Some financial companies claiming to act in the best interests of their clients appear to act like parasites existing at the expense of their hosts. Like many packaged savings plans, it looks like the fine print in Greensboro’s 457 retirement plan costs more than its big print suggests.
A recent Center for American Progress study reported “the corrosive effect of high fees in many of these retirement accounts forces many Americans to work years longer than necessary or than planned” and a “seemingly small 0.75 percent fee difference could cost a worker almost $100,000 in fees over a lifetime.”
Forbes Contributor John Wasik cited research contending “the typical worker is able to achieve sufficient retirement income 69 percent of the time when fees are at 0.5 percent, 57 percent of the time when fees were 1 percent, 45 percent of the time when fees were 1.5 percent, and just 29 percent of the time when fees were 2 percent.”
As of 2012, there was $79 million invested by about 2,420 City of Greensboro employees in their 457 tax deferred qualified retirement plan, which is very similar to 401(k) or 403(b) retirement savings plans. A first glance at the City’s statement looked like Greensboro’s 457 plan participants were paying an annual fee of $143,292, or about 0.18%, which is clearly identified.
Greensboro’s 457 plan provider is the “non-profit” International City/ County Management Association Retirement Corporation (ICMA-RC).
ICMA-RC’s mission is to “help build retirement security for public employees” and whose “products and services are designed with the public employee in mind.” According to their web site, ICMA-RC handles more than $50 billion in assets.
ICMA-RC’s non-profit 2012 tax form states “The corporation provided plan administration, investment management, and retirement planning and investment education services to 4,839 state and local government employers that offer 9,257 retirement plans holding 1,056,358 public sector employee retirement accounts.”
ICMA-RC’s President/CEO/Director Joan McCallen’s 2012 reported compensation was $2,159,365. ICMA’s Executive Director Robert O’Neal only makes $345,126.
ICMA-RC’s website says they have a “license agreement with ICMA that allows ICMA-RC to use the association’s name” in exchange for “$400,470 to ICMA’s corporate account.” Both companies are housed in the same Washington, D.C. building.
The contract between the City and ICMA-RC says ICMA-RC can make money on the back end from City of Greensboro employee accounts with very little disclosure to employees. ICMA-RC appears to be charging relatively overpriced “retail” rates, where part of the fees can be “kicked back” to ICMA-RC from outside investment managers, as opposed to “institutional” rates, where most fees are usually clearly displayed and cost much less.
Based on information the City and ICMA-RC provided, I came up with a more realistic estimate including the fees masked within the underlying investments of somewhere between 0.96% and 0.98%, or about $788,920 per year taken from the City employee 457 retirement accounts.
In the summer of 2013, meeting with City staff while acting as a mayoral candidate, I spelled out how the $788,920 fee was $645,628 more than the $143,292 on their statement. That Greensboro’s fiduciaries would be aware of the underlying fees was relatively small, as the financial services industry has limited transparently reporting at the expense of those with money invested in retirement plans for decades.
About 49% of Greensboro’s 457 plan was invested in the VantageTrust Plus Fund, otherwise known as a Stable Value Fund. ICMA-RC’s web site says “The PLUS Fund’s investment objective is to seek to offer a competitive level of income consistent with providing capital preservation and meeting liquidity needs. Key goals are to seek to preserve capital, by limiting the risk of loss of principal and delivering stable returns.”
The overt fee reported on the statement the City provided suggested the fee for the VantageTrust Plus Fund was about $89,168. What the statement didn’t show was another 0.81% ICMA-RC was taking as a relatively covert $314,288, for a total of $403,456.
I proposed reducing total City of Greensboro 457 plan expenses by an estimated $572,328 per year, or about 0.7%, which would directly increase Greensboro employee balances in the plan by the same amount.
According the Securities and Exchange Commission’s Investor Compound Interest Calculator, paying 0.7% less over 30 years would increase participant account values by $18,504,396, if everything else remained the same.
In 2012, the U.S. Department of Labor implemented rules requiring fee disclosures for 401(k) plans, fiercely opposed with a massive lobbying effort by the financial industry. The end result was less than clear disclosures that many retirement plan investors still have a hard time figuring out.
Plans like Greensboro’s 457 for government employees remain exempt from the new transparency rules.
I believe the financial services industry and the U.S. governmental regulatory infrastructure are responsible for not acting in the best interests of consumers, as many retirement plan fiduciaries across the country continue to know not what they should.