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.  

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.

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!


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.

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.

Not Everyone Needs a 401K Account


Employers don’t need to wring their hands if some of their employees don’t participate in the retirement plan.  Sure, it is helpful to most of your employees to inform and educate them about your plan and how it can benefit their future.  But you’ll never know the specific situations of all your employees and it is not your business to pry.  Of course, I’m not encouraging anyone to skip out on their retirement plan and for employers not to care about it, but for some people it’s just not a big deal. These outcasts tend to fall in one of the following groups:

THE RICH.  There aren’t really all that many of these people, at least from my perspective, but they don’t need to worry too much about putting money in their 401k plan (if they are even working with the rest of us stiffs), SEP, Solo 401k or whatever they might have access to.  Maybe they won the lottery, benefit from a trust, received an amazing inheritance, their spouse/partner has a seven figure income, etc.   It can happen any number of ways.  However it happened doesn’t matter – a pre-tax savings plan is just a drop in the bucket for the rich.

THE PENSIONED.  Yes, these people are still out there.  They have some excellent pension plan that will provide more than enough income for them in their retirement years.

THE OTHER INCOME PERSON.  These people have relatively significant income from some other source, like a farm or business, rental units, royalties, etc.  Many of these people plan on selling their business later in life or just living off of the income until they pass away.

THE LOW EXPENSER. Really!  People with little or virtually no expenses.  They live with friends or other family members or in an RV.  They might receive support for food and basic necessities from others and don’t buy much of anything else.  Some are professionally frugal and amazingly thrifty.  I think many industry commentators and observers would be surprised at how some have learned to get by in this fashion!

THE WORK FOREVERER.  Why save for something that you will never need?  If you are the work forever type, then what is the point of having or needing a 401k account? (High regret possibility with this one!)

While there may not be many of these people, guess whatTHEY’RE REAL.  I have met several of these folks over the years.  If they don’t want or need to participate in a retirement plan, that’s their decision. Most will end up fine – others may regret their decision.

Have you come across these people before?  Do you know of any other categories?

The Do Nothing 401k Plan

What if your company’s retirement plan never required your employees to do anything!  Would this be a good way to run your plan?  How would it work? Consider this:

Your new 25 year old employee starts and on his/her first day of employment he is automatically enrolled at 6% and receives the company match of 3%.  The beneficiaries use standard defaults and the investments are defaulted as well to very low-cost target date funds.

Each year, with auto escalation, the contributions increase by 1%.  When your employee reaches age 35, the contributions cap at 15%.  They stay at 15% until they hit the IRS maximum or until the employee retires at age 67, whichever comes first.

Along the way, this employee never looks at statements.  They never change their contribution amount; never borrow or withdraw their money, and never have a question about their account. The contributions keep coming in – year after year. They spend their time budgeting, controlling their expenses, managing their health, and enjoying their life and their family.   They concentrate on the things they can control and don’t worry about the things they can’t.

Could you really have a retirement plan like this?  What would become of this employee (assuming they won’t go crazy working for the same company for 42 years)? Wouldn’t you be concerned that, without the help of the experts in the financial services industry, they would end up far short for retirement?

An employer would never do this because, ya know, you just can’t.  It wouldn’t be prudent, would it?  You have to hire experts to monitor your plan and make sure of whatever you need to make sure of.

And to be sure, no person would behave this way and I am not advocating for it. In fact, our business is based upon the notion that the value we provide in the form of guidance to organizations and individuals on their retirement plans will produce a better outcome for the plan participants.

But the financial services industry is simply filled with too much nonsense and jargon that passes for professional assistance.  Much of this guidance comes at a steep price – which acts as a drag on the earnings of plan participants.  It is an unnecessary transfer of wealth from people trying to save and plan for their future to the careers of those in the industry.

I am confident that this simple, do nothing approach would, in most cases, produce a better outcome than relying on an industry that spends millions on investments that try to beat the markets, more millions providing consulting services evaluating these investments, and even more millions on marketing dollars to promote these investments and consulting services.


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? 

Honesty is Such a Lonely Word

How important is candor, or an honest message, when you determine where and how to invest? The value of candor in the financial services industry came up in a recent interview with Jack Bogle, the founder of Vanguard.  Over the years he has said much, written much, and had much said about him.  The Bogle/Vanguard story is unique and compelling.

In this interview, he made a comment that I thought was profound.  It was brief and even simplistic, but it really struck me.  He was asked if the index fund had won.  As he answers the question and comments on the growth of the index fund as a successful option for all types of investors, he describes the index fund message as “…candor as a marketing strategy.”  Read the article in the link and look for the quote.

Though this is obviously true, I’ve never heard it expressed so eloquently.  The Vanguard approach to investing could not be any more honest.  Their core product, the index fund, is the market.  You get what the market delivers, less whatever it costs Vanguard to provide it.  A simple idea.  At this point in my career this is the message I want to buy and what I suggest my clients buy as well.

But how susceptible are you to the marketing stories and schemes common in financial services? Do you prefer a good story or are you willing to accept a less glamorous, honest message?  If you want your money to “work hard” for you, will the straightforward candor of Bogle and Vanguard win you over?

Unfortunately. I believe that most investors are not willing to settle for pure candor.  Vanguard has done an amazing job, but too many people want to believe in the message that someone can deliver more than the market.  In the financial services industry, too often great story telling and marketing trumps candor, and honesty truly is a lonely word.


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?