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Employers Seem Unaware Of The Higher Potential Share Class Fees They Are Paying In their 401k Plan!
When you invite "Joe the plumber" into your home to fix a nasty leak in your TV game room just before the big Super Bowl party you probably get the same queasy feelings and questions in your head most American's do. "How much is it going to cost and should I compare his quote to fix this inconvenient problem?" If it's your brother in law who referred this guy, well, it may make sense to call another Plumber in for a 2nd opinion. On the other hand, if it's your old fraternity brother who referred this guy and you would go to war for your college buddy in a heart beat, well you take the diagnosis from this plumber at face value and don't get another quote. After all, that little leak ruining your floor may be growing into a huge mess that may ruin real quick your upcoming Super Bowl party for the family
Enter the duties to compare your 401k plan fees and funds. Most American's that are responsible for picking their 401k vendor are unaware of the leaking going on in their 401k plan with very high investment fees. Believe it or not, most American's who have problems with something in their home will think more about the fees and service they receive from their contractor doing the work then the 401k fund and fees their employees experience to save in their 401k plan. It always amazes me at Ok401k when we perform independent fund reviews of 401k plans how many owners and key decision makers are unaware that their employees can have lower fees to invest. What is even more amazing is that most of the time, the owner of the company that also has a higher balance of money in the 401k as compared to most other employees is also getting hit by these unnecessary fees. Yet, their seems to be this "fraternity" brother trust thing going on where decision makers don't challenge the advisor or TPA.
Take for example, American Funds mutual fund family out of Los Angeles managed by Capital Research & Management Company. This great fund family has been around for years and is one of America's largest and most successful mutual fund families. Ok401k does business with American Funds and our clients enjoy the lowest possible investment fees. You will easily find these days' American funds in quite a few 401k plans and IRA's. I visited their world headquarters in 2003 and met with some of their very bright fund managers. Unlike most mutual funds that are managed by one star investment manager, American Funds manages their funds by a unique multiple manager approach. They currently have 30 funds to select from. Like most fund families, not all of their mutual funds are in the top percentile in comparison to their competing peer fund managers. Because of this we at Ok401k feel it is important for an independent 401k advisor to make sure their client's 401k plan offers other leading fund family choices from other Morningstar categories that may have better potential returns long term.
Some contractors, like the 401k sales guy that sold you a 401k plan may enjoy many commission choices to make money on the American Funds share classes they offer to you and your employees to invest. The most expensive share class for your employees is the R2 share class and this one also offers the highest commission to your advisor as compared to the lowest expense ratio share class R5. Remember, employers have a fiduciary responsibility under ERISA to be aware of all fees that their employees incur to invest in the 401k plan.
Most employers are mistakenly led to believe that there are certain asset sizes their 401k plan must achieve to enjoy lower fees for their employees. For example, some fund companies suggest you must have $1.5 million to go from an R2 to an R3 share class. We at Ok401k call this "DSOL" or Desired Standard Of Living of your advisor or TPA. These break points that your 401k assets must reach are typically "DSOL" standards set by either your advisors broker/dealer or TPA. Don't let anyone fool you. These plateaus are artificial and negotiable. Challenge these Share Class requirements and if you don't like the answer, get another TPA quote from someone else. Fight for your employees money. It's truly something you should challenge because after all, this is the employee's retirement money we are talking about correct? Check out the expenses below for the various R shares offered by American Funds. If your employees are in the R2 they pay an average of 1.46% in their funds to invest. If they are in the R5 share class at an average of .43 basis points they would be able to save an average of 1.03 basis points off the very same funds in the R2 share class. Would you buy a 30 year fixed mortgage from your banker at 6% or 4.97%? The very same laws of economics that exist in your mortgage exist in your 401k plan. The lower the fees you and your employees pay to invest with American Funds or any fund family, the more money you and your employees may have at retirement.
Current American Funds Share class
Average Expense Ratio
R-2 1.46%
R-3 0.98%
R-4 0.70%
R-5 0.43%
Unfortunately, though not enough employers that have the responsibility to review their 401k plan annually challenge these higher then necessary fees they incur from their TPA or advisor. They seem to accept at face value a common explanation that their 401k plan must reach a certain asset size before they get to invest at a lower share class expense ratio. And, with the market dropping this past 2008 and overall 401k assets don't you think you and your employees deserve a little break from the fund company, TPA or advisor? We at Ok401k feel you do.
At Ok401k, we believe you have rights and will always strive to provide you with the lowest possible expense ratio you deserve and explain your investment fees. If you're with an insurance company 401k plan, there is another fee you must be aware of which is called the "wrap fee or asset charge". This is another "Desired Standard of Living (DSOL) your Advisor determines on how much he or she wants to make in commission. The 401k insurance company vendor can also make a higher profit if this asset fee is higher. Most employers are unaware of this extra fee and that it is negotiable. Of course, this DSOL topic for insurance comopanies will be addressed in another story next month in our newsletter. Call us if you want the lowest possible share class in your 401k plan at (405) 603 4986 or email me at terrencemorgan@ok401k.com, |
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Did This Bloomberg.com Video News Story About Hidden 401k Fees Mention Your 401k Vendor?
More then ever, employers in Oklahoma and around the nation are seriously looking at their 401k plan fees both revealed and the ones 401k vendors don't want you to know about. The reason? When the market is down, this is the time employers should be making changes or asking their 401k provider to lower these high fees that affect their employees retirement balance.
At Ok401k we have seen many great news reports from the media that educate employers about hidden insurance or mutual fund company fees. For the first time one of America' s leading business media reporters have finally got the hidden 401k fee game right. Click on the link below to access this stunning report on how your employees may be paying more then they deserve to invest in your 401k plan at work.
What is the next step? If you supervise your 401k plan, you have a fiduciary responsibility to be aware of these fees. Why? The word "fiduciary" means simply that you are responsible for other people's money. And, that means specifically your employees 401k money. Your employees are relying upon you to get them the best bang for their investment buck. We can help you. At Ok401k we have a unique comparison program that reveals these hidden fees in an easy to understand and colorful report. Call us at (405) 603 4986 for your free review. Terrence Morgan, AIF President
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| The Oklahoma Employers 401k Bill of Rights. (What your agent and 401k vendor owe you.)
The Employee Retirement Income Security Act (ERISA) requires that fiduciaries of employee benefit plans (that is you the employer) administer and manage your 401k plan prudently and in the interest of the participants and beneficiaries. In carrying out these responsibilities, plan fiduciaries often rely heavily on professionally trained 401k advisors like Ok401k for help. A recent report by the staff of the U.S. Securities and Exchange Commission (SEC) released in May 2005, however, raise serious questions concerning whether some insurance agents, stockbrokers and consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice they are providing to their pension plan clients. For example, a stockbroker or insurance agent and bank representative may have their own proprietary funds they want to sell inside your 401k plan. Obviously these 401k vendors selling agents may be able to make more money selling their own proprietary funds inside your plan.
The gold standard in the future used by quality employers when screening 401k advisors is to hire an Investment Advisor Representative (IAR) who will sign an agreement stating they will be a co-fiduciary on your 401k plan. Under the Investment Advisers Act of 1940 (Advisers Act), an investment adviser representative providing consulting services has a fiduciary duty to provide dis-interested advice and disclose any material conflicts of interest to their clients.
Ok401k meets regularly with potential clients. We are always amazed about the many groups we meet who seem unaware of what their basic fundamental fiduciary responsibilities are. Your 401k mutual fund, insurance company and/or bank is a vendor. Vendor's always need supervision. If you don't have the professional training to supervise your 401k, smart employers hire a fiduciary advisor to make sure their 401k vendor is giving you and your employees the best bang for your buck. Therefore, Ok401k came up with the following "Employer 401k Bill of Rights."
Your Employer 401k Bill of Rights
Article 1. The Right To Real 401k Investment Advice. As my consultant, please provide my employees with real investment advice and investment help not investment education which is as simple as handing out enrollment kits and wishing my employees good luck. My secretary and I can do that. (Investment Advisors are able to provide dis-interested investment advice to participants. We do not sell proprietary investments. There is no incentive to sell one product over another. Registered Representatives, insurance agents and stockbrokers may have another agenda. Only an Investment Advisor Representative can sign an agreement with an employer accepting co-fiduciary responsibility. Ask your advisor if they are registered with the SEC or a state securities regulator as an Investment Advisor Representative and will sign a co-fiduciary agreement. If so, they must provided you with all the disclosures required under those laws (including Part II of Form ADV))
Article 2. Please be unbiased in recommending 401k vendors. We don't want plans that you can make more money on certain funds or vendors. (This is a common problem in the 401k business. Agents, bank representatives and stockbrokers can make more money recommending certain investments or 401k providers).
Article 3. As my advisor, please review my 401k investments quarterly and report to me annually to satisfy my fiduciary responsibilities. Our investments must be in the top 25th percentile as compared to their peers. (Some "lazy" advisors rely upon the investment data from the 401k vendor and do not 2nd guess the 401k vendors. Good 401k advisors compile their own data and perform their own research on the 401k investments in your plan. Allowing your 401k vendor to provide you with the annual review data may result in mediocre or poor performing funds being left in your plan rather then being replaced.
Article 4. As my advisor, please provide me with an Investment Policy Statement (IPS). This IPS will enable me to have important written criteria in place that guides me and my 401k committee when reviewing our 401k plan. Not having a customized IPS is like trying to build a new sky scraper without a blue print. Don't you deserve a custom designed IPS instead of a "cookie cutter" IPS?
Article 5. The right to fair disclosure of the total cost of participation. As my advisor please provide me with a complete disclosure of all investment fees my employees incur in the 401k plan. You have a fiduciary responsibility to know exactly all fees in your 401k plan. Some advisors can get paid more in commissions by having a wrap fee on top of your investments . Insurance companies either put this fee on top of your funds or slip you in a higher share class. You have a duty to know those fees and your advisor should be forthcoming. Typically these extra wrap fees are negotiable.
Article 6. Do not allow my company and employees to be put into a 401k contract with a vendor that has surrender fees. This "a-sleep at the wheel" consulting is soooo 20th century. We at Ok401k usually see unprofessional advisors allowing their client to sign silly 401k contracts like this. If you are in a 401k vendor contract like this, fire your 401k advisor and hire a real one. Ok401k has a way to help you get out of these contracts.
The six articles up above are your basic 401k Employer Bill of rights. We have more. Call us and ask us what the other four (4) Bill of Rights are. | |
| Try Ok401k's Outstanding 401k Investment Education Out For Free!
The market has dropped a lot in 2008 and I am sure your employees have let you know how they feel about their 401k portfolios? A toll free phone number or internet web site sometimes is not enough to reassure them about their long term 401k investing goals. Ok401k will provide complimentary education meetings for your employees in your break room before, during or after work. Think of it as a trial run and see just how good we are at getting employees motivated to save and invest properly.
At these fun and informative meetings, we discuss market conditions and how these short term gyrations in the market are a natural occurence. We also emphasize that your employees need to be diversified and invest for the long term. Modern Portfolio Theory, a generally accepted investment tool is Ok401k's bedrock investment philosophy.
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Terrence Morgan, AIF
Ok401k, Inc.
(405) 603 4986
Terrence Morgan, AIF is a Registered Representative of and offers securities though Wilbanks Securities, Inc. Member FINRA & SIPC. Securities activities supervised from Wilbanks Securities, Inc. at 4334 Northwest Expressway, Suite 222, Oklahoma City, Ok. 73116. (405) 842 0202. Fee based through Wilbanks Securities Advisory. Fiduciary status requires employer being given WSA ADV form Part II and a fee agreement must be established. |
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