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.

 

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.

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!

 

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.

Crowd of People

How Are Your Employees Influenced?

Every once in a while I recall how much influence I have on the people that I work with at my plan sponsor clients.  I provide guidance on their retirement plan and they often ask for additional assistance on other financial matters.

It is gratifying that I don’t feel the need to persuade them to buy other investment products or ideas.  I derive no additional compensation from them from the decisions they make on how to invest their funds in or outside the plan. In fact, our contract with our clients makes it clear that we cannot generate any additional revenue from staff (we have nothing else to sell anyway, so it doesn’t matter).

Last year I submitted a guest post for the White Coat Investor on sales tactics used by financial advisers.  I saw a very cynical though likely accurate comment in the follow-up to the blog.  In the thread I mentioned that it was disappointing that an employer was not vetting the presentations provided to residency students. The follow-up comment was: “No one vets anyone, anywhere.”

This got me to wondering how many employers take the time to review and understand the guidance provided to their employees?  Do they review the presentations to staff?   Do they ask to see what a retirement projection might look like?  Do they determine what interest rates their advisory firm is using in projections?   Do they understand what other products their employees might be purchasing from the broker or advisory firm?

I could list several more questions but you get the point.  I understand employers value the assistance advisers provide to their employees – this is what we do at PlanVision.  It can clearly make a difference in how well employees understand and get the most out of their retirement plan.  But it is also critical for employers to make a distinction between education and guidance and veiled sales presentations.

I am sure it is just me, but I think it would be great if the DOL added a field to the Form 5500 to indicate how much advisers or broker/dealers generate in revenue from non plan related transactions for employees still working at the employer. This could be required small plans and would be very revealing!

My wife took a new position and I was reviewing the paperwork she will use to set-up her 401k account.  The provider is well known in the retirement plan industry – Principal.  It struck me how the paperwork emphasized that she can transfer prior retirement assets into her new account.  Is this a big deal?  Maybe not.  But her new plan has higher fees than her individual IRA.

I am skeptical that Principal is objective in explaining this.   Based upon their revenue structure, they generate more revenue as the plan grows.  Of course, plan assets will increase with new employees,  more contributions, market growth, etc. This is good for the participants and the plan. But shouldn’t employees fully understand their options and the implications of their decision with funds they could voluntarily transfer into the plan?

It is virtually scandalous how financial services firms use smaller employers’ retirement plans as an opportunity to sell products to the plan participants.  If pressed on it, I cannot image any of these organizations seriously denying their intentions.  But until some employers  make it a point to limit product sales to employees, it will continue to happen.

Gifts

Vanguard Does It Again & Other Updates

Recent developments affecting retirement plans – with our editorial comments:

VANGUARD REDUCES EXPENSES FOR TARGET DATE FUNDS.  Not exactly known for ripping you off, Vanguard found room to reduce the costs on their Target Date Funds by 2 bps.  Another great example of how they can provide a simple low-cost model and candid approach to investors of all tyeps.  By the way, if you happen to have $5 Billion, two of their funds only cost 1 bp.  I’m just sayin’. Read more here.

FIDUCIARY STANDARD MOVES FORWARD.  Probably.  Looking more and more like there will be a fiduciary standard in place for advisory firms that service employer based retirement plans.  This would mean, theoretically, that plan sponsors will receive a higher standard care from the firms that service them.  I get it and understand the motivation.  Broker/dealers are not happy about this and are battling hard to maintain a lower standard of suitability.  PlanVision is a fiduciary.  We stand to gain on this.  However, I think many, many fiduciaries overcharge and oversell.  I am not all that impressed.  

LAWSUITS ON 401K PLANS.  Mega plans are being targeted left and right.  Clearly, attorneys stand to gain a tremendous amount in fees so you can expect to see more of this.  It will definitely have a short term impact on large plans and eliminate much of the nonsense with retirement plan fee payments.  However, it will take longer for this to affect the small plan market.  Many smaller employers simply don’t understand the payment systems and the conflicts of interest that impact the structure of their retirement plan.

STATES PROMOTING THEIR OWN PLANS.   These efforts would target smaller employers and are designed to help make plans more affordable.  Yes, the states are getting in on the act.  We currently see many low cost options in this space and other technology firms invading as well.  I see how this could help bring down costs for small plans.  I am really uncertain, though, how the final product will look and how it will compare to employers’ current options.  From what I have read, some advisers are not happy about this.  Of course, I think far too many advisers overcharge for their services so I am not sympathetic.

FEDS TO PROMOTE A MEP (MULTIPLE EMPLOYER PLAN) OPTION FOR SMALLER EMPLOYERS. Similar to the idea on the states getting in on the market, the feds are promoting a method for smaller employers to join together in one plan and reduce the administrative costs of their plan. This could be a benefit, but I am simply not sure how it will look.  Also, as I mentioned above, there are already low cost plans for smaller employers using 401k plans or even lower cost Simple IRA’s. Ultimately, it will depend upon just how competitive a MEP offered through one record keeper would compare to the independent service providers.  I am cynical of large providers offering this platform to smaller employers.   I think they will use it as a means to reach many “consumers” and sell them additional products and services.  The financial services industry is relentless in pursuing distribution options for its overpriced products and services.

PLANVISION TO SPEAK AT MINNESOTA COUNCIL OF NON PROFITS.  Not quite national news, but we are looking forward to speaking at a conference for non profits in Minnesota on Thursday March 3rd. We are pleased that Jon Pratt of the MN Council of Non Profits has taken the time to learn more about our efforts to help smaller employers improve their retirement plans.  Non profits can learn the goals for a better plan and the steps they can take to make it happen.

Smaller Transactions

Why Smaller Employers Can Have Better Retirement Plans than Larger Employers

It is generally assumed that the retirement plans of larger firms would be better than plans of smaller firms.  Right?  Not so fast.  In my experience, and I have quite a bit of it, there are specific features of smaller firms that offer them the potential to have a better retirement plan.

Before I explain how this can happen, what is it that makes one plan “better” than another plan?  The answer is somewhat subjective.  But let’s be clear about this – the best feature of any plan is the amount of money the employer contributes.  If your employer contributes 8%, 10%, 12%  or more then you have a good or great plan.  If your employer puts in a lot of money for you and your plan has high fees and crappy service, as far as I am concerned, you still have a great plan!

But most plans, large or small, with high employer funding amounts tend to be outliers.  Most plans contribute in the area of 3% to 6%.  So, if we eliminate the amount of employer contributions from the evaluation, how can a smaller employer have a better plan?  These three aspects of smaller firms could enable them to offer a better benefit to their staff.  

First, we believe that many smaller employers are simply more aware of the needs of their employees as it relates to saving and planning for their future. Larger organizations tend to be more removed from the rank and file.   But in smaller firms, those that design the plans have a keen sense of the aspirations and challenges of their employees.  They are simply more in touch with their employees.  This provides an opportunity to craft a plan that might be closer to the needs of the entire organization.

Second, smaller employers are less likely to have quarterly Investment Committee meetings on the retirement plan.  This idea is heresy to many advisory firms, but in our view many of these meetings are just a waste of employee energy and company resource.  All employers need to review their plans periodically, but quarterly meetings, which are more likely to happen in larger firms, are just overkill.  If an employer, large or small, sets up a smart retirement plan with a straightforward Investment Policy Statement using an array of low-cost index funds, they should be fine with annual meetings or scheduling meetings as the circumstances demand.

Finally, many smaller companies are more willing to provide personal guidance to the employees.  Smaller firms typically work with advisers on their plan.  They tend to more supportive of their employees receiving personal guidance.  Larger firms are more reluctant, for several reasons, to provide a personal resource to the employees.  They may be more controlling of this aspect of employee education and/or unwilling to handle the logistics involved in providing personal support services to staff.  This might be a nice feature of smaller companies, but beware!  If you provide guidance to your employees, make sure your adviser is not using the interactions with staff as an opportunity to sell products and services to the employees.  This is really, really lame!

What about fees?  Most surveys of plan fees reveal that large plan fees are on average, as you might suspect, less than the fees of smaller plans.  It is certainly the case that larger employers have an opportunity to have lower cost plans. However, it is now possible for smaller employers to substantially reduce their costs – they can achieve overall costs per participant which are relatively close to those of large plans.  Maybe not as rock bottom low as some large firms, but they can get pretty darn close.

What do you think?  Do you know of smaller employers with great retirement plans? Or is this notion ridiculous? 

Billions

How a $1.6 Billion 401k Plan Figured it Out

I saw a note (link might be blocked) that a $1.6 Billion 401k plan decided that revenue sharing was, among other things, not a good idea for their plan.  Duh! Was it that hard to figure out?  What took so long?  They could have read this blog in 25 seconds and realized this.  But that would have been too easy.

They interviewed six different firms over seven months and used a consulting firm with an impressive sounding name.  I am sure they generated reams of documents with analysis as well.  I would guess that many people were involved in this process and there were multiple meetings and discussions and consultations and…  I wonder how much they paid for all of this amazing advice?

It turns out that they “negotiated” lower fees on some of their fund options. Congratulations! But does a plan this size really have to negotiate hard? All sarcasm aside, I applaud them.  They ended up with a better plan which will clearly save their employees money – which is great.  But will all due respect, HAVING A GREAT PLAN IS JUST NOT THAT HARD!  I could have told them how to do it in 30 minutes.  

I know they aren’t asking,  but my suggestion would be to write a three page Investment Policy Statement (IPS) and use a bunch of index funds from Vanguard.  Make sure that the IPS is written so that most of the employees in the company can understand it – not just a bunch of suits from financial services firms. Get rid of the consultant.  Save all of this money for something else more useful.   Simplify the whole thing.  Or, as Albert Einstein said, “Everything should be made as simple as possible, but not simpler.”