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It’s Even Worse Than I Think (#2 and #3)

I’ve written about this before but it is still shocking how horrendous some plans and fees are I come across in the marketplace.  Here are two examples from last year:

Company A is a small employer with only 11 plan participants.  However, the plan has some nice assets at around $1,400,000.

They contacted me through a referral.  Their adviser had gone through a change from one firm to another and they weren’t sure if they were getting a good deal if they stick with him.

As I talked with them, it was clear they didn’t know how much they were paying for their plan.  They didn’t know how much their recordkeeper charged or how much the adviser made.  I don’t mean they didn’t know the amounts they were getting, I mean they really didn’t know how they were compensated.  Was it directly deducted from employee accounts or were they paid by revenue sharing?  They also weren’t sure how much their adviser was earning on their plan.

As the conversation unfolded, I was blown away by one of their comments. They explained how their advisor had switched firms and that the charge to continue working with him would be $10,000!!  Did I hear that right?  I thought I had heard it wrong and had to confirm it with them as the conversation continued.  Yes – $10,000 to work with their adviser at his new firm. They also told me the investments would stay the same and they would keep the same record keeper.

So to switch advisers, for a plan of 11 people, with no other changes to the plan – at least as far as I could tell – the cost would be $10,000.  I am pretty sure you don’t have to work in the industry to understand what an insane rip-off this is.  Where do advisers get the nerve to pull this crap? Well, they do it because consumers let them!  This plan sponsor, after evaluating options, decided to keep working with this adviser!  They got back to me and told me that they didn’t want to disrupt the good relationships he had with the employees.

Company B contacted me in October.  A plan with 44 participants and around $4,000,000 in assets using a large, well-know insurance company.   Fortunately, one of their employees had gotten savvy to fees and wanted to do better.

They sent me their fee schedule. Sadly, the average fund ratio was a little over 2%.  I went to look at the Form 5500 info on their plan.  Their advisory firm is making $33,000 a year on commissions!!  Almost $1,000 per plan participant.  Are you kidding me??

But $33,000 a year is not enough for the adviser.  I have subsequently learned that the adviser was selling other commission-based products to the employees.  This is so ridiculous.  Some advisers are completely shameless in the income they generate off of people.

Company B got it right though.  They changed plans and cut their costs by around 85%. This is a massive savings for the plan participants and will make a huge difference in their future.  And while their employees will receive personal planning and assistance, they will not be sold any additional products or investment schemes.

I don’t know why plans like these still shock me, but they do!

 

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A Checklist of Questions for Your Plan Advisor

You have a lot to do when it comes to running your business.  Any time you spend managing your 401k plan may seem like too much.

With this in mind, though, you still need to know what’s going on with your plan.  Why is your fund lineup structured the way it is, how much do you pay in service fees, are your fees reasonable and competitive, does your plan receive good value for the money, is your plan operating in a compliant manner, etc…

If you are like most smaller and mid-sized employers, you likely contract with an adviser to provide guidance on your plan.  In addition, your adviser might work directly with your employees. If so, most would agree that this represents an endorsement of your adviser’s guidance.  It’s important! Many of your employees’ current financial decisions, based upon your adviser’s recommendations, will impact their future.

Providing this type of guidance is a nice perk.  You should also benefit, in theory, from the good financial health of your employees.  But is the guidance smart and sensible?  Or confusing? Does your adviser use product hype or absurd assumptions?  Does the guidance promote other investment products that will benefit the adviser? 

With your limited time, you can use this simple list of questions to better understand the guidance your adviser offers:  

DO YOU ADVOCATE MARKET TIMING?

WHAT INTEREST RATES DO YOU USE IN RETURN PROJECTIONS?

HOW DO YOU DISCUSS THE FUTURE OF SOCIAL SECURITY AND MEDICARE?

WHAT TARGET AMOUNT DO YOU USE FOR RETIREMENT INCOME?

HOW DO YOU CONDUCT AN ENROLLMENT MEETING?

WHAT IS YOUR PHILOSOPHY ON PAYING DOWN DEBT VERSUS INVESTING IN A RETIREMENT PLAN?

WHAT DO YOU THINK OF TERM LIFE INSURANCE OR PERMANENT LIFE INSURANCE?

HOW DO YOU PRESENT AND DISCUSS RISK?

WHAT IS YOUR APPROACH TO DISCLOSING PLAN FEES AND GENERAL INVESTMENT FEES TO EMPLOYEES?  

WHAT KIND OF FORECASTING DO YOU USE?

HOW DO YOU USE OR OFFER ASSET ALLOCATION MODELS?

Would it be inappropriate for you to ask these questions to your adviser and get their answers in writing?  Not at all!  This is a great opportunity.  By asking just a few of these questions to current or prospective advisers you will learn a lot about how their guidance might benefit or hurt your employees. For all the hype and nonsense I hear in the industry, there are many times when no advice is better than bad advice.

 

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Are 401k Fees Too Complex? Can Your Employees Understand Them?

NO THEY AREN’T AND YES THEY CAN! 

You and your employees understand the price of many things you purchase.  However many people are truly perplexed about their 401k fees.  Why the big mystery?  Do your employees care about fees?  Do they trust that you understand the fees?  Or do they feel like its pointless to find out because they can’t do anything about their fees anyway?

THE SITUATION

RETIREMENT PLAN FEES ARE A MYSTERY BECAUSE MOST FINANCIAL SERVICES FIRMS WANT THEM TO BE!  They are masters at making fees difficult to assess. The fees are never completely hidden, just hard to get to.  Think about it.  The price of virtually everything you purchase is prominently displayed.  Yet have you tried to read a fee disclosure or prospectus from a financial services firm? These ridiculously lengthy documents can confuse industry veterans.  Novices have virtually no chance.  The fees are in there somewhere.  But you have to find them and then figure out if they apply to your plan.

Things are getting better though.  Now more than ever 401k (and other employer sponsored retirement plans) fees are in focus.  More articles, more research, more lawsuits, more legislation, more comedians riffing on fees, etc.  (Yes, comedians are even making a joke of 401k fees these days).  The DOL required Fee Disclosure in the past several years (even though I think it has largely failed).

This is as it should be.  Most plans, and plan participants, are grossly overcharged.  While plan fees have come down, the fee reductions have been minimal – hardly anything to get excited about.  The current average for small plans is around 1.30% to 1.35%, depending upon the study.  They are down roughly 10 to 15 basis points in the past five to ten years.  Big whoop.  They are still absurd.  Fees will vary from plan to plan, but far more can get closer to .50% per employee.  Not all will, but many can. Even small, micro plans.

Don’t get me wrong – I would never expect the average person to be able to explain, in detail, their 401k plan fees.  Maybe a few can, but most won’t be able to.  But it’s not unreasonable at all to expect the average person to have a general sense of what they pay and how each service provider to the plan is compensated.

THE REASON

This comes down to the attitude of the employer.  If you make a commitment to helping your employees understand plan fees then it will happen.  You should demand that your adviser provide some type of basic education on plan fees.  Not an hour long seminar where they blather on about all their expertise, experience, competence, value, etc.  Something short and concise about each fee and it’s purpose.

Unfortunately, many employers don’t take this on because they aren’t even sure about their plan fees and don’t know if they are competitive.  They might be legitimately concerned that they cannot justify their fees – so why educate staff about them.  And if employees aren’t making a big issue of it, why bring it up?

THE SOLUTION

The employer should present to each employee a one page sheet explaining the important fees. These are the larger fees which represent the main costs of the service providers on the plan.    

The key figure for employees is the percentage of their account which pays for plan services and investments.  This is how much they pay.  Why can’t this be presented on one page?  Seriously – with one line item and cost for each.  That’s it.  Distribute it once a year with the updated percentage per person and new total plan costs.  Nothing fancy – no small type and endless disclosures.  Would this be so hard to produce and understand?

The idea that employees cannot understand their plan fees is ludicrous.  When you make a commitment to educating your staff about fees, and work with an adviser that will help you do this, the majority of your employees will have a better idea of what they pay.  In addition, you will them become better consumers of financial products and services they purchase outside of the workplace.

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Asset Based Charges – 401k Plans – Lawsuit – Inevitable

401k and other retirement plans that pay for either record keeping or advisory guidance as a percentage of assets are getting ripped off.  We explain here why employers should purchase these support services as a flat fee or on a per person basis.  It’s a great way to save big money on plan expenses.  Unfortunately, way too many plans pay the wrong way.

In the rash of recent 401k lawsuits, I haven’t seen any that tackle this specific issue.  Up until now.

The employees of Mass Mutual sued their employer over excessive fees in their 401k plan.  I suppose management felt like the plan they were providing to their customers was good enough for their employees.  The employees didn’t think so.  Apparently the employees only like their products for everyone else except them!

They settled for $31 Million.  They also agreed to eliminate paying for record keeping as a percentage of assets for four years.  Good.  Then what?  Are they really going to go back to an asset-based method?  Would they do something this stupid?

I assume we will see more retirement plan lawsuits based upon asset-based fee models.  It’s an obvious and easy target.  Employers can and should change how they pay.  If their current service providers don’t bill this way, they can find many that do.  

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The 401k and Pop Culture

The 20 minute segment by John Oliver of LastWeekTonight from early June has been making the rounds in the financial services industry.  If you haven’t seen it yet, here it is.  Very clever and – warning – with adult humor throughout.  Many laughs and the spoof commercial at the end is fantastic.

Generally speaking, his comments about the industry are spot on!  It appears to be motivated by the research they were doing on their 401k plan.  I was quite surprised they decided to take this issue on.  Seems like something that might not hold his audience.  In fact, he had to ask for their patience during the segment.

Their 401k with John Hancock is lame.  It is not “competitively priced” for new plans.  Yes, there are administrative costs, etc. for all 401k plans, but the fees built in to their product are absurd.  They are part of the problem – not the solution.

While it is a great segment, their focus on the benefits of working with a fiduciary is misplaced.  (BTW, PlanVision is a fiduciary – but we understand that how we are compensated is more important than whether or not we are a fiduciary.) Fiduciaries can rip-off their clients just as well as brokers! Fiduciaries are notorious for charging assets under management (AUM) fees.  AUM fees can create just as strong a conflict of interest as commissions.  In addition, most fiduciary AUM programs imply that they provide value by managing their clients’ money.  It’s a bunch of nonsense.  See here for an example.

The overall cynicism in the segment is fully warranted!  People are paying way too much for investment and financial planning guidance.  I was pleased he researched it and went forward with it. Great to see this important message for consumers show up in popular culture.

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401(k) Deception

We have all been in a situation where we have received completely conflicting information when shopping for products from different companies.  It can sometimes be easy to determine the right choice – other times its much more difficult.

It happens in other areas of life too.  For example, after our daughter’s birth, one of the nurses working with my wife told her that her mobility would be very limited – it was likely she wouldn’t be driving and moving around actively for three to four weeks.  A few hours later, the physician dropped in for an update and told her that she would be fine in a couple of days and encouraged her to resume her schedule as soon as possible!

Many fiduciaries at smaller employers are not well-versed in the ins and outs of 401k administration and compliance.   They are at the mercy of industry practitioners (like me). Understandably, it can be difficult to distinguish the truth from the BS.   It’s hard for large firms and even more difficult for smaller firms.  Unfortunately, in the small retirement plan industry, the BS is rampant.  Here are three examples I just recently came across:

EXAMPLE 1

I was reviewing the fiduciary liabilities and obligations with the office manager of a small firm. She had been tasked with the responsibility of exploring 401k options.  As a part of our discussion, I introduced her to the fiduciary codes 3(21) and 3(38).

I explained how these two types of fiduciaries are different and how advisers can share or take some of their liability.  Some advisory firms like PlanVision are willing to accept the liability of the 3(38) Investment Manager for plans.

She had discussed this issue with another consultant.  The consultant explained that they didn’t want to hire a 3(38) because they would not be able to change the investments in their 401k lineup on their own if they hired a 3(38) adviser.

In a literal sense, this is correct.  But how often is a smaller employer interested in making changes to their fund lineup based upon their own research?  Does it make any sense at all for a plan sponsor to do this?   NO.  It’s ridiculous.  Why would an employer, who has more than enough to do already, want to take on the liability of making changes to their 401k fund lineup based upon their own selection of funds?  Also, if they went insane for a while and decided they don’t want the 3(38) service from their adviser, they could just take it out of their contract.

EXAMPLE 2

I was contacted by an employee of a plan sponsor with a relatively smallish plan.  Not tiny, but small.  About 350 participants and $5 million in the plan.   She was doing research and, smartly, was hoping to include index funds in her plan.

Her employer’s plan adviser, however, told her they were not available for her plan – it was too small.   What???  Nonsense!  Their plan is not too small.  Plans of any size, including start-up plans, can use Vanguard Admiral Share Class index funds.

The real reason they can’t offer these funds is because many low-cost index funds won’t support revenue sharing! Too small?  Pathetic.

With low-cost index funds there will be administrative and support costs.  However, the record keeper can clearly separate out those costs so the employer can include low-cost index funds and the employees or employer can pay for all plan support services separately.

EXAMPLE 3

Similar to example 2.  An overseas employer with American expats inquired with PlanVision.  They are interested in implementing a 401k or 403b plan for their American staff.  During the evaluation process, they have become educated about the benefits of low-cost index funds.  They have a relationship with a large, well-known broker-dealer.  When they asked their broker if they could include index funds, they were told they could not.

Why not?  Why can’t their broker simply offer index funds and bill the plan sponsor directly for their guidance?  Because this would be too transparent!  It is simpler for the broker to hide their overall revenue if they can build it into the investments in the form of revenue sharing.  And, once again, it’s harder to share revenue from low-cost index funds.

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I’m an advocate of innovation and competition and believe they help consumers receive more value.  In the marketplace of ideas and services, there are legitimate differences in philosophy and process from firm to firm.  Understanding these distinctions is a buyer’s responsibility.

Yet many financial service firms intentionally deceive plan sponsors.  Yes, intentionally.  They know better.  In many cases, unfortunately, their business model relies on this deception.

Vanguard is a great success story.  John Bogle attribute much of their marketing success to candor. It’s easy to see why candor works so well in an industry with so little of it.