Trader Joe's 401k ERISA Lawsuit

[litovskyassetmanagement]

Just got this today:
https://401kspecialistmag.com/trader...erisa-lawsuit1

Several things to take away from this:
1) An argument that basically says that it is no excuse that higher cost funds are used vs. lower cost funds. This is now a mainstream legal approach, which is good. I want to see index funds mentioned vs. actively managed (closet 'index') funds, but we haven't gotten there yet.
2) Using revenue sharing as an excuse to offer higher cost funds is not viewed as 'safe' anymore. Sure, plan sponsor fees are lower (maybe, maybe not), but participants end up paying the bulk of these fees which results in a higher than necessary expense for all participants.
3) Total disdain for AUM fees by the attorneys, and how inappropriate (and costly) those are for plans with significant assets in them. This is what I've been saying for years.

Quotes from the article:

"The dispute centers on participant pricing and the plan’s supposed revenue-sharing arrangement, and the filing notes that Capital Research received a reported $183,075 in direct compensation for record-keeping services in 2018, and that over the past six years, the plan paid record-keeping fees in the amount of roughly $140 per participant."

'“A reasonable record-keeping fee for the Plan is $40 per plan participant,” attorneys wrote, and the asset-based nature of the fees were singled out with a colorful metaphor.'

'“One commentator likened this fee arrangement to hiring a plumber to fix a leaky gasket but paying the plumber not on actual work provided but based on the amount of water that flows through the pipe. If asset-based fees are not monitored, the fees skyrocket as more money flows into the Plan.”'

Bottom line is that even if nothing happens with this lawsuit, TJ will most likely make changes to improve their plan. What's crazy is that there are still these $1B plans out there that have no idea that they are overpaying (and it takes an ERISA lawsuit to make them realize it). Another thing is, it is really not that difficult to bring the fees down. These plans tend to hire very expensive 'consultants' who are simply not interested in bringing the fees down as low as possible (while retaining good quality services), because often they do not act in a fiduciary capacity. Their approach is to benchmark fees vs. other plans of similar size, which is just plan wrong - the fees should be the lowest possible (ideally, zero AUM), as it is not too difficult to do this for a plan with zero assets, so it goes without saying that $1B plans should have only institutional funds from the likes of Vanguard. All the money they save can be used for better participant education and advice (which you can get for a fixed fee as well), and they'll still have money left over after that.

[Peds]

Thanks for the info.

[jacoavlu]

$180k for record keeping for a $1.6B plan is like an 0.1% record keeping fee which while I’m sure could be lower doesn’t strike me as unreasonable.

it’s hard if not impossible to find a flat fee recordkeeper. I have a TPA I’m happy with. I would gladly accept a referral to a recordkeeper that wouldn’t charge an asset based fee for our plan

Kon can you name one?

[jacoavlu]

Would like to know details of the fund lineup TJ offered.

[ajm184]

Would like to know details of the fund lineup TJ offered.

Guessing with Capital Research involved I would hazard a guess at American Funds, Lord Abbott, etc. Embarrassing imo to treat its workers so poorly with these types of plans with high costs, poor choices and more importantly poorly performing funds. Not like Capital Research was lending money via a bank line. IMO the finance folks / retirement committee members at TJ's should be shown the door due to an utter lack of fiduciary duty to the plan.

[litovskyassetmanagement]

$180k for record keeping for a $1.6B plan is like an 0.1% record keeping fee which while I’m sure could be lower doesn’t strike me as unreasonable.

it’s hard if not impossible to find a flat fee recordkeeper. I have a TPA I’m happy with. I would gladly accept a referral to a recordkeeper that wouldn’t charge an asset based fee for our plan

Kon can you name one?

So this is about them receiving indirect compensation, in addition to what they charge as a fixed fee. And 0.1% is actually quite a bit for a plan this size. So even if the record-keeper charged only a fixed fee but received a share of the revenue, that makes it bad, not just charging an AUM fee. Revenue sharing payments are bad for everyone (except for the record-keeper of course). I have a huge spreadsheet sent to me by different record-keepers that shows which funds accept revenue sharing. I always check that to see, as plan sponsor never knows that this is happening (as it is rarely if ever disclosed).

Ascensus is a fixed fee record-keeper. They start making sense vs. the rest once you reach $3M-$5M mark as far as assets, and they are not cheap for large plans, but it all comes down to what assets you have and how many participants you have. If you have way more participants than you have assets, paying a small custodial fee is fine. And of course, you have to use an independent TPA with them as they are not particularly good with more sophisticated plans (which is fine).

[litovskyassetmanagement]

Would like to know details of the fund lineup TJ offered.

Here you go. Can definitely be much better than this given the size of this plan.

[litovskyassetmanagement]

Guessing with Capital Research involved I would hazard a guess at American Funds, Lord Abbott, etc. Embarrassing imo to treat its workers so poorly with these types of plans with high costs, poor choices and more importantly poorly performing funds. Not like Capital Research was lending money via a bank line. IMO the finance folks / retirement committee members at TJ's should be shown the door due to an utter lack of fiduciary duty to the plan.

UBS FINANCIAL SERVICES is their adviser and they are paid $300k for basically doing nothing. They are most likely not a fiduciary (ERISA 3(38)), and even if they are ERISA 3(21), it does not seem like they care about lowering their clients' cost much. They might be a 'consultant' of sorts, not even a fiduciary. What's amazing to me looking at the lineup is that they throw in like 3 index funds as if to acknowledge that yes, we probably should throw SOMETHING low cost on the menu, but the rest are junk.

And of course, 'party in interest' is the American funds (probably where most of CR revenue sharing comes from). Any good ERISA 3(38) should have fired Capital Research in a heartbeat and replaced them with a good fixed fee and/or low cost record-keeper. But big companies such as UBS have the size and 'suits' to make unsophisticated plan sponsors believe that they know what is going on and are the best around. Plan sponsors are also not the most educated people, so they don't necessarily understand what is going on. That, however, is no excuse for a plan this size. Because UBS was not named in this lawsuit I'm guessing they are not even a fiduciary, so there's that.

[Mobilemom37]

Where does one find a good ERISA 3(38) for a non-medical business?

[litovskyassetmanagement]

It depends on the type and size of a business. We work with several non-medical companies, but there has to be a good fit. I would say that any company should be able to afford to hire an ERISA 3(38) vs. having to pay excessive fees to retirement plan service providers who are not fiduciaries, but this would have to come directly from the leadership who should have a vested interest in making the big changes to their plan. Many plan sponsors who are not well educated might not see the value in hiring a fiduciary in the first place, but those who do can definitely benefit themselves and their staff.

[Tim]

litovskyassetmanagement
Seems to be something else coming into play besides the offerings.
Ishares has three offerings (500,Intl,Bonds) that are usually relatively lower priced. From the holdings, it seems participants might be being steered to the Ameriprise funds, generating more shared revenues.
Just looking at the balances, but maybe that’s an incorrect speculation on my part. Balances are lower with higher costs, but balances prove it is my logic. Rigged to the detriment of the participants. False logic?

[litovskyassetmanagement]

Well, people want 'balanced' funds, this is very standard approach by most plan participants who are not particularly educated. Guess who works for Trader Joe's? So I see this a lot. If this was a doctor plan, I would see the same thing by the way, with a bump around index funds for more sophisticated participants. I would also like to see how participant education was handled (if there was any done at all). This might also explain things. Most participant education programs would not go into portfolio building, this is way too sophisticated for most people, so balanced fund is the only alternative since nobody wants to just hit the gas.

[litovskyassetmanagement]

Another conclusion here is regarding something that's extremely obvious, so obvious that I missed it in my original post. Just because you sprinkle in a few index funds in a sea of managed high expense funds that pay revenue sharing does not make it good anymore. I like to see that because I know some other plans of this size that are doing exactly the same thing. This is primarily due to 'advisers' such as UBS and many others who manage these plans, by the way, as plan sponsor has very little input as far as investments (despite them being the fiduciary), because the fiduciary function is so spread out (due to them having HR departments where nobody is taking ownership). These 'advisers' (and record-keepers) are still clinging to sources of revenue beyond their fixed fees, and it is a good trend that this is getting punished. Revenue sharing is probably going to stick around for smaller plans unfortunately, but there is no reason why this should even be taking place.

[Tim]

“What's amazing to me looking at the lineup is that they throw in like 3 index funds as if to acknowledge that yes, we probably should throw SOMETHING low cost on the menu, but the rest are junk.”
S&P 500
Intl
Bonds
An employee COULD have survived with the Ishares offerings. That is their “defense” I bet.
SECURE is the answer: Annuities! Ameriprise annuities where cost is specifically a safe haven. Perfect “defense”. Seems like a logical enhancement.

[litovskyassetmanagement]

Yes, I totally agree, EDUCATED employees! Do you want to bet whether the employees got this type of education or not?

[WCInovice]

When I joined my group we have American Funds in the 401K. I was absolutely floored when I looked at the plan options. I wanted Vanguard, but we settled on DFA funds.

The fees on the American Funds index funds were astronomical.

[litovskyassetmanagement]

When I joined my group we have American Funds in the 401K. I was absolutely floored when I looked at the plan options. I wanted Vanguard, but we settled on DFA funds.

The fees on the American Funds index funds were astronomical.

Yes, but DFA funds are also quite a bit more expensive vs. Vanguard. I use several, but for most asset classes there is no reason to use DFA funds. Anyone who advocates for all DFA funds has basically been hoodwinked by their marketing (or is 'selling' DFA funds under the pretense that they return more than Vanguard funds by at least as much as the fee they charge).

[Peds]

Yes, but DFA funds are also quite a bit more expensive vs. Vanguard. I use several, but for most asset classes there is no reason to use DFA funds. Anyone who advocates for all DFA funds has basically been hoodwinked by their marketing (or is 'selling' DFA funds under the pretense that they return more than Vanguard funds by at least as much as the fee they charge).

i would be ecstatic if my employer just added index funds and left the crap 1% funds there.....
i only have an s&p for 11bp, an intl for 35 bp....

[litovskyassetmanagement]

i would be ecstatic if my employer just added index funds and left the crap 1% funds there.....
i only have an s&p for 11bp, an intl for 35 bp....

I agree, that's because you know what's best for you...99% of retirement plans are more like TJ.