dollar-black-hole

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!

 

pexels-photo-110110

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.

 

Complex

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.

percent_complete

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.  

78288-show-95657

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.

night

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.

__________________________

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.

 

pexels-photo-30342

The Truth About Investment Consultants and Advisers

I have been looking for a way to describe most of the guidance provided by those in the financial services industry. I’ve struggled with the best way to put it.

However, the quotable Warren Buffet provided a great take on how investors waste money on investment advice.  In this case, he is referring to “sophisticated” investors.  However it applies to everyone.  It’s happening as well with those we work with – middle class individuals and smaller organizations.

Here it is:

“Supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you ‘just buy an S&P index fund and sit for the next 50 years.’ You don’t get to be a consultant that way. And you certainly don’t get an annual fee that way. So the consultant has every motivation in the world to tell you, ‘this year I think we should concentrate more on international stocks,’ or ‘this manager is particularly good on the short side,’ and so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in the American business without cost. And then those consultants, after they get their fees, they in turn recommend to you other people who charge fees, which… cumulatively eat up capital like crazy.”

And he had more:

“And the consultants always change their recommendations a little bit from year to year. They can’t change them 100% because then it would look like they didn’t know what they were doing the year before. So they tweak them from year to year and they come in and they have lots of charts and PowerPoint presentations and they recommend people who are in turn going to charge a lot of money and they say, ‘well you can only get the best talent by paying 2-and-20,’ or something of the sort, and the flow of money from the ‘hyperactive’ to what I call the ‘helpers’ is dramatic.”

I haven’t come across a better summation of what I have learned about the value of investment advice.  Keep your money.  Set up a well diversified portfolio of extremely low-cost index funds and…that’s it!

 

pexels-photo-66757

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!

 

man-hands-reading-boy

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.

Lightning

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.