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.

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:


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.


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.


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.


Advisers and Brokers Square Off

There is quite a bit of buzz about the status of advisers in the financial services world. The Department of Labor is pushing to require an adviser to employ a fiduciary standard when providing guidance to their clients on retirement assets (both IRA and employer based plans). This has actually been a debate for some time now. However, the President has weighed in recently supporting a fiduciary standard for retirement advisers so it has gotten increased attention.

With a fiduciary standard, an adviser is required to act in the “best interests” of their clients. On the other hand, a broker/dealer is only required to provide recommendations that are suitable for the client. As such, the argument is that a client will always be better off by working with someone that is working in their best interests. That sounds right, doesn’t it? I am not sure it is and I think this argument misses the point.

An important aspect of the debate in determining what is suitable is adviser compensation. It is argued that if an adviser is paid on commission instead of by a fee directly from the investor, they are less likely to work in the client’s “best interest”. While certainly not complex, I don’t think it is quite that simple.

Let’s look at an example. Assume a 62 year old wants to (or is convinced to) transfer $250,000 from their low-cost 401k plan. How might two advisers handle this based upon whether or not they are a broker/dealer or a fiduciary? Adviser A, the broker/dealer, recommends the client transfer their 401k to A shares with American Funds and invest in a mix of bond and stock funds. We will estimate that the client pays 2.5% on the investment. That would total $6,250. The adviser gets a portion of that, right? (Some goes to the adviser and some to the firm). Good payday – but maybe the adviser has been providing service and guidance to the client for a long time and has “earned” it. The client still pays the ongoing management fees of the funds going forward. Also the adviser will continue to generate income in the form of trailer commissions on the account.

Adviser B, the fiduciary, recommends a managed program that charges the account 1% a year. That would work out to be $2,500/year. (Again, some of this fee goes to the adviser and some to their firm). But that fee would change as the size of the asset changes. As the asset gets larger, say it grows to $350,000, the annual fee is now $3,500. What a great income stream for the adviser! In addition, the client also pays the various fund fees used in the managed program.

So, which option is in the client’s best interest? First of all, was it even advisable that the client transfer their money from the 401k plan? Maybe it was, but maybe it was not. We indicate it was a low-cost plan. However, neither adviser is paid if they recommend that the client keep his or her funds in the plan. It doesn’t mean that an ethical adviser would not make this recommendation. However, they clearly do not have a financial incentive to do so.

It is obvious that the client will end up paying a lot more, and I mean a lot more, in fees with the fiduciary. Of course, the fiduciary will argue that they get all of this awesome service, investment guidance, and value going forward. Maybe they do, but couldn’t a broker provide this as well if they want to maintain and grow their business. Sure they could – and many do. So in which case is the client better off?

Frankly, I think both of these options are pretty crappy for the client. In both cases, they are paying too much for help. (They could leave the funds in the plan or use a well diversified index fund with Vanguard and be far better off in my opinion). But in both cases, the adviser has a strong financial incentive to promote the benefits of their approach, right? In fact, the fiduciary has a much stronger financial incentive to convince the client of the value of their 1% program, which continues to pay the adviser significantly year after year.

What I believe is most important is the total dollar amount of the adviser’s fee and how it is affected by the client’s decision, whether or not they are a fiduciary. In both examples, the adviser is well compensated – whether by commission or by fee. Fiduciaries have their own ”biases” and I get tired of fiduciaries promoting their “objective” advice while charging outrageous fees and claiming that they are working in the best interests of their clients.

FULL DISCLOSURE: PLANVISION IS A FIDUCIARY FOR ALL OUR CLIENTS. Regulation requiring a fiduciary standard would be, ya know, good for our business and all that – we would clearly gain from this requirement. But we would rather have our business promoted on its own merits than on misleading labels. We are proud of our model and how it supports our work with our clients. We decided to structure our business in this way for many reasons. However, it is not the idea that we can puff out our chest and call ourselves fiduciaries. We prefer being a fiduciary, but what is more important is the value we provide to clients at a low cost and how we have no financial incentive to push investors to invest their money in a certain way. So, in spite of the fact that it would theoretically be a boon to PlanVision if a fiduciary standard is required, we cannot get behind this.

By the way, while I am not a big supporter of this change, the argument of broker/dealers that the smaller investor will be left behind with this standard and no longer receive guidance is ridiculous. Give me a break! Whether or not this change goes through, there will always be opportunities for investors with modest portfolios to receive advisement. These investors don’t need hours of service, quarterly meetings, and endless reports they won’t read. They can do fine with straightforward, concise, affordable guidance.

In our recent Ebook How To Improve Your Employer’s 401K Plan, we encourage employers to work with a fiduciary. However, we are also careful to point out that there are many good broker/dealers and many overpriced fiduciaries. I have observed how “fiduciaries” make recommendations for products and ideas that I think are way overpriced. I also think they are guilty of many of the same misleading and ridiculous sales tactics used by broker/dealers. In fact, the word “fiduciary” might be one of the most overused words in the industry these days. It’s as if each firm is trying to outFiduciary every other firm.

Like everyone else, I do not know exactly how this will roll out (even though I think it will ultimately happen). I am not trying to be cute or contrarian with this viewpoint. I just don’t know if this will have the impact people think it might – it may have little effect on consumers. If people want real change, demand that all fiduciaries charge for their time instead of as a percentage of managed assets. I would be curious to see how many of the fiduciaries who promote the pristine nature of their model respond to that.

What do you think? Agree? Disagree?


PlanVision’s Predictions and Outlook for 2015

Based upon the events of the last year, our research and monitoring of worldwide political and market events, and reviews of the available economic and financial information, we have a forecast for the upcoming year:

We have no idea what will happen!

We anticipate that our forecast will be 100% accurate.

Advice Everywhere, Who Should You Trust?

Talk about risk in the financial services industry is everywhere.  And I mean everywhere.  This post on Investopedia refers to 11 different types of investment risk.  To be certain, big dollars are spent by firms to promote their essential products and strategies you need to control your risk including insurance products, asset allocation programs, and other legitimate methods for consumers to protect the money they have earned and invested.

But is one of the biggest investment and planning risks you face simply the risk of getting bad advice?  If so, it is not on the list and you will rarely hear about it from advisors.  Duh.  But there are so many examples of how getting bad advice is costly, why isn’t this listed as a real risk?  Seriously!

What about people that have been swindled out of their money by Bernie Madoff or Charles Ponzi and his original “Ponzi’s Scheme” (a good read I would recommend), Tom Petters, or any number of scams?  These are extreme cases, but getting garden variety bad advice from a financial advisor, though not financially devastating, can certainly be costly and could result in having less money than otherwise.

Of course, we can’t do everything for ourselves and rely on doctors, plumbers, auto mechanics, teachers, or any other number of professionals or trades people. Unless you move to the outback, it is highly likely your success in life is impacted by the performance of others.  So I am not suggesting that you shouldn’t seek out the guidance of a professional for your financial matters – doing so can be a very wise move.

But as you begin to look for advice,or if you currently receive advice, here are some considerations on adviser risk:

What if the advice you receive is affected by how the provider is compensated? This one should be obvious, but it isn’t.  Consumers should absolutely ask how an advisor gets paid and how much they make based upon their recommendation. You can also ask if there are any alternative ways for them to be compensated.  

Does the advice sound too good?  Is it filled with a bunch of sales jargon?  The radio infomercials are the worst.  It is discouraging that people fall for these.  Many firms promote their unique insights and special techniques for helping investors. “Invest like the professionals” or “Learn the secrets of investing success.”  If the advice is so good, particularly on investment ideas, wouldn’t the provider be better off keeping it to themselves and profiting from their knowledge?  Of course they would.

Does the advice promote a new, hot idea?  If so, be very, very cautious.  This could be promoting something that does not have a substantiated history of performance through different market cycles.

I could go on and on but don’t need to – here is a good article on investment advice from a great blog, A Wealth of Common Sense.

Finally, when it comes to advice, I think this commercial from Charles Schwab is awesome!  If we had the budget for a national advertising campaign, this would work well for PlanVision.  While it speaks to compensation, it also could be applied to investment advice.

One Advisor’s Advice on Meeting with A Financial Adviser or Broker (Part 2)

Well, if you have to meet with an adviser then that is your problem.  But I suppose the following could be valid reasons for a meeting:

  • Your married to your adviser
  • Your adviser is a good friend or is in your Family
  • Your adviser has an awesome office with comfortable chairs and a great view
  • Your adviser gets you tickets to cool things and always has this fantastic customer appreciation event and you want to be invited again
  • You are always impressed with what your adviser says, even if you don’t understand it

or maybe

  • You need help with investing
  • You want to put together a plan for your future
  • You have some other financial matters, such as reviewing your cash situation or debt issues
  • You have had a life change event that requires you to evaluate or consider your options
  • Your investments are changing rapidly and you need to make sure you are doing the right thing

There are other reasons too.  In fact, meeting with an adviser can be an important step in helping you make some smart decisions about a wide variety of issues. There are many advisers that can provide outstanding guidance when you need it most.  Alright, so maybe my suggestion to avoid meeting with an adviser or broker/dealer is not great advice!

However, if you call a meeting with an adviser, make sure it is on your terms.  I would suggest sending your adviser, or prospective adviser, an e-mail listing out what you want to discuss and how much time you have.  Let your adviser know that you want to hear their suggestions and ideas – that is why you are meeting, right?, but that you would prefer they be specific to your needs.  If they have any new products or ideas they are going to introduce, ask how they will be compensated for those products.  Frankly, it is better for both parties if you share your experiences and prejudices with your adviser before the meeting.   You could also ask them to describe their experience with your issue(s) and an example of what they have recommended to other similar clients.

Be prepared for your meeting and stay in control.  It is your money and your future, so be sure you keep your meeting moving towards your objectives!

How Much Time Should You Spend “Watching” Your Investments?

Or how much time should you have a professional do that for you?  In my view, I would say that it should take anywhere from nothing to maybe 30 minutes a year. Yes, that’s right.  I have been in the industry long enough to have realized that most of the activity involved in trying to enhance your investment return is probably, over the long run, just a waste of time and money.  This recent article in the Wall Street Journal speaks to this idea.

Obviously, many advisers would dismiss this approach.  They would say that you need to stay on top of the markets and opportunities so you can take advantage of the trends to enhance your wealth.  You need to get your money working harder. And most importantly, they would argue, you need their assistance to do this.  Blah, blah, blah.

I think the smartest strategy is to set-up a well diversified, low-cost portfolio of investments and leave it alone – for the most part.  You should only modify it if something in your life changes that requires rethinking your strategy.  This could include things like unemployment, divorce, inheritance, triplets, career change, upcoming retirement, etc…  Another reason for a change would be if you do not feel comfortable with the amount of risk in your portfolio.  Other than that, you are better off focusing on saving, controlling expenses, and planning.

And if you don’t spend any time watching your portfolio each year, that is fine with me!

Financial Industry Speak (Part 1)

Do you understand what your advisor tells you?  Or what you hear in the financial press?  Really?  Or do you just nod your head when they start to use terms or phrases that you are not familiar with just so you can move the conversation along?  Do you start to tune out?

Do you ever wonder if they are talking this way intentionally to sound impressive – to imply that the whole investment process is far more complicated than you could ever understand and you need their highly paid team of experts to figure this whole thing out for you?  Has this occurred to you?

A few years ago, at a district meeting for my prior firm, my manager said to occasionally use words that your clients may not fully understand to create the illusion of complexity.  If that is not bad enough, many years ago, my then manager suggested that I recommend increasing my clients’ international holdings and come up with some reason why this is a good for them.  In his words, “they won’t know any difference.”

I never took their advice, but I didn’t quit either.  Well, eventually I did quit – to set up PlanVision.   Now, my primary objective is to provide education and guidance to my individual and plan sponsor clients because they pay me to do it – not because an investment firm pays me.  It is much better for them – and liberating for me!  The next post will provide some examples of Industry Speak.

Tricks of the Trade

Financial Plans, or Retirement Plans, are typically completed using a software program.  An adviser meets with a client, reviews their situation, collects the information relevant to the plan, and then runs the analysis.  During the process of “running” the analysis, there are normally some features of the system that the advisor can adjust, such as the inflation rate, savings rates, etc… This process produces the plan.  The advisor then delivers and reviews with the client.  By and large, this is how it is done in most situations.

None of this is necessarily surprising or unusual.  However, you might be interested to know how we were trained at my prior firm. We were instructed, as we communicated with clients, to let them know that we were working on their analysis for a week or two – even though it was basically generated immediately.

The idea was to create the impression that there was a huge commitment of time and resources to this process, that we were working hard on their personalized analysis, in spite of how simple it really was.  Instead of simply being honest with our clients about what we provided, we had to mislead them about the process to create value.  In addition, once produced, we were taught how to sell the company’s products from specific pages of the report.

Unfortunately, I think too many ploys are used to help advisors and investment firms create perceived value instead of real value.

Trusting Your Advisor

Receiving investment, tax, or planning guidance is an important way for some people to develop confidence about how they are handling their money.  As you work with a Financial Advisor, developing a sense of trust that they are working on your behalf and are competent at their profession will go a long way towards helping you implement their advice.

However, if you are looking to develop a healthy relationship with an advisor, I would suggest that you develop standards for the level of information and education you receive.  I was trained at my prior firm on how to “connect” with my clients as a way to develop trust.  I was taught that if I learn what my clients’ real values are, if they open up to me, that they would trust me and then invest with me! I think this is a common practice in the financial services industry – train advisors to connect on an emotional level with clients.

I fully support the notion of getting to know the people that I work with and how their experiences form their attitudes and their goals.  But it should not be done as an alternative to fully educating clients as well.  I do not support advisors abusing the trust clients have placed in them and downplaying product features their clients may question.

The products that you invest in, and their costs, matter a lot to your financial success.  I would suggest that you make sure you fully understand:  1) what you are investing in; 2) the costs of the investments; 3) exactly how your adviser is compensated; and 4) how much total compensation they receive.