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’s 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’re not talking lipstick on a pig — we’re 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. 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’s services, and the employers must make disclosures to their employees. When you add these together with another new requirement — 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 — 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’t address most, or sometimes any, of these issues. This left delighted providers to revel in their conflicts of interest, adding more and more services — such as payroll, mutual funds, trading, performance reporting, rollover IRAs, investment guidance and legal documents — all under one roof.
This sounded good, and easy, to many employers, until they began to read the fine print in 2012.
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’t track. These so-called “sub-accounts” are designed very carefully to look like mutual funds, but they are not. There are no public records about them, nor is there a way to track them with accounting software. 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 “sell” 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 while still 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?
“Target date” funds are a current example. They’ve grown massively since 2006, yet a target fund is nothing more than a collection of mutual funds, almost always the provider’s proprietary funds —maybe even ones that have not been doing well in the market and might fail completely if not hidden behind a date like “2050.”
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. Naturally, each party would like to be paid as much as possible, in exchange for as little work and accountability as possible. For companies with products like investment management (such as mutual funds or sub-accounts) this means they’d really like the ability to “bundle” 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 — 20 million workers hold $800 billion in such funds, according to research compiled by Paladin Registry and Target Date Solutions. The providers certainly don’t want to open things up for price and performance competition. Competition hurts profitability.
And if a sales agent brokered the plan (meaning the agent “sold” it but isn’t very involved in how it runs), the agent would make less money by negotiating lower fees. The dire concern over such practices is evidenced by the Labor Department’s still fairly new requirement that all plans that are audited must publicly disclose anyone who is a “party in interest.”
And how about plan providers layering in add-on services, and setting up systems to automatically capture more of workers’ money? 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’s landing page that prompts you to “click here for a 529 college savings plan”?
Most often these product offerings cast a wide net in the hopes that people just fall into them without electing an alternative. None of this has to do with low fees or good investments. In other words, that glossy look could be hiding firm policies designed to rob workers blind.
Disrupt this industry
It’s entirely possible for low-cost providers to do great things for our great American workers to help them prepare for retirement. A number have popped up and are putting up a good fight. We’ve simply got to move a few bad apples and conflicted people out of the way. 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 your plan’s administrator. If you think it’s hard to understand, you’re not alone. It’s likely that way for a reason — to mask conflicts of interest.
Demand clarity from the provider. Call, email, ask your employer. 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 “parties in interest.” This could be a clear indication that fee negotiations have been compromised.
The incumbents won’t leave easily. They’re very good at shaping the conversation. But there is still time for America to reinvent how workplace retirement plans work. Let’s start by figuring out where all the hidden fees and conflicts of interest reside, and weed them out.