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.

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.


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.”  


A Primer on Retirement Plan Fees

Since we work on retirement plans day in and day out, sometimes we forget that many plan sponsors don’t have a basic understanding of the fees your retirement plan should pay.  We’re sorry about that – our bad!

Unfortunately, if you are like most smaller employers, you may not know how you should be paying for fees.  Here is a quick primer on what your plan should be pay.  We break it down into three categories:

MUTUAL FUNDS.  These are the investment options in your plan.  Their fees are known as expense ratios and can range from .05% to maybe 2%.  Big range, right? (If you are using insurance accounts, stop it – get rid of them).  Bond funds are typically less than stock funds.  Index funds should be less than actively managed funds.  International funds are typically more than domestic funds.

The fund expenses are deducted from your employees’ accounts.  We think you should use mostly passive index funds from Vanguard.  If you do, the cost will probably average .12%.  This means that for each $10,000 an employee invests, they will pay $12 a year.

RECORD KEEPING.  This is the cost to run your plan.  Record keeping is the engine of your plan.  Your record keeper processes the payroll, handles distributions, generates your Form 5500, handles plan testing, provides your plan document, etc… Sometimes this is also known as TPA work.  (Some organizations have a separate TPA, but this work is generally lumped together in most cases.  We don’t think you need a separate TPA for your plan unless it is complex or weird).  Also, the plan’s trust services are typically part of a record keeper’s service.  When you add all of the record keeping fees together (except for the trust services – which should be between .05 and .10 bp), you should be able to easily calculate this as an annual fee.

This should be paid as a flat fee.  It is typically paid quarterly.  You can have your employees pay it and have it deducted from their accounts or you can choose to pay it directly.

ADVICE.  Your organization probably needs help running your retirement plan. And your employees probably need help too. The firm providing advice to your plan will help you decide the best type of plan for your company, the investments for your lineup, how to establish an Investment Committee and an Investment Policy Statement, how to educate your staff, etc..

Just as the record keeping fee, it should be a flat fee (not a percentage fee!).  It is typically paid quarterly.  You can have your employees pay it and have it deducted from their accounts or you can choose to pay it directly.

THAT’S IT!  These should be the categories of fees you pay.  Record keeping might be the most difficult to figure out, but you should be able to determine what it is with a little research and assistance.


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?  

Analogies that Don’t Make Sense!

In the advisory world, there are many different methods and tools used to convey ideas.  The intention, in theory, is to help the average investor better understand some of the more complicated aspects of saving or investing.  These methods might include images, stories, charts, etc… and analogies.  As a matter of fact, there was just a post in a LinkedIn group I belong to (which I really should get out of) called “Analogies are a great way to make investment concepts more relatable.” Over the years, I have become very cynical about the use of analogies as tools to effectively convey ideas.  It’s not because they don’t work, but because what they convey, more than anything else, are sales messages.

I was pleasantly surprised to come across this excellent post by Scott Burns.  I can’t tell you how many times I have heard advisors compare their service and guidance to other professionals – even though they are very dissimilar.  In addition to this ridiculous comparison of advisors to brain surgeons, I have heard other analogies, many times relating to products, that are just as inane and misleading.

Using analogies can be a very effective way to simplify concepts.  But is investing such a complicated concept that most consumers cannot get it?  Do they need to have it compared to something else they can relate to?  How about just trying to provide information and facts in a straightforward fashion? Maybe that’s just not clever enough.  It is my view that with a simplified approach and patience, investing can be easier to understand for most consumers.

So, when you hear analogies from the financial services industry, you might stop and consider what is being compared.  The way these things are thrown around is like…well, something, I guess!

How Long Term Care Insurance is Sold

For years I have felt that Long Term Care Insurance is an important tool that people can consider to protect their assets.  I encourage my clients to evaluate the cost and benefits of a policy and how it may fit into their strategy.

That being said, I part with the sales tactics of agents and firms that mislead consumers about their risks.  The big number that is always used is that nearly 2/3’s of Americans over the age of 65 will need long term care.  However, what is “needing” long term care?  Is it a stay of 5 years?  Or 2 weeks?  What are the averages and the actual out of pocket costs that someone might face?  Many long term care stays are less than 1 year and roughly 70% of Americans that reach age 65 have long term care events that will cost less than $25,000.  Only 16% of people have stays that are greater than $100,000 and only 5% greater than $250,000. While 2/3’s is technically correct, it is quite misleading.

Another tactic I do not care for used by some firms or agents is the Hold Harmless letter they have consumers sign.  This letter is used when a firm recommends a policy and the consumer decides not to pursue (purchase?) it.  The letter removes any liability from the firm for the consumer’s decision.

I understand that people and organizations want to protect their liability, but really?  Why doesn’t every firm that sells anything to anybody have every potential client sign a hold harmless agreement? For example, you get a bid on a new roof and then they have you sign the following statement:  “You didn’t agree to buy the roof we recommended?  We cannot be held responsible when your roof leaks and ruins your house.”   Everyone knows this is a pathetic scare tactic.  You might as well say to the client, “Hey, I tried really hard to save you all of your money but you were stupid and cheap and would not take my advice so sign this form saying that you are making a really bad decision!”

Clearly long-term care is costly.  It is wise to consider how a policy can help someone protect what they have accumulated.  But bogus statistics and lame tactics used to scare consumers and sell products damage the industry trying to offer this protection.

On a separate but related note, I think an excellent option for Long Term Care Insurance products would be very high deductible policies – in the area of $200,000 to $300,000.  Benefit payments would kick in after long term care bills reach these levels. These would allow many people that have accumulated some assets to purchase policies at much lower costs since the carrier’s risk would be substantially reduced.   Consumers could protect against an unlikely but catastrophic care event in a much more affordable manner.  Unfortunately, the current price of many policies discourages many middle class consumers from a purchase.

Time to Update Your Beneficiaries and Other Nonsense

Should your beneficiaries on your retirement accounts be current?  Of course!  But do you know that advisory firms contact you ostensibly to make sure your beneficiaries are current – but have a totally different agenda for the meeting?

It is likely they are trying to find out if you have other money you can invest with them.  This is known as “uncovering assets.”  Or they may have a new, investment or advice program they can add to your current investment to “improve” the performance of your investments – obviously for a fee.

But when they call to set-up an appointment, it sounds better to say “We want to update your account to make sure that the people most important to you receive the funds in the event something unexpected happens”  than “We would like to visit with you to see if you have any assets that we can uncover to invest with us so we can make a commission – and by the way, if we need to update your beneficiaries we can do that too!”

Maybe it is just me, but I have never heard of any broker/dealer or investment firms that use, as a goal for their financial advisors, the number of clients that have accurate beneficiaries for all of their accounts.  I am pretty sure that is not near the top of the list for metrics used to gauge performance – it is not even on the list.

Of course, it is smart and prudent to always make sure that your beneficiaries are current.  And if your advisor can assist you in that process, then they should be congratulated for helping you stay on top of something that can easily fall through the cracks.  But it is quite dishonest to imply that you will be getting help for one thing when your advisor has an entirely different agenda.

By the way, I get quite a bit of junk e-mail and regular mail on products and services for advisory firms, even though about only 5% of it applies to my practice.  In the midst of developing this post, I received an e-mail from a very large distributor of Life Insurance products that specifically recommended this strategy to advisors! Honest.