High expense ratios and administrative charges on offered 403b/457b

[legobikes]

Hi folks, I previously brought up the apparently poor investment options provided by my employer through an Edward Jones advisor. Note that the screenshot below shows the cheapest products, none of which dip under 0.75% and all of which have a 0.5% administrative charge.

Someone in the previous thread said this was tantamount to, I guess, fiduciary malpractice. I am arranging a meeting with the advisor and plan to discuss this, but I was wondering how solid is the case for demanding cheaper options (and index funds), and who would I talk to next if they simply deny there's anything wrong with these optons? How can I strongly make this case?

 

[Hatton]

These expense ratios and admin charges are too high.  Your employer should be interested in switching to another firm that will offer better investments.  I own several American Fund products and none of them have ratios that high.  It might be that there is a "break point" meaning after your account value exceeds a certain amount the fees drop. I would go to the meeting but don't be surprised if nothing happens.

[Zaphod]

This is actually going to be a big problem for a lot of employers, etc...in the future and its already starting. ERISA lawsuits have begun at different firms. Basically how it works for you depends on how seriously your employer takes your concerns, and how willing you are to make a stink out of it.

[ajm184]

A meeting with the Edward Jones advisor does not make any sense, he's the order taker, not the decision maker.  Hank in the prior thread is rightfully pointing out that the folks on the retirement committee for the 403B/457 have a fiduciary responsibility to the plan participants (that's you and the employees, not the employer).  Depending upon how you feel about this particular employer, a couple of approaches to consider:

a.  Not a long term position (< 3 years)-  Get into whatever combination of bad choices you feel is appropriate and fund only up to any type of match, remainder goes into low ER taxable.  Complain to HR, hope you have some allies to take the case to the retirement committee to 'see the light'.

b.  Long term position.  Get into a bond or MM type fund up to the match, remainder into low ER taxable.  You are going to have to be a PITA.  Complain to HR. Demand to see any paperwork regarding manager/investment selection.  Make it known that the retirement committee does not appear to be working in the participants best interests (this should get their attention for if no other reason than the potential to be sued).  Look to get on the retirement committee (I'm going to guess it will be easy given your employer's size).  In particular, you will need to gather information on plan size, plan cost, and any documentation that an retirement committee acted as a fiduciary for the plan (requested multiple bids, decision basis for management/investment plan etc. (this is where most retirement committee's totally fail to act as a fiduciary). I would seek out Vanguard, Fidelity to get some preliminary information on trustee costs/potential investment choices based on plan assets to take to HR (this is the lower cost alternative, if you can throw in the bone of ease of transition to HR that will be priceless).  I would become real good friends with the HR benefits person, they will be able to really help or hinder you.

You may not want to sue, but it maybe your only option depending upon the response to suggestions above.  If it comes to this you would be suing the retirement committee members for failure to follow their fiduciary responsibilities.

[legobikes]

ajm184 wrote:

hould be interested in switching to another firm that will offer better investments.  I own several American Fund products and none of them have ratios that high.  It might be that there is a “break point” meaning after your account value exceeds a certain amount the fees drop. I would

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Thanks this is very useful.

This is a long-term position as far as I am concerned, so I guess it's option 2. By the way this is a governmental 403b, and also, there is no employer match. There is some kind of retirement fund the employer offers which is a flat 3% regardless of your contribution. How does that change your recommendation? When you say 'low ER taxable' you mean something outside of these plans?

"Never attribute to malice that which is adequately explained by stupidity." - I am not sure if this is just incompetence, which would not surprise me, but is there also the possibility that execs are 'on the take' so to speak? This place has had multiple CFOs in the past few years.

I guess the next step is to ring up HR and ask about who is responsible for the plan offerings.

 

 

[Hatton]

legobikes wrote:

When you say ‘low ER taxable’ you mean something outside of these plans?

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He is talking about you opening a taxable account.

[ajm184]

I relate a 403B to a retirement plan for the teachers within a school district.  These types of plans tend to attract primarily high commission product offerings. The Edward Jones person may have been the first person to talk with you, but there maybe other trustee/investment managers available within the 403b plan. HR can detail if there are other choices or if they would sign-off/offer one such as Vanguard/Fidelity.  No employer match does not make it very compelling except for the tax-deferral aspect and if the Mass Mutual/Edward Jones combo is your only choice, you will need to crunch some numbers to determine if the high fee/administrative cost versus low-cost taxable.  Not sure what would offer a 3% employer contribution regardless of match, unless it is some type of pension contribution by the employer, in which case you would not have any control on the investment decisions.

Though CFO turnover may or may not be an issue, there is an 'Certificate of Achievement for Excellence in Financial Reporting' that can be awarded to governmental entities.  If the governmental entity you are employed by has this award for it most recent statements, it would provide some added comfort.

If your 403b plan is not subject to ERISA, a lawsuit would be much higher hurdle in addition to being a governmental body; avoid if at all possible.  Get with the benefits HR person, they will be in a good position to know what's going on.  If the HR person multi tasks; for example do compensation/insurance, you may have to be more pro-active if it is not a specific area of expertise.

 

 

[adventure]

legobikes wrote:

“Never attribute to malice that which is adequately explained by stupidity.” – I am not sure if this is just incompetence, which would not surprise me, but is there also the possibility that execs are ‘on the take’ so to speak? This place has had multiple CFOs in the past few years.

I worked for a place that had a terrible retirement plan, fund selection, then work. The guy who chose the plan liked it because they "have some nice webinar videos and that's neat".

[litovskyassetmanagement]

legobikes wrote:

Hi folks, I previously brought up the apparently poor investment options provided by my employer through an Edward Jones advisor. Note that the screenshot below shows the cheapest products, none of which dip under 0.75% and all of which have a 0.5% administrative charge.

Someone in the previous thread said this was tantamount to, I guess, fiduciary malpractice. I am arranging a meeting with the advisor and plan to discuss this, but I was wondering how solid is the case for demanding cheaper options (and index funds), and who would I talk to next if they simply deny there’s anything wrong with these optons? How can I strongly make this case?

 

Click to expand...

We get contacted often by young docs whose employers are offering high cost retirement plans.

There are several issues in play here:

1) Fiduciary and legal liability of the plan sponsor.  If they are not doing anything but letting the brokers run their plan, they are financially liable for any excessive fee lawsuits, which are now hitting smaller and smaller companies.

2) Having the plan that is not run by an ERISA 3(38) fiduciary working in the best interest of the plan participants.  This comes back to 1), and this simply loads the plan sponsor with extra fiduciary and legal liability that's unnecessary.

So in short, brokers can sometimes negotiate lower fees, but they will still remain brokers and will still want huge fees for themselves.  To change this cycle of fiduciary malpractice (which is what it is), I recommend the following:

1) Get your plan reviewed by an ERISA 3(38) fiduciary so that they can look at the overall situation (which includes fees/cost, participant advice/education, fiduciary/administrative compliance issues, etc).  This is all in the best interest of plan participants and also for the benefit of the plan sponsor.

2) Get them to give your plan a proposal to improve services and to lower plan cost.  For a plan like this, it should be really easy to save a LOT of money by going to low cost index funds and by switching exclusively to fixed/flat fees vs. AUM fees.

To get this accomplished, get on the investment planning committee, and if such does not exist, get the plan sponsor to form one, or appoint someone who can negotiate on the plan sponsor's behalf.  Group practices are often run by doctors who are financially interested in not paying excessive fees, so if you work for such a practice, get the partners involved.  A good starting point would be a calculator that shows the actual cost over time of excessive AUM fees:

http://retirementplanhub.com/retirement-plan-cost-calculator/

And some basic education on what's possible (for example, on how low cost index funds can save significant money for plan participants, and why working with an ERISA 3(38) fiduciary is a lot better in many ways than working with a broker).

[legobikes]

Hello folks, I asked a few people at work if they were using the retirement plans. My MA puts in 25-50 bucks every month, and yet it sounds like she's ahead compared to the three doctor I talked to, none of whom were putting anything towards retirement!

Then today I had a short meeting with the Edward Jones advisor. Apparently he was brought on board five years ago. The account was originally with Hartford, and then MassMutual bought Hartford, and many of the investment options remained the same. The attached file is a picture of the current options out of about 90 that are available, and the advisor said he would 'check' if there were any index funds available and perhaps one of the other funds could be switched out, since the majority of the investing is in the RetireSMART funds.

When I brought up the high expense ratios, he said that he had talked about this with MassMutual but they had said they 'internally' set these expenses and they are specific to this plan as a remnant of whatever original plan was with Hartford. He also said the fees partially paid for his 'services'. He said the plan could be switched but then there are upwards of a 100 people with various investments in the current options and therefore this would be in some way difficult.

He also alluded two or three times to things going south or ************************ hitting the fan or some-such expressions about the financial situation of the world at large and how 'any idiot can pick stocks right now' but it would be more important when this alluded-to bad thing happens and therefore these AUM plans are worth it. When I said that they are about an order of magnitude more expensive than index funds he said nonetheless the cheapest options were the American funds, and also pointed out the 'General Account' option which is a fixed 3% return. I didn't bother to point out that this isn't any better than inflation.

In the end I asked specifically who was responsible for these specific options and he said that he was, and that the point person at my company was so-and-so in HR. I plan to discuss this with my CMO and HR to get a better picture, but none of it looks good. I guess I need to find out who is acting as plan sponsor if there is no financial/retirement committee. Then I need to convince folks that we need to hire a fiduciary.

Other points:
-this specific advisor and this specific plan are the only ones available
-the advisor said the 457b is governmental, yet there is the risk of creditor claim on assets, when I thought that was not possible with a governmental plan; he also said I would first take a 20% hit if I took the distribution of the 457 upon leaving the job, and then an additional 10% hit when I filed taxes for that year
-he said the plans are non-ERISA

Does any of this make sense? I certainly wish I had a bit more financial education to be able to pick up on what sounds like a lot of BS.

 

Side question: If this ends up being too much of a battle, is the 3% fixed return option alright, or should I just invest in taxable accounts at that point?

 

 

[The White Coat Investor]

I wouldn't talk to the advisor. Talk to the employer and point out he is liable to a lawsuit from employees for not fulfilling his fiduciary duty. Be aware this discussion could cost you your job, so tread carefully.

[Craigy]

The advisor doesn't want to reduce fees.  That's how he makes money.  Anything that comes out of his mouth when asked is going to be just a bunch of garbage to get you to be quiet and act like the situation is more complicated than it is.

Only way to change this is by finding out who picks this awful plan, and apply pressure.  If you're a newbie then this is tough, you might need to try to get other docs on your side who are higher up, or who have been there longer and have more pull, to pick the fight for you.

I successfully pressured my firm to switch by bringing it up at annual meetings, cold calling Vanguard myself for basic fee information and getting that to the office manager, and by peppering a colleague who had a big account balance with articles on how much fees he'll be paying over his career and what better options are available.  The colleague had the pull, and was able to pressure the boss to switch from the long-time advisor/friend to someone else.

[litovskyassetmanagement]

legobikes wrote:

Hello folks, I asked a few people at work if they were using the retirement plans. My MA puts in 25-50 bucks every month, and yet it sounds like she’s ahead compared to the three doctor I talked to, none of whom were putting anything towards retirement!

Then today I had a short meeting with the Edward Jones advisor. Apparently he was brought on board five years ago. The account was originally with Hartford, and then MassMutual bought Hartford, and many of the investment options remained the same. The attached file is a picture of the current options out of about 90 that are available, and the advisor said he would ‘check’ if there were any index funds available and perhaps one of the other funds could be switched out, since the majority of the investing is in the RetireSMART funds.

When I brought up the high expense ratios, he said that he had talked about this with MassMutual but they had said they ‘internally’ set these expenses and they are specific to this plan as a remnant of whatever original plan was with Hartford. He also said the fees partially paid for his ‘services’. He said the plan could be switched but then there are upwards of a 100 people with various investments in the current options and therefore this would be in some way difficult.

He also alluded two or three times to things going south or ************************ hitting the fan or some-such expressions about the financial situation of the world at large and how ‘any idiot can pick stocks right now’ but it would be more important when this alluded-to bad thing happens and therefore these AUM plans are worth it. When I said that they are about an order of magnitude more expensive than index funds he said nonetheless the cheapest options were the American funds, and also pointed out the ‘General Account’ option which is a fixed 3% return. I didn’t bother to point out that this isn’t any better than inflation.

In the end I asked specifically who was responsible for these specific options and he said that he was, and that the point person at my company was so-and-so in HR. I plan to discuss this with my CMO and HR to get a better picture, but none of it looks good. I guess I need to find out who is acting as plan sponsor if there is no financial/retirement committee. Then I need to convince folks that we need to hire a fiduciary.

Other points:
-this specific advisor and this specific plan are the only ones available
-the advisor said the 457b is governmental, yet there is the risk of creditor claim on assets, when I thought that was not possible with a governmental plan; he also said I would first take a 20% hit if I took the distribution of the 457 upon leaving the job, and then an additional 10% hit when I filed taxes for that year
-he said the plans are non-ERISA

Does any of this make sense? I certainly wish I had a bit more financial education to be able to pick up on what sounds like a lot of BS.

 

Side question: If this ends up being too much of a battle, is the 3% fixed return option alright, or should I just invest in taxable accounts at that point?

 

 

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Edward Jones is a broker.  We need to call retirement plan advisers with their proper names.  A broker works for the firm, so their recommendations are in THEIR best interest, not in your plan's.  And who's liable? The plan sponsor, of course.  They just don't realize it in many cases. When the plan sponsor allows brokers to select the plan's investments, this is a clear breach of the plan sponsor's fiduciary duty to the plan participants.

It sounds like the broker lives in a 'la la' land as far as retirement plans and investing, but then brokers are not paid to provide investment advice, just to sell mutual funds that their company asks them to sell.  Switching funds is very easy, by the way.  You just scrap the whole lineup, and let participants select new investments from scratch. And you never let brokers run the plans - always get an ERISA 3(38) who subscribes to low cost index fund philosophy (because some ERISA 3(38) would select high cost funds under the guise of doing due diligence).

Cheapest thing is Vanguard index funds, but of course the broker won't make any money selling them.  This is exactly why the lawsuits are coming, and fast, too.  The plan sponsor can easily replace this adviser and this provider with a different one, and this is done all the time, especially if you can save significant money in the process.

A 457 governmental plan does not have the risk of forfeiture, and you will be penalized if you withdraw from it prior to 59 and 1/2, so you better roll that money into an IRA.  Yes, this is not an ERISA plan.

Big companies don't really care, unfortunately, that's why you can have these huge plans that are so much worse than the small plans that can be set up for solo owners today.  Thankfully there are plenty of ways in which a plan can significantly lower their cost, but this would require too much red tape, and the management is rarely interested because they might have an 'arrangement' with a provider (without realizing that they are overpaying).

[Hank]

Unless there's a kickback from the Edward Jones guy to someone in HR or management, it's hard to understand how the plan sponsor benefits from this high cost, inefficient retirement plan.

WCI raised the possibility of you being fired if you make a stink about this. It's sad to think that your employer would choose their golfing buddy Edward Jones guy over fulfilling their fiduciary duty. These high fees are hurting the high earners and the guys with the big retirement accounts more per year than the new guys with lower balances.

[ajm184]

It would be interesting to learn from OP regarding any discussion with HR.  In the interim determine who can help influence your efforts towards retirement change in the organization.  Though I understand the career risk issue stated, as long as you are professional in working towards a solution/outcome, you'll be alright and if not, then that also tells you something.

The goal question to ask is:  Would I be willing to use the selection(s) and costs of this plan to place other retirement/non-retirement assets into this plan?  The closer to answering 'yes' you get, the better plan will be for all participants.