In Baltimore there is an investment firm that has flooded the airwaves with radio and TV shows guaranteeing 7% returns with no downside risk. Those of us who act as fiduciaries to our clients scoffed at these infomercials, but it didn’t take long for our clients to start calling us, asking why they weren’t invested in these can't lose investments. For the record, these “advisors” were pitching different types of annuity products to their unsuspecting clients. If you want to learn more about how these products work (warning: it’s complex), click on this short webinar I created to try to de-mystify these investments.
Getting back to the topic, as clients would call us explaining what they heard, the conversations usually went something like this:
Client: I just heard about these investments that guarantee you get a 7% return OR the return of the market, whichever is greater. Why aren’t we investing in things like this?
Greenspring: Were you listening to the “Money Guys” on TV?
Client: That’s it, have you heard of them?
Greenspring: Yes, but let me ask you a question, “How can someone guarantee an investment return of 7% OR the return of the market, whichever is greater, if guaranteed investments like treasury bonds are earning 2%”?
Client: I’m not sure, but that’s what it is.
Greenspring: I wish it were so, but the one thing I know from working in this field for a long time is that if it sounds to be good to be true, it probably is.
At that point, I would explain the product and how terrible it is. Thankfully, I don’t believe we’ve had any clients buy these products after we explained how they work. As much as we all know deep down that there are no free lunches, I am amazed how many people still want to believe it. Fast forward to today, this investment firm has been permanently barred from the investment advisory business for “fraudulently misrepresenting the risks of their investment strategy”. The old adage about being too good to be true, is proven right once again.
On March 9, 2009 the S&P 500 hit a low of 667 (as I write this it is trading at 2365). It seems like an eternity ago, but I thought it would be fun to pull out the letter we sent to clients on February 26th of that year, just a week or so before the ultimate bottom. While reading the letter I am reminded of the carnage we felt all around us at the time. More importantly, I am proud of the way we counseled clients through the worst investment markets since the Great Depression.
Feel free to click on the link below to stroll down memory lane…
For those of you keeping score at home, the pace of 401k fee lawsuits is increasing. More and more large companies are being sued and even institutions of higher education and learning are in the crosshairs. I did a recent Google search for “401k fee lawsuit” and nearly 400,000 results come up!
Also, more and more plaintiff’s attorney’s are getting into the mix and a colleague of mine in the industry shared with me that he recently received a VM from a gentleman stating he was “seeking an expert in the standards of care in regards to appointing and monitoring fiduciaries for 401k plans.” Turns out he’s recruiting for a law firm.
One of the more ironic twists over the past few years is the industry that some of the companies who’ve been targeted work in. I’ll give you one guess. It’s the retirement industry! Here’s a list past and pending lawsuits (and awards) for excessive fees against retirement plan vendors and advisors:
- Transamerica – Settled for $3.8m
- Fidelity – Settled for $12 million
- Ameriprise – Settled for $27.5 million
- New York Life – Settled for $3 million
- Morgan Stanley – Pending litigation
- Edward Jones – Pending litigation
- Franklin Templeton – Pending litigation
- Neuberger Berman – Pending Litigation
- American Century – Pending litigation
- Charles Schwab – Pending litigation
- JP Morgan – Pending litigation
The most recent company to get sued for 401k mismanagement is T. Rowe Price. Here’s a sampling of some of the allegations in the lawsuit:
- T. Rowe Price offered between 80 and 95 proprietary, in-house funds to its employees
- Prior to 2012, the funds that were offered were retail share classes and expensive compared not only to funds offered by other fund companies but also compared to the T. Rowe Price funds offered to its clients which were lower cost institutional share classes of T. Rowe Price funds
- Participants allegedly paid more than $50 million in fees for investment advice to T. Rowe Price affiliated entities
- These higher cost funds caused participants to pay over $27 million more in fees than if comparable lower cost options had been provided
- Had these comparable lower cost options been provided participants would have earned at least $123 million more for their retirement
Amazingly, it appears these companies who manage corporate retirement plans for their clients can’t even properly oversee their own 401k plans for their own employees from a fiduciary standpoint. Talk about a case of the “cobbler’s children having no shoes”! Of course, the companies that have settled don’t admit wrongdoing and the ones that have pending litigation will still have their day in court to defend themselves against these allegations.
As someone who has worked as a fiduciary to 401(k) plans for over a decade I can tell you I am not surprised by this at all. What is surprising to me is that many companies think these vendors have their best interests in mind. If you are a plan sponsor or a plan fiduciary, you’ve got to ask yourself “if these service providers can’t manage the fees in their own plans how confident can I be they are helping me manage the fees in my plan?”
This is why the role of fiduciary advisor is so critical and why more and more companies are turning to 401(k) specialists like Greenspring. A specialist advisor with the right experience as an ERISA fiduciary, a commitment to fiduciary principles and practices and the courage and conviction to hold vendors accountable is essential to protecting the interests of participants and keeping companies out of hot water. At Greenspring, our duty and obligation is to be an advocate for the companies and participants we represent and to make sure they are being treated fairly by the marketplace. If you’re a fiduciary to your company’s retirement plan and you haven’t had your plan benchmarked by a specialist firm like Greenspring in the past year you owe it to yourselves and your employees. It’s a great time to be in the market to negotiate retirement plan services. Feel free to contact us to learn more about our 401k fee benchmarking services – we’d love to help.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.