Ameriprise - It's What They Do

Here's a news item on Amerprise workers bringing a lawsuit against the company for loading up the company 401(k) plan with its own expensive, underperforming mutual funds and charging employees excessive fees.

The article states,

The fees for the RiverSource funds that are current investment options are significantly higher than for comparable mutual funds in other 401(k) plans as well as the other options available in the Ameriprise plan, according to the complaint. For example, the fee for the RiverSource midcap fund around 2005 was a high 1 percent, and the comparable Vanguard fund charged 0.08 percent, the plaintiffs argue.

I can understand the ongoing business strategy of exploiting clients and plan administrators by over-charging for funds.  After all, it's what they do.  But...their own employees?  They surely understand they are a fidiciary as administrators of their employees' plan, which they are not as providers to other plans.

I would think this would be a wake-up call to plan administrators around the country.

Good Luck to Restaurant Workers Seeking to Retire!

So it starts.  401(k) plans are now required to spell out fees.  No one said they were required to make understanding them clear.  It interests me that you can open a brokerage account, buy funds and easily understand, even if you are not an investment professional, all the costs involved, including commissions and fund costs; but with a 401(k), participants could have PhDs in math and still be bewildered when it comes to the costs.  Of course there is a reason for this.  Clearly, big 401(k) providers are out to take advantage of financially illiterate plan administrators and participants.  It is part of the Wall Street ethos.

I have in my hands the "Hospitality Industry 401(k) Plan ERISA 404 Retirement Plan and Investment Information" document.

Source: Advisorone

It says, "The attached notice is intended to assist you in making informed decisions with regard to the management of your individual account ...by providing you with information about the Plan, including fees and expenses regarding the Plan's designated investment alternatives."

The notice was prepared by the Principal Financial Group.

When I get a document like this, I take a deep breath and try to imagine an employee reading it.  I have made a number of investment presentations and conducted financial education classes.  I know firsthand how fast eyes glaze over and people become stupified when confronted with financial documents.

Some people say fine - maybe the administrators will boil down the information.  Not necessarily so - administrators in some instances don't understand the cost of the plans or want to advertise that they have chosen plans that are costly.

With that said, let us think of the line cook, bar person, or waitress reading this document and trying to do the right thing in creating a nest egg for retirement.  It would be like a mutual fund manager trying to decipher a recipe for a fancy French entree.

The document says "An annual Plan administrative expense of 0.83 percent applies to each participant's account balance."  In addition, there are some nickel and dime expenses - for example, $35 "withdrawal service fee."

The real eye opener, and what participants need to pay attention to, is the investment management expenses.

For the Fixed Income Fund choices, the annual expenses range from .73 -.78%.
For the Balanced/Asset Allocation Fund choices ,the annual expenses range from .90 - .95%.
For Large Equity Fund choices, the annual expenses range from .31 (index fund) to 1.09%.
For International Equity Fund choices, the annual expenses range from 1.14% to 1.46%.

And so it goes with the other choices.

A non-investment person wouldn't see these fees as egregious.  But they do a lot of damage.

How much damage?  Suppose you have $10,000 in the MidCap Growth III Separate Account, one of the choices offered restaurant workers, sub-managed by Turner/Jacobs Levy.  The document informs us the fee is 1.10%.   Its return over the 10 years ended 6/30/2012 was 7.49% annualized versus 8.47% on the Russell Midcap Growth Index it reports as the benchmark.  Over 30 years, the investment would grow to $87,305. I f you got the index return, the $10,000 investment would be $114,627--31% higher!

Here's the kicker - it is very easy today with low-cost index ETFs to get within .15% of an index's return.  The bottom line is that seemingly small differences in fees have a huge impact over the longer run.  And, though progress has been made with the new law requiring reporting of fees, there is still a need to spell out their impact explicitly.

401(k) Fee Disclosures

The Department of Labor rules requiring 401(k) fee disclosures finally become available on the fall 401(k) statements.  Participants will see fees for the first time for administrative expenses as well as for investment management.

Smaller plans with less participants tend to take a bigger chunk out of the bottom line.  These plans, of course, tend to have the least sophisticated administrators.  In fairness, it should be noted that the larger plans do enjoy economies of scale; so their costs on a percentage basis should be somewhat less.  CNNMoney reports the following figures based on BrightScope data:

Total Assets                  average # of participants              Fees

> $1 billion                             53,650                                     0.36 %

$100 mln. - $1 bln.                       6,324                                     0.53 %  

$10 mln. - $100 mln.                       858                                      0.85 %

< $10 mln.                                    42                                       1.40%  

 Source: p.16, Money, August 2012

FYI:  A fee of 0.85 compounds to 13.5% over 15 years.  Thus, rolling over $10,000, say, to a 401(k) with these expenses could take out a good chunk of the nest egg over time.

401(k) participants will want to use this information to determine how to allocate their retirement contributions and make fund rollover decisions.  Generally, they will want to take advantage of any company match.  After that it may make sense to fund an IRA and use low-cost, diversified funds.  One outcome will likely be a general lowering of expenses as competition kicks in.

IMHO, it is a shame the government has to pass a law requiring this information.  Administrators should have insisted on it up front.  Once a few big providers got the message, it would become standard practice.          

401k Fees

Many Americans have been ripped off by the outrageous hidden fees embedded in many 401k plans:


This is about to change in 2012, as 401k fees will be required to be disclosed. Notice the names of the 401k providers in the video. Why wouldn't they return the calls of Bloomberg News?

Hopefully, Americans will get proactive on this important issue and understand the impact of fees on their retirement.

401k Fees

(Source: Bloomberg)

Ron Lieber of the New York Times has an excellent piece on 401k fees and the upcoming requirement that costs be revealed to plan participants. For those who require a bit of titillation on this subject, Mr. Lieber's article has a murder in it. Not exactly a Robert B. Parker novel but still...

He points out an example of the impact of fees on retirement balances (i.e., the "nest egg") put out by the Labor Department.

The Labor Department looks at a person who will retire in 35 years with a balance today of $25,000. Assume a 7% average annualized return and that plan expenses amount to 0.5%/year. At the end of 35 years, the plan participant will have a nest egg of $227,000. If, instead, fees are 1.5%, the nest egg will end up at $163,000--a 28% reduction!

BrightScope has been compiling 401k plan data enabling participants to assess how their plans compare to similar plans. At the BrightScope website, participants can easily get this information at no cost by just typing in their company name.

BrightScope finds that larger plans pay considerably less and that plans with less than $10 million take an average 1.90% out of the bottom line. As an aside - smaller plans, with less than 100 employees, can significantly reduce these fees by offering a SIMPLE IRA to their employees.

In 2012, fund providers will be required to reveal the detail on these fees - a huge step in the right direction.