by Jerry Lynch, CFP, JFL Total Wealth Management
The White House is proposing new rules for qualified retirement accounts. (You can read the details here.)
I totally agree with some of the proposals, but there are some that I simply feel are a spin on what is really happening.
For the record, we have always acted as a “fiduciary” for our clients — individuals clients as well as corporate retirement accounts. This simply means that we legally have to act in the best interest of our clients. We disclose conflicts of interest, what we get paid, what we do for our services and we are very proud of the work that we do in this area. Our fees are not hidden, and I do feel that we help employees make better decisions with their investments, which over time, leads to higher returns. The fees must be in line with the services and value provided. Everyone, both employers and employees, should be aware of them.
What many people do not know is that you do not need a securities license to sell company retirement accounts if you use group annuity contracts. A simple life insurance license is all you need to sell that, and I think that is insane. Generally, group annuity contracts are more expensive and do have more fees than pure mutual funds. I also feel that someone with a securities license will generally be a better resource for retirement planning then someone who is just licensed for insurance.
There is a cost of providing this type of service as an employee benefit. The costs are for the investments (expense ratios), third party administrators (that do the testing and plan design) and the investment advisor. Generally, the larger the plan, the lower the fees due to the economies of scale. Smaller companies will definitely be more expensive, simply because there is less money and a lot of work involved.
So think about this: A 10-employee company wants to start up a 401(k) plan with people of different income levels. Assuming the company puts in $100,000 over the next 12 months — which is very high for 10 employees — and the fee is .5 percent, the advisory fee is $500. After the expenses of doing business, if the advisor is doing their job of meeting with the trustees and the employees for the educational meetings, that advisor will lose money. The only people who can afford to do this are generally new advisors with very limited experience. The problem is that advisor and their lack of experience is not as helpful for the trustees to make better plan decisions, or for the employees to understand, which can be rather confusing. Who is going to work this market and help these people, many of whom are middle class!
In theory, the employer can pay all the costs of doing this, which is what all employees want. Advisory fees, administrative fees and using no-load funds (we have some clients that do) can be entirely employer-paid if they work with an investment firm that is a Registered Investment Advisor (we are). The problem is that not many employers can afford to do this, so instead of offering a plan with marginal fees, the employer says it is too expensive and say they can’t afford to do it. So who wins then?
There are good and bad people in every industry and financial services falls within that category as well. It is getting more and more difficult to get new and younger advisors into the business due to compliance issues and the time needed to develop a book of business.
My point here is that this is not a simple issue and before we make some rules that may cause more harm than good, we should really think this out.