Who’ll Slay Your 401k Cost Dragon - You or Your Participants’ Lawyer?

Several weeks ago, we posed the question, “Does caring = compliance?”  Of course the answer is "no." 

But the point was simply that if plan sponsors show genuine concern for the well-being of plan participants, much (if not most) of their compliance challenge will fade away. It’s really not that technical, difficult or costly to eliminate the most common causes of failed discrimination tests in 401k plans.

A subset of that genuine concern, yet perhaps a bigger issue, is fiduciary responsibility.  As a plan sponsor, your obligation as a plan fiduciary – in effect, caring for your participants’ contributions – is literally codified in the law.  You don’t really have to agree to care – the law just declares it for you.  Service providers might agree to accept fiduciary liability for the plan (or not) – but at the end of the day, the obligation rests with the plan sponsor. You really can’t avoid it.  Is this something to fear?  We don’t think so – but only if you really do care about protecting your participants’ money.

Let’s face it.  In most plans, virtually all the money belongs to participants.  It’s their money that’s being invested and they are likely paying the lion’s share of plan expenses too.  Have you done everything you can to make sure they are getting the best deal?  That they are not paying too much?  That they’re able to maximize the return on their investment?

When they make the decision to save for their retirement in your plan, employees are trusting in your due diligence.  You’re their sword and shield.  You’re their knight in shining armor.  But thy name be not Lancelot.  Thy name be Fiduciary! All the responsibility, none of the glamour, right?

The spate of 401k-related lawsuits is marching relentlessly toward what will likely be seen as a “sudden revelation” when it occurs: The “discovery” that the predominant plan investments, actively-managed mutual funds, and all the expenses loaded onto them are NOT REASONABLE.  They are omnipresent, but they are not reasonable.  A true Lancelot would slay this dragon…..now.

The latest marquee lawsuit has Mass Mutual’s participants suing their plan over hidden and exorbitant plan expenses. Fidelity’s participants are suing their plan as well.  You can Google the specific complaints but your plan likely is no better off.   If their attorney knows what he’s doing, the relative performance and cost of the Fidelity funds in that plan are going to get pounded -- and all the facts will support the plaintiffs’ position.  The Mass Mutual case goes to a different place on fees and could be a bellwether, because the complaint addresses the murky practices of internal revenue-sharing (read hidden compensation) that exist in virtually every insurance company-based plan, including yours.

Your 401k provider is almost certainly telling you your fees are reasonable.  Heck, they may have given you a 33-page disclosure document to prove it.  Even a giant dragon can hide if the fog’s thick enough!  But participants are increasingly seeing through the fog and just the bringing of lawsuits proves one thing:  Participants are willing to take up arms against the dragon, even if their Lancelot is not.  And if thy name be Fiduciary, thee go down when the fight begins.  Who even cares what happens to the dragon?  He deserves his fate.

The good news is that if you care, you can squash the dragon like a bug!  And your participants may even be inclined to polish your armor or put you up on a white horse.

The Lazy Man's Guide to 401k Fees

Ok, we're really NOT calling you lazy.  But we know you're busy.

We've heard several folks say that they really aren't sure what is included in 401k fees and fund expenses.

Well...the industry doesn’t want you to.  That’s why we routinely see fee disclosures that are 30 pages long and “explanations” written in vocabulary that most humans don’t readily understand.

Here’s the simple scoop.  There are 5 basic expenses that a 401k plan incurs on an ongoing basis.  We’ll tell you exactly what they are, in dollars, and how they are calculated.  Here’s the list with our definition of what they are (not necessarily the industry’s definition!)

1.    Fund expenses – In the Revolt plan: the lowest possible percentage charge on each mutual fund in your plan.  This cost is assessed by the funds in your plan and netted out of participant returns.  Funds express this fee as “basis points” but it’s simply a percentage of assets.  1 percent = 100 basis points.  This is the largest cost associated with your plan.

2.    Record keeping and Administration – self-explanatory, should be largely an explicit per participant fee. Total cost should be expressed in dollars; increase only with consent.

3.    Investment Advisory – In the Revolt plan:  selects funds, builds the model portfolios, monitors and reports performance.  Flat annual fee;  increase only with consent.

4.    Trust/Custody – Holds funds, executes trades, etc:  only other asset-based cost.

5.    Employee Education – In the Revolt Plan, services include custom plan identity/logo, 2 PowerPoint presentations (current employee and new hires), Web-based live seminars, customized employee booklet/forms, website design, quarterly participant updates with reports on model portfolios, retirement expense/income worksheet. – Flat annual fee for these services; increase with consent only.

For more information on the Revolt plan, check out our sample cost page here.

Why the Big Name 401k "Powerhouse" Companies CAN'T Fix your 401k Plan

Our “service team” firms are not exactly household names...we know.  You might be doing business with John Hancock or Merrill Lynch right now.  How can we expect you to make the switch to our no-name team? 

We are not “big name” by any measure – although you’ll note that our senior members have worked with major firms and large clients in prior lives.  Our common thread is that we now all work as wholly independent advocates – always serving the best interest of our clients. 

In the 401k world, the huge firms that advertise at the Olympics and during football games are the ones who have caused the need to revolt.  They are the ones selling high-cost funds (Vanguard excepted) and siphoning exorbitant fees from your participants’ accounts.  They are the ones providing services that result in 60% (or lower!) participation and poor investment behaviors by participants.  Looking to them to do away with high-priced, actively managed funds is asking them to put themselves out of business.  It’s not going to happen.

So you really need to work with a more “maverick” firm on this problem.  We’re not beholden in any way to the 401k establishment and we are not competing for assets.  The “big name” players in our solution are TD Ameritrade (trust/custody) and Vanguard (investments).  But the biggest name player is you and your company.  Ultimately it’s your company’s plan and your participants’ money.  We are providing a solution that is in your best interest and we are your advocate in getting you to a successful plan.

Does Caring = Compliance in 401k Plans?

Technically no—but if you really care about the success of your plan and your employees, it gets you way down the road!

If a 401k plan sponsor never laid eyes on a compliance checklist and never met an ERISA attorney, he could exceed the purpose of compliance laws simply by caring about how his employees and participants were impacted by his plan provisions.  Think about it.

Nearly all the rules deal with participation, discrimination and/or cost.  They’re all intertwined.

Do you have lousy participation in your plan?  We use the word “lousy” because the majority of plans have bad participation—which the industry would have you believe is…..good!  Bad participation is the benchmark!  Got 33% of employees staying out of the average plan?  No worries; that’s right on target, they’ll say.  A Schwab study a few years back concluded that employers need to lower their expectations for participation, because industry by industry statistics proved you can’t get the average above 65%!  In other words, “our failure is so widespread and so consistent; we’ve decided to redefine it as success”!  Seriously?  Do you care that a third of your people have no retirement plan or are you happy to meet the benchmark?

Bad participation, either in number or deferral percentage, is the cause for failing most of the non-discrimination rules.  And why don’t plans have better participation?  Could it be they are still using the strategies and materials produced by the entrenched providers?  Are they still immersing participants in myriad investment choices and investment education—hoping that after 30 years of trying, it will suddenly start working?  Employees and participants have consistently signaled that they don’t want investment education, they want help.  Do you care to give it to them?

When it comes to cost, most participants don’t have any idea how much they’re paying to be in a 401k plan (and that’s after the new disclosure rules); yet they bear most of the cost.  Perhaps that’s why many plan sponsors, even in their role as fiduciary, don’t have much of a handle on plan costs either.  Now, the new law says plan sponsors must know their plan cost and must ensure that they are “reasonable”.  But forget about the law for just a second.  Do you care what your participants (and you as a participant) are paying?  If you can’t list the cost of each service in your plan and express the cost in dollars, then you don’t.

When you look at 401k lawsuits today, more and more of them are being brought by participants.  Two weeks ago, Fidelity 401k participants filed a suit against the Fidelity plan.   (Maybe that green line isn’t leading anywhere good?)  Merrill Lynch seems to find their way into the legal news quite often as well. (Total Merrill, Total Bull?)  Regardless of the outcome of such suits, it’s safe to say none of them helped to build employee appreciation for the plan—so everyone involved really loses.  Did these disputes happen because the plans were technically out of compliance or did they happen because the participants didn’t believe their plan sponsors cared enough to make sure they were getting a good deal?

The reality is, there are some plan sponsors that have addressed poor participation and high cost successfully.  But the solution was not found in the 401k establishment of actively managed funds, a compliance checklist or even in the office of an ERISA attorney. It started with the plan sponsor.  Do you care enough to make sure your participants are in your plan?  Do you care that their costs are as low as they can be (or is someone else’s definition of “reasonable” OK)?   Do you care that your participants make bad investment decisions once in your plan?

In the absence of plan sponsors looking out for them, participants are increasingly looking out for themselves.  They’re not poring over plan regulations and non-discrimination rules—they’re simply saying, the investments are not in my interest and my cost is too high.  Many, if not most, are right.  By today’s rules, most plans may be compliant and some may even have “reasonable” costs—yet they remain a failure for sponsor and employee/participant alike.  And participants have a legitimate gripe.

Your plan must be compliant, but it may be more important that you actually care about your employees/participants.  If you start there, you’ll find compliance checklists easy to complete.  Your ERISA attorney will not be billing you a fortune.  Your employees will get into your plan.  Your participants (including you) will be doing as well as they can.  And your plan will be both compliant and successful.

Do you care?

Here's a Quick Way to Eliminate the Need for Employees to become Investment Experts

Studies show that the single biggest factor for low participation in 401k plans is the fear of investing and not having a clear understanding of the investments in the plan.  Thus, we use model portfolios to enable 401k participant education to focus on saving as opposed to investing. 

In the Revolt plan, model portfolios are managed by our independent investment advisor.  All the employee has to do is select the “bucket” that’s right for him.  He is taught to be a saver, not forced to become an investor.  He answers a simple risk questionnaire to discern his risk tolerance – conservative, moderate or aggressive.  Then there are 4 different “time horizons” – fewer than 5 years to retirement, 5-10, 10-15 and more than 15. The participant is coached to “set it and forget it” except as his time horizon changes – and he is reminded of that quarterly.  This creates a “grid” of 12 portfolios, or, "buckets" as we like to call them.

The buckets are constructed from 11 underlying funds, 8 of which are low-cost index funds.  Our advisor uses low-cost actively managed funds for diversification when index funds are not available for a particular asset category.

If you're interested in learning more, click here to request a proposal from us!

The Myth of the Active Advisor

I just read an interesting little article called Yesterday’sTop Mutual Funds in Today’s 401k Lineup.  I like the theme and one key point in particular caught my attention:  “Actually, no actively managed fund stays on top forever”.

In fact, virtually no actively managed funds outperform their index with any regularity whatsoever!   Decades of data and numerous empirical studies show that index funds, at approximately 1/5 the cost, outperform actively managed funds about 80% of the time. Not only that. Recent studies show that, more often than not, when active advisors recommend changes in funds, plan costs increase and the new fund does worse than the one it replaced! How could that be? Think about it. No one replaces a fund that’s doing well (so you are “selling low”) — and no one adds a fund that’s doing poorly (so you’re “buying high”). Is that not exactly the opposite of what conventional wisdom says you’re supposed to do? Is that not the very definition of “chasing returns”?

So your problem may not be that you don’t have an advisor.  More likely, your problem is that you have an advisor who told you to have actively managed funds in your plan and that he now performs the admirable service of making periodic changes to find you better ones. The data says that strategy fails with amazing frequency. Everybody thinks their advisor is the exception to the data-proven rule, or you wouldn’t have him around. But think about this: The fund your genius is telling you to buy….someone else’s genius is telling them to sell.

 

Want to see how your actively managed funds are doing against just the S&P index for example? Go to Yahoo Finance. You can readily check out your actively managed funds, for any period of time, against an index. If you take the time to do it, one of two things should happen: You dump your advisor and your actively managed funds and join the 401k Revolt;  or,  you insist that your advisor start taking you to places like the Bahamas. Which one do you think is the best course for a plan fiduciary?

401k Numbers Say Time for Revolt has Come!

5 Reasons to Overthrow Your 401k TODAY

1. It's too expensive.  Hear this—your plan costs you and your participants way too much.  Your advisor might tell you that he has reviewed it and it's "in line" with the industry.  He might quote the Department of Labor's contention that "401K costs are trending down."  But even if that’s accurate, they have A LOT farther to fall; "reasonableness" shouldn’t be based on the collective failure of the industry.  A typical 401K plan, comprised of actively managed funds costs about 150 basis points on average.  It can and should cost closer to 40.  Is your cost really “reasonable” at 145?!

2. Index funds outperform actively managed funds 80% of the time.  Don't believe it?  There are endless studies that prove it.  Check out the latest Dalbar Study for great set of numbers and charts.  Why on earth would you subject your employees’ money to higher, non-productive cost? Actively managed funds outperform the index so infrequently (and the rare winners never repeat), the event can only be characterized as a lucky guess.  Wouldn’t you rather tell employees that your plan helps them succeed by not subjecting them to guesswork and excessive cost?

3. Employees aren't participating.  Depending on the industry, 40-60% participation is the norm.  Put another way, that’s 40-60% of employees that don’t have a retirement plan.  Does that meet your definition of success? 

 

4. Participants are lost and have no hope.   

Lost:  According to a recent Charles Schwab survey, “But more than half of the 401(k) savers said their plan’s investment options are more confusing than their health-care benefits, and 57% said they wish it were easier to choose among their plan’s investing choices.

Forty-six percent of savers said they don’t know what their best investment options are, and 34% said deciding how to invest in their 401(k) is causing them a lot of stress. (The survey respondents ranged in age from 25 to 75, and worked at companies with 25 or more employees.)”

No Hope:  According to a recent article on Yahoo Finance, only 13% of people with 401K accounts think they will have enough to retire with.  

5.  Its highly likely that you can lower the cost of your plan by 50% or more and make it more successful for both your company and your employees.  Do you still have actively-managed funds in your plan?  Are you still hoping to turn employees/participants into investment pros?  Are nearly all your people in your plan?  Are your participants saving enough?  Are participants exhibiting good investment behavior with their accumulated savings?  Only you know the answers to these questions and only you know whether your plan is successful.  If it’s not, it’s time to overthrow your plan and the advisor(s) that got you to where you are today.

Rest assured—there is a better way!  Visit us at www.401kRevolt.com to learn more!