $9 Million and 114 participants – it is certainly not large.  So, what does this mean for other smaller employers?  Are micro plans going to be targeted?  Plans under $5 Million?  Or what about plans under $1 Million?

I have mixed feelings about this.  Running a small business presents many challenges.  I am sympathetic to the owners’ circumstance.  Maybe they have been doing the best they can to satisfy the needs of their consumers, grow their business, and provide for their employees as well.

For competitive and personal reasons, I assume they felt like they needed to offer a 401k.  And I’m sure they relied on the professionals calling on their plan.  But now that they that have been sued, wouldn’t they have been better off just paying their employees more and letting them do whatever they wanted with the money?

Yet, is there a reasonable excuse for a plan with absurd fees?  I’m not talking about average fees – which are too high anyway.  This plan is just plain awful.  Some plans for smaller employers are so filled with excessive fees and conflicts of interests that it is hard to feel sympathy for the fiduciaries.

I come across employers who have virtually never bid their plan.  I am not exaggerating.  They have not compared options in 15 to 20 years.  A review of the plan might involve a conversation with their current custodian, vendor, agent, broker, or whomever.  They ask how their plan is doing.  Their contact tells them they are doing fine, and they get on with their business.

I don’t know how this case will shake out.   The suit claims that the per participant costs for plans with more than 100 participants should be $18 per participant a year.  This is preposterous.  On the other hand, I also know this plan is grossly, grossly overcharged.

Regardless of what happens, smaller employers have to take notice.  Fixing a plan, and severely limiting liability, is just not that hard.  Do the following:  1)  Eliminate revenue sharing – period:  2) Always, always use the lowest cost share class;  3)  Pay flat or per participant fees for advisory support and record keeping; 4) Offer an array of low-cost index funds; and 5) Eliminate insurance or broker/dealer charges.  If you can’t do all of these at least do some of them!

Unfortunately, employers don’t know what they don’t know.   This is not good when they carry the responsibility and liability.  Cases like this will make the liability less theoretical and more real!

 

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Being Uninformed or Misinformed – Which is Worse?

I’ve heard skeptics on the quality of media reporting say that people would be better off being uninformed than misinformed.  Whether this is true or not of the media, it is certainly true of the financial services industry!  I don’t advocate that people be ignorant of developments in the financial markets or economy.  But I think they need to be careful about determining what type of information is helpful to their financial well-being.

This brings me to market updates and newsletters provided by advisory firms.   We decided when we founded PlanVision that we would not put market updates on our website.  Why?  For our clients, who invest and plan for their long term future, this information is not relevant.  It’s just noise which distracts from long-term goals.  

We don’t help people time the market or make speculative plays on stocks or bonds.  This is not part of a sound investment strategy.  As such, we’re not going to provide this information.  If we put it on our site, this would imply we think it’s helpful – that our clients should use it or be interested in how it affects them.

MOST IMPORTANTLY, THIS INFORMATION DOESN’T INDICATE WHAT WILL HAPPEN.  It is not predictive in the short or the long-run.  In fact we think its misleading or, even worse, harmful. Many professional and amateur investors use it to make investment choices.  Armed with recent market knowledge, they’re under the impression that they can predict how the markets or individual stocks or bonds will perform.   Good luck with that!

Do you or your employees really need to know what happened the last 30 days and why?  How one asset class may have performed compared to other asset classes?  What happened to short term rates in Japan?  How about leading market indicators?  The price of oil? Trends in clown shoe sales? Virtually all of this information that might pass for interesting facts, statistics, or ideas are useless in predicting market performance.  Cause and effect in investing, like many things, can be very evasive. For a little fun, check out some of these correlations from Tyler Vigen. 

However many advisers present this information on their site and in newsletters as though it means something and is somehow useful.  The truth is it just gives them something to talk about – a way to add value.   They can explain what happened and why it happened and how it may impact something next.  And based upon what is happening, and what might happen, they make recommendations.  Of course they’re guessing – but this is beside the point.  They are being paid a fee so they have to figure out what to do with all of this impressive data they collect.   

As a plan sponsor, what you expose your employees to matters.  Don’t provide information that doesn’t help.  The smartest approach for people preparing for their future is to budget, save, and plan.  And when it comes to investing, keep costs low, diversify, and select an appropriate level of risk.

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403b Plans are Worse Than 401k Plans

Most non-profit organizations can offer either a 403b or a 401k plan to help their employees save retirement.  Since for-profits cannot use the 403b plan they commonly use the well known 401k.

When I talk with non-profits, we generally discuss the pros and cons of using a 403b plan.  Even though there are many technical differences between the two, they are quite similar.  Yet there are key differences which impact their effectiveness.  A big advantage of the 403b plan is that it does not require the ADP test, which is applied in non-Safe Harbor 401k plans.  This is huge!  Without this test, the Highly Compensated Employees (HCE) – yes, non-profits do have HCE’s – will not have their personal contributions limited by the average of the non-Highly Compensated Employees (NHCE). Many for-profits use Safe Harbor 401k plans just to avoid this specific test.

Another advantage of the 403b plan is that employees who work for more than 15 years can use a special catch-up provision.  Known as “Cap Expansion,” they can save an additional $15,000 more in their accounts (no more than $3,000 a year) after 15 years of service.

Other administrative requirements between 403b and 401k plans are similar.  But if you think they would be charged about the same to administer and support, you would be wrong.

With all of my experience with non-profits, I know fees in many of their plans are just awful.  I mean really, really bad. I think it has to do with the fact that the 403b has been around longer than the 401k and was originally targeted by many insurance carriers.  Many 403b plans have been using annuity based products or other broker-based products with excessive sales or AUM charges. Unfortunately, these excessive fees damage how much their employees accumulate for retirement.

How did this happen?  I don’t know.  Maybe they were just easier targets for the agents back in the day and many of these relationships are still dominant to this day.

Another possibility might be non-profits willingness to provide guidance to staff.  I believe that non-profits tend to be more supportive of their employees receiving personal guidance than comparable for-profit businesses.  This is to be commended.  Unfortunately, the fees for this support are disproportionately large to the amount of real guidance the employees receive.  The fees are not directly tied to the services provided – they are just wrapped into the insurance product, investments, or assets under management.

And to top it off, many of their employees are sold additional products and services – that are also overpriced!  It’s a double whammy.  

There are plenty of overcharged 401k plans.  But 403b’s have it worse!  Small non-profits can have much better plans – but it is up to the plan sponsors to get rid of the crappy, fee-laden providers that overcharge their plans and their employees.