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!