Retirement plans often rife with conflicts of interest
The technology revolution has disrupted dozens of industries, with nimble startups doing a better and more transparent job of serving the customer, and traditional companies paying the price in lost market share or even extinction.
What鈥檚 needed now is a similar revolution in the retirement-plans industry, with small, independent thinkers retooling how workplace retirement plans are built and delivered.
We鈥檙e not talking lipstick on a pig 鈥� we鈥檙e talking entirely new thought processes.
There is no doubt that we have a problem. Plenty of anecdotal evidence, empirical data, successful lawsuits and analysis show that much of the retirement-plan marketplace is manipulated purely for profit.聽People in the industry know that this is the reason for the recent spate of fee-disclosure regulations.
Under rules enacted in 2012, everyone getting paid to manage a retirement plan must make disclosures to the employers who are using that provider鈥檚 services, and the employers must make disclosures to their employees.聽When you add these together with another new requirement 鈥� that anyone getting paid by a workplace retirement plan must provide a services agreement explaining what they do and how much they get for doing it 鈥� you begin to understand the intent of the regulations. Employers must now gain an understanding of who is getting paid, how they get paid, how much they get paid, what services they provide and any conflicts of interest.
Prior to 2012, most plans didn鈥檛 address most, or sometimes any, of these issues. This left delighted providers to revel in their conflicts of interest, adding more and more services 鈥� such as payroll, mutual funds, trading, performance reporting, rollover IRAs, investment guidance and legal documents 鈥� all under one roof.
This sounded good, and easy, to many employers, until they began to read the fine print in 2012.
Conflicts abound
It was about time for some changes, but there is still a long way to go. Take mutual funds, for example. Why do mutual funds still dominate workplace retirement plans? One mutual fund family offers 16 different versions of the same fund. This means that, depending upon who negotiates the fees, you might be paying vastly more than someone else for the exact same fund. This kills compound interest.
Insurance company providers add another layer to this misery by promoting fund-like investments that you can鈥檛 track.聽These so-called 鈥渟ub-accounts鈥� are designed very carefully to look like mutual funds, but they are not.聽There are no public records about them, nor is there a way to track them with accounting software.聽The revenue such investments share with the insurance company has remained undisclosed or opaque for decades.
Then there is the matter of the people selling you these products: sales agents who are bought and paid for. A great number of people who 鈥渟ell鈥� workplace retirement plans have hidden agendas, with no particular skill when it comes to assisting the plan. Many are there solely to sell other products to employees, such as annuities, rollover IRAs, insurance, tax and accounting services, credit cards and more, all聽while聽still聽getting paid both openly and behind the scenes by the company or companies whose products they advocate.
Last but not least: conflicted providers. It seems great on paper to have one company that keeps all the records for the workplace retirement plan and also the legal documents. But what about when the provider also layers in its own investment products, often not as good as others and with higher fees?
Off-target funds
鈥淭arget date鈥� funds are a current example. They鈥檝e grown massively since 2006, yet a target fund is nothing more than a collection of mutual funds, almost always the provider鈥檚 proprietary funds 鈥攎aybe even ones that have not been doing well in the market and might fail completely if not hidden behind a date like 鈥�2050.鈥�
The negotiations that take place to determine how much each of the parties is paid, if such negotiations happen at all, are critical to the success of the plan.聽Naturally, each party would like to be paid as much as possible, in exchange for as little work and accountability as possible.聽For companies with products like investment management (such as mutual funds or sub-accounts) this means they鈥檇 really like the ability to 鈥渂undle鈥� together as many products and services as possible, willfully ignoring other providers that might do a better job or cost less.
This is why target date funds now find themselves under the microscope 鈥� 20 million workers hold $800 billion in such funds, according to research compiled by Paladin Registry and Target Date Solutions.聽The providers certainly don鈥檛 want to open things up for price and performance competition.聽Competition hurts profitability.
And if a sales agent brokered the plan (meaning the agent 鈥渟old鈥� it but isn鈥檛 very involved in how it runs), the agent would make less money by negotiating lower fees.聽The dire concern over such practices is evidenced by the Labor Department鈥檚 still fairly new requirement that all plans that are audited must publicly disclose anyone who is a 鈥減arty in interest.鈥�
And how about plan providers layering in add-on services, and setting up systems to automatically capture more of workers鈥� money?聽Have you heard about former employees of a firm who were automatically put into a rollover IRA once they left? How about the cute logo on the provider鈥檚 landing page that prompts you to 鈥渃lick here for a 529 college savings plan鈥�?
Most often these product offerings cast a wide net in the hopes that people just fall into them without electing an alternative.聽None of this has to do with low fees or good investments.聽In other words, that glossy look could be hiding firm policies designed to rob workers blind.
Disrupt this industry
It鈥檚 entirely possible for low-cost providers to do great things for our great American workers to help them prepare for retirement.聽A number have popped up and are putting up a good fight.聽We鈥檝e simply got to move a few bad apples and conflicted people out of the way.聽Then these firms will really take hold, and the landscape will change dramatically.
If you want to get involved, start with the annual fee disclosure you receive from聽your plan鈥檚聽administrator.聽If you think it鈥檚 hard to understand, you鈥檙e not alone. It鈥檚 likely that way for a reason 鈥� to mask conflicts of interest.
Demand clarity from the provider.聽Call, email, ask your employer.聽And if your plan has an advisor that you suspect is compromised (a sales agent), ask your employer to evaluate others.
Check public filings and the reports that are mailed to you for excessive 鈥減arties in interest.鈥澛燭his could be a clear indication that fee negotiations have been compromised.
The incumbents won鈥檛 leave easily. They鈥檙e very good at shaping the conversation. But there is still time for America to reinvent how workplace retirement plans work. Let鈥檚 start by figuring out where all the hidden fees and conflicts of interest reside, and weed them out.
