One who intends to leave others better off for his having existed.

3/4/15

"Middlemen Fees are Depleting Your Retirement Accounts."

"...In a recent suit filed by seven employees against Novant Health, Inc., they allege that Novant “breached their fiduciary duties” by allowing middlemen to overcharge them for plan fees. Novant is a healthcare firm based in Winston-Salem, North Carolina.

...Novant Health didn’t protect its employees by ensuring that “fees for various bookkeeping and administrative services were reasonable.”

The fees charged on the Novant plan grew as the plan got bigger. The plan now holds more than $1.2 billion in assets. Over time, high fees make a huge difference in total savings. A 1.25 percent difference in fees, for example, can translate into a loss of $100,000 over a working lifetime.

Who was getting the fees in the Novant plan? Great-West Life and Annuity Company collected nearly $9 million from 2009-2012.  ...this money was deducted from plan accounts and was not invested.

Plan Sponsors are not “picking up the tab” for middlemen expenses — and lying about it. The common refrain by employers is that they absorb all plan expenses. Only the most generous companies do.

The bulk of expenses can be passed along to employees, but most workers never see these fees since they are represented as percentages and buried in reports. Department of Labor statements require that employers break out these fees, but most employees don’t read the disclosures or act on them.

...Your Plan Sponsor Doesn’t Act Prudently. This has a simple meaning. Your employer must shop around and attempt to offer the most diversified line-up of funds at the lowest cost. If not, they are breaking the law.

...Here’s what they should be doing:

1) Offering passive index or actively managed funds at the “institutional” rate. That means stock-index funds with annual expense ratios below 0.15 percent annually. Many offer “retail” class funds that are ten times that percentage. The Novant plan, for example, offered funds with fees 109-percent higher than institutional class vehicles.

2) Finding economies of scale and passing along the savings to you. Bigger retirement funds are cheaper to administer...

3) Finding the lowest-cost vehicles. ...It doesn’t mean “proprietary” funds offered through brokers or annuity-based accounts with “wrap” fees.

4) There are no revenue-sharing or commission agreements. Sometimes brokers get fees from fund  managers for simply getting specific funds into a plan. Their compensation is called revenue sharing. Schlichter called them “kickbacks.”...

According to the Novant suit, a broker was receiving up to $6 million in annual commissions “despite the fact that the services didn’t change in any way.” The broker’s take increased merely because it was based on a percentage on assets under management. As the total plan assets grew, so did their haul.

5) The employer monitors all expenses, audits the plan and lowers costs. They should hire an independent fiduciary consultant to do this. This is a no-brainer, but employers are reluctant to perform this oversight. Why? All too often the money being paid to middlemen isn’t coming out of the company’s treasury, so they have little incentive to trim expenses.

...closely examining your 401(k) is a bit like going to the dentist. You can have good news (no cavities or other work) or do some unpleasant stuff now to avoid much more pain later.

John F. Wasik 

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