If you missed Last Week Tonight with John Oliver: Retirement Plans (HBO) and his account of trying to set up a 401k plan for the show's staff, watch it here. Right now. No, seriously, it's worth it! It's so good, we decided to blog about it. This is part one of the highlights along with our commentary:
First, Prudential commercials. Prudential worked hard developing commercials that people would understand and find relevant. Bravo to them, because they were so well-understood that they were satirized! "This is the creepiest commercial...they're walking toward their own death!"
Next, we have $24 Trillion saved in Retirement Assets in the US. True story! (So much, that Congress likes to dream up ways of possibly nicking a little bit here and there from it to balance their budget.) While it's true that it's a big number, it's unfortunately not enough if we expect everyone to get to age 65 and stop working for the rest of their life. We fall woefully short of saving enough.
While I won't disagree that folks don't save enough, there's an idea out there that our system is broken. Not so. Nearly 80% of full-time workers have access to employer-sponsored retirement plans, and more than 80% of these workers participate in a plan. At companies with 500 workers or more, 89% have access to employer-sponsored retirement plans, and 90% of those employees participate. In short, we need more companies offering plans. (And we need folks who would rather save than blow money on elf spotting school, as Suze Orman's segment showed in John Oliver's piece.)
"Financial Advisor/Planner/Analyst..." as a title is meaningless. Correct. Neither the SEC nor NASAA endorses any financial professional titles. They encourage you to look beyond a financial professional’s title to determine whether he/she can provide the type of financial services or products you need. In fact, we made up our own title because we were tired of being lumped in with people who sell products or do personal financial planning, since we do neither. Hence, we are "Retirement Planologists." (The trademark people pointed out we don't own the word "retirement." Duh.)
Only one title is currently required by law to place their clients interests first by providing advice without an inherent conflict of interest: investment advisor representative (IAR) of a registered investment advisor (RIA). They're under the fiduciary standard regardless whether the DOL's new fiduciary rule takes effect next year or gets waylaid by lawsuits. "Broker" or "Registered Representative" is not.
Which brings me to the next truth in John Oliver's piece: They had a problem with the fees that the broker was getting paid -- the broker the employees had never met, didn't conduct the enrollment meeting, thought that the plan was too complicated to be handled by Vanguard, was supposedly helping advise on their "very complicated plan" and so on. Compensation was conveyed as 1% of assets in year one, 0.50% afterward, tiering down at some future point. Quick math: does that amount to a lot of money? 35 employees, each contributing $6,000 annually, commissions would amount to roughly $2,000 in year one, and investment professionals are paid roughly $150-$400/hr, which theoretically would be 6-13 hours of work.
So, is that compensation a lot of money? No...unless you're being paid to do nothing.
When are fees a problem? In the absence of value. When they're egregious. When you can't connect them to the quality of services being provided in return. When nothing is being done and someone is getting paid. THIS. This is what's wrong with the retirement plan space. There are far too many financial professionals who cannot demonstrate any value to plan sponsors. (To be fair, I didn't see the service contract of John Oliver's team's broker, and the piece also didn't describe any discernible services.)
In 2012 DOL published final regulations on fee disclosures requiring service providers to disclose the fees they were receiving from retirement plans. What did that mean to investors? It meant that BEFORE that, service providers didn't need to tell you how much they made from servicing your retirement plan. And the majority didn't, at least not in language any non-specialist could interpret.
Related here is the fact that John Oliver's broker was CLEARLY UNKNOWLEDGEABLE. He said "Your plan was probably too complicated for Vanguard." NO! The plan was too small to be on Vanguard's large market platform. Their option was to go to Vanguard's small market platform, which is white labeled by Ascensus. Ascensus has a robust document and they can also work with third party administrators, so there's virtually NO WAY the plan was "too complicated for Vanguard." Thus, the broker either lied or didn't know. Now, whether Vanguard was appropriate or more cost-effective here is up for debate.
Somebody ask that broker if he was allowed to sell Vanguard. Somebody ask him if he's allowed by his firm to choose investments in a retirement plan. Someone ask him if he even knew Vanguard had a small plan product! That's where you'll find the real answer -- buried in the knowledge gap and compliance department. So, yes, $2,000 is too much to pay this broker IMHO. So is $2.
Folks, the majority of "financial advisors" that service retirement plans have less than five plans as part of their client list. They are not specialists. They are not knowledgable. They see plans like John Oliver said, "...[401ks are] a potential gold mine for financial services," and like the fact that they [used to be able to] sit back and get paid for doing very little. Click here: This is what your plan's advisor is supposed to be doing. They should be actively building and advising on a plan that makes sense -- fees and services and investments and fiduciary support and education and outcomes -- for the company and its employees.
You SHOULD pay fees for services. You should also know WHAT you pay, if it's reasonable, and those services should have real value in your eyes. Can we PLEASE make yesterday the last day that a "financial advisor" can sell a plan and do nothing and receive payment?
Because those "advisors" have no business pretending to be in our line of work.