I couldn’t believe my ears. I was talking to a very credible source from one of the largest investment firms in the country, and he was openly telling me that a group at one of the big Wall Street firms has a sales practice designed to redirect workplace retirement plans into high-fee, low-service products with little or no accountability.
Here’s how it works: A team of financial advisors pitches a suite of high-touch services exclusively for key decision-makers at large companies. Those decision-makers get exclusive insurance and investment deals for themselves and their families. In exchange, they give the firm the company’s lucrative 401(k) plan business.
They have some nifty name for it like “concierge service.”
The shocking part was the way this source delivered this news. It sounded quite a bit like: “What a smart idea these guys have. Who can resist special white-glove treatment?”
For a moment, I thought I had traveled back in time. What this guy was describing was eerily reminiscent of bank interest rate schemes of the 1990s and 2000s, but worse.
It’s common knowledge that banks used to offer lower interest rates on lines of credit to businesses that placed their 401(k) plans with the bank. The bank might make slightly less profit by offering the lower rate, assuming the company used the line of credit. But it’s a small sacrifice since the bank can more than make up for it by charging the retirement plan more. This means that the company benefits slightly — but its employees might have to work an extra few years to make up for the lost earnings on their investments.
You could argue that there is indirect benefit to the employees because this helps strengthen the company, and therefore the company is in a better position financially. It’s a bit of a reach, but at least plausible.
The new “concierge” scheme, on the other hand, is much worse and has no plausible excuse. In this case, decision-makers at the company are placing the retirement plan simply so that they can get some sort of exclusive insurance and investment deal for themselves and their families. There is no argument that can be made that the employees are not harmed solely so that the decision-makers can reap personal benefit.
Let’s put the logic of this, and the associated legal requirements, into perspective. By law, every choice that these people make about the retirement plan make must be for the exclusive benefit of the plan’s participants. It’s that simple. Most decision-makers go to great lengths to document their objectivity and to treat this responsibility seriously, because the law likely allows for them to be sued personally if anyone other than the plan’s beneficiaries, well, benefits.
Imagine, for example, that your company put you in a particular health insurance plan — one that has higher fees than other available plans — because several high-level people at the company get passes to an exclusive golf club or travel points. This wouldn’t happen, because health plans are fairly transparent. If you suddenly have a higher deductible or can’t see your doctor, you’ll know right away.
If, however, you’re put into a more expensive retirement plan, you won’t really feel the pain of it until you get close to retirement age. At that point, the people who have sold the plan to your company have a few ready-made excuses. They can blame the markets, and they can suggest that you may not have saved enough. While both of these are relevant factors, there’s only one thing that we can say with certainty will positively affect your investment returns: low fees.
The idea that a big financial sales organization, and perhaps others like it, has customized a sales pitch to key decision-makers to appeal to their sense that they should be treated differently is made even worse by the fact that this is a clearly discriminatory practice. This sends a message to the employees that if you do not have enough money to invest, you get little or no attention, and certainly not the “concierge” service. It’s another one of those practices that drives a wedge between upper management and the rank-and-file employees of companies.
The way the relationship between plan providers and decision-makers at your firm is supposed to work can be boiled down to two very important ideas: the “Duty of Loyalty” and the “Exclusive Purpose Rule.” You’ll find all sorts of information about these under what is known as ERISA, which stands for the Employee Retirement Income Security Act. They simply mean that anyone who makes any decisions about your workplace retirement plan must do so solely in the interest of the plan’s participants and pay reasonable rates.
If this leaves you wondering how many extra years you might have to work in order to make up for ground lost to some slick sales practices throughout the years of your retirement plan saving, you should know that a host of new Web-based resources are coming online to help you determine the impact extra fees is likely to have on your future. They show the fees your plan pays compared with average fees for comparable plans and estimate the number of extra years you’ll have to work in order to make up the difference. Sites like these are thought-provoking at least, and eye-opening at best.
Learn more about Jonathan at NerdWallet’s Ask an Advisor.