Is This Guy Your Friend or Foe?

That depends on who you are and your point of view.  If you are one of the millions of employees in employer based retirement plans then I think he is your friend.  If you are fiduciary that has done a bad job of managing your company retirement plan, he might be your foe.

His name is Jerry Schlichter of the law firm Schlichter Bogard & Denton.  He has become known for pursuing lawsuits on behalf of participants in employer based retirement plans – and winning.  I don’t think it is controversial at all to acknowledge that the work of his firm has raised awareness to the generally awful nature of defined contribution plans.

His work appears to focus on the retirement plans of large corporations. But I believe that the pressure his lawsuits have put on fees and conflicts of interests in the retirement plans of larger employers will slowly trickle down to smaller employers as well.   

It’s easy to flippantly blame lawyers for unnecessary and excessive litigation. (And I am certain that his practice is doing very well.  BTW, so what?)  However, too many plan sponsors have simply been irresponsible in managing 401k style plans.  The costs to their employees, the plan participants, is real in terms of personal sacrifices they will have to make later in life due to accumulating less dollars in their retirement plans.  Instead of going to their retirement, the money they are earning and saving unnecessarily funds the careers and lifestyles of those in the financial services industry.

I like what he is doing and how it is helping plan participants – the regular people trying to save for their future.   Whether you know it or not, if you are a rank and file employee saving money in a lame employer based retirement plan, I think he is your friend.   His efforts might result in a better workplace retirement plan and more money at retirement.  But if you’re a fiduciary that hasn’t cleaned up your plan….

It’s Even Worse Than I Think

I frequently write about the excessive fees in the retirement plans of smaller employers. However, even I still get shocked every once in a while with real life examples of how bad it is at some/most firms.  It happened again just this week.

A smaller employer (6 participants and between $500K and $1 Million in the plan) sent me an overview of new pricing options they had received on their plan.  Their plan has been in place for ten years and they want to reduce their costs.  The advisory firm that provided the comparison did a great job of providing a total all-in cost for each option in a relatively simplified format.

There were a total of seven firms presented.  Many are household names and all of them are well known in the financial services industry.  The costs were appalling, to say the least!  The total annual fees ranged from $9,600 to $17,300.  And believe it or not it gets worse.  Much of their costs, which should be fixed, are charged as a percentage of plan assets.  As their assets grow to $1 Million and beyond, their fees will keep growing, and growing, and growing!

Our proposal was for $3,600 a year.  This includes everything.  Full recordkeeping from an independent firm, trust services, an array of Vanguard funds, personal employee assistance and guidance, fiduciary support as a 3(38) and 3(21), etc…  The whole nine yards.  The advisory support would be provided by an independent adviser.  And since much of our proposal includes flat fees, their cost creep over time will be minimal!

Needles to say, this was an eye opening education for the plan sponsor.  They can’t get back the money they have paid in over the years but at least they can do something about it going forward. This new, lower cost option will help the employees keep tens of thousands of dollars in their accounts that would have otherwise gone to the financial services industry.  It’s a great example of how so many small employers overpay for retirement plan services.

How much do you pay for your plan?  How much could you pay?  

Why Did the Department of Labor Push for Fee Disclosure?

Fee disclosure for retirement plans has been in place for a few years now.  The idea is that with better fee disclosures from the service providers, people that put money in retirement plans will be better informed about the costs of their plan.

Well, I suppose that would be the goal of fee disclosure, wouldn’t you think?  Better disclosures would mean better informed consumers.  Do you believe that is the goal?  Really? I don’t!  The DOL didn’t mandate fee disclosures so people would become better informed and then just get on with their lives.

The DOL’s real goal was that as participants became aware of plan fees they might scream something like: “What the #$@%*!”  Then they would ask their employer why they are paying all these fees and demand that they do something about it.  Employers would in turn put pressure on service providers to clean up their convoluted payment streams and reduce costs.  Plan costs would come down and more money would stay in the employees’ accounts, where it belongs, so they have more money for retirement.  This, I believe, is the real goal of fee disclosure.

Of course, I don’t know nor have I ever talked with anyone from the DOL.  And I am definitely not a mind reader!  But the DOL has most certainly known for years about the absurdity of many of the fees in retirement plans.  They had to expect that mandated fee disclosures would promote big reductions in fees for many plans.

Fees might be coming down as a result of fee disclosure.  It certainly has generated some buzz in the industry.  But from what I have seen as I talk with plan sponsors of smaller firms, it has had little impact.