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Poof! Could Your 401k Ever Be "Madoffed?" |
Greetings!
An An Italian immigrant named Charles Ponzi in the early 1920's was able to magically make disappear $20 million dollars of investor's money thus coining of the phrase "Ponzi scheme" for any con job during the rest of the 20th century that defrauded people out of their money. Bernie Madoff set the bar higher. Through hocus pocus and sleight of hand, Mr.Madoff some how "made off" or magically enabled $50 billion dollars of individual investors, pension and corporate money go "poof" into thin air!
Madoff's sting was all built on two human frailities. Greed and unverified trust (similar to blind love). President Ronald Reagan had an edict when dealing with the old Soviet Union in arms talks. Trust but verify.
The fiduciaries who dealt with Madoff completely ignored this simple process of verifying and allowed Madoff to probably enjoy one of history's biggest con jobs. His relationship with his customers was simple. Don't ask and we won't tell you how we do it. Professional financial executives, pension trustees or individual investors that did dare to ask questions had their investment money refused at the door and word got out that if you wanted to invest with Bernie, you simply did not want to ask Bernie Madoff too many questions. Thus, the amazing psychological process of refusing entry to someone takes over. The more you tell someone they cannot enter the club or participate, the more they want in even if they suspect problems. The 2nd important human weakness, greed followed when early investors started to get their money back handsomely from late investors coming to the party.
Madoff told the public and the regulators via his prospectus that his money managing process followed a "Split conversion strategy." Hold it, what did I say? I would guess 99 percent of you reading this have no idea what that means. I didn't. I had to call a big deal mutual fund manager at a back east city I know who runs a very sophisticated program based investment process to explain it to me. "It's not a magic Abra Ca Dabra process," he told me. "It's no big deal, but there's no way to get the returns he did doing this strategy." After talking with him for a few minutes I can tell you this stuff is serious math, computer and accounting financial gobbledygook. Latin to us mere mortals. You want nothing to do with it. Avoid it like a mean Oklahoma rattle snake that just had its tail stepped on. Ok401k subscribes to Modern Portfolio Theory (MPT) developed by Nobel Prize winning Dr. Harry Markowitz at the University of Chicago. You don't need a super computer to explain this.
Bernie also was his own custodian for all his investors' money. That is like the Fox watching the hen house. Typically, when your employees invest in a 401k plan the custodian of the 401k money is separate from the investment manager or recordkeeper. So, there are a lot of hoops and doors for anyone to jump thru before any money is moved. Bernie also had his own friendly auditor in New York City. Most 401k plans that are over 100 eligible employees have to have an audit done by an independent auditor every year. Obviously Bernie's auditor did not ask any tough questions and Bernie liked it that way. Think his auditor has some problems?
The victim list is growing as this story is being written. Prominent organizations from Unions, municipalities and even other fund companies that had a fiduciary obligation to ask him questions and simply did not, woke up one morning and discovered Bernie had a finger in some or all of their money. Unbelievably, some mutual fund/money managers were taking institutional or personal investors money and transferring some or all of it to Bernie and allowing him to be the investment manager.
The people and organizations that lost money is a huge cross section of not just America but the world. Names you may know such as Stephen Speilberg, Za Za Gabor, Larry King, Sandy Koufax and Jeffrey Katzenburg (think Dreamworks). Well known corporations and other institutions that you think would be smart investigators of investment managers were also "Madoffed" from their money such as the International Olympic Committee, Swiss ReInsurance, Royal Dutch Shell Petroleum, Jewish Community Foundation of Los Angeles, Fortis, Royal Bank of Scotland and AXA, the French insurance giant. HSBC has emerged as one the largest victims of Bernard Madoff's alleged fraud with potential exposure of about $1 billion to the investment manager's collapsed venture...HSBC's exposure stemmed from loans it provided to institutional clients, mainly hedge funds of funds, that wanted to invest with Mr Madoff. I wonder how the guy at HSBC that introduced Bernie Madoff to the company feels about his reputation now?
Many Trusts were pilfered and they were quite tragic circumstances. The Diocese of St. Thomas has $2 million dollars unaccounted for. Most of their money represented endowment funds for youngsters at two Catholic elementary schools in St. Croix, the poorest of the U.S. Virgin Islands. Even teachers in Korea through the Korea Teachers Pension fund lost an estimated $9 million dollars. Bernie even supposedly fleeced a Union fund in Syracuse, New York called the United Association Plumbers & Steamfitters Local 267. Do you think the fiduciaries of the Union pension fund have a fiduciary problem in trying to explain how they selected Madoff to manager some of their money for their union members?
Quite frankly, I don't think Madoff or the trustees have a problem with ERISA or the DOL, I think they have a problem with wise guys that have broken noses and baseball bats. I don't know about you but I was told to never mess with a working man (union) guys hard earned money because they might have friends in low places you did not want to meet.
The fiduciary problem that exists for the trustees of various pension and retirement plan funds that picked Bernie Madoff to manage some or their entire investment portfolio could be a major legal headache of head splitting proportions. Everyone from the SEC, FINRA and Department of Labor will want to know what their selection process and due diligence was. A typical question time and again from these investigators will be, "How did you select Mr. Madoff's investment expertise (written process or Investment Policy Statement (IPS) and please show us your annual review process IPS)." Most of these investment committee members (owners, HR Directors, CFO's and common employees) of these pilferred pension and retirement plans may get quite nervous when they hear that their personal assets including home, car and savings may be under assault if a law suit can go forward to recover lost participant monies. I know many owners of companies in Oklahoma and surrounding states that sponsor a 401k plan that don't even know what an Investment Policy Statment is. They think, "Oh, my insurance agent who brought the insurance company 401k vendor will take care of me on that." (blind trust). They don't know that most insurance agents, stockbrokers and bank representatives cannot be Fiduciary Advisors. Only fiduciary advisors are true partners to the Investment committee and will stand behind an employers 401k investment choices.
One of the common misconceptions in the 401k retirement market is that when the participants are responsible for making their own investment decisions, (participant directed), then the plan sponsor is free from liability relative to the investment options. This is a complete fallacy. Under the Employee Retirement Income Security Act (ERISA), employers (investment committee) are accountable for providing plan participants with an array of appropriate investment options to allow the participants to diversify and avoid the risk of large losses. However, the employer has a fiduciary obligation to monitor these investment options (IPS) on an ongoing basis to ensure they continue to be prudent and appropriate for use (Investment Policy Statement). Did the Korea Teachers Pension fund investment committee or Syracuse Union fund committee able to adequately explain how Bernie Madoff's investment selection was achieving its returns and where their employee's money was parked (custodian)?
It is clear from the Bernie Madoff on going investigation that many organizations that were responsible as fiduciaries for other people's money may have violated their responsibilities of being good stewards. Even today just two months later since December 11, the whole story is still unraveling. The average 401k investment committee today under ERISA standards has to; (1). act in the sole interest of the plan participants, (2). follow the "prudent man" rule, (3) diversify assets among a broad range of investment options, and (4). follow the 401k plan document.
Stay tuned for more on the Bernie Madoff tragedy. Oh, by the way, as of press time, the latest is that Bernie pilfered over $2 million from his sister. She is selling her Palm Beach home at a fire sale price just to pay her bills. Quite a tragic story.
Who is performing your 401k annual review? Your insurance agent or stockbroker who is not a fiduciary on the plan? Call us at (405) 603 4986 if you want a 2nd opinion.
Terry |
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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.
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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.
Terrence Morgan, AIF
President
Ok401k.com
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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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What if you woke up one day and discovered one of your 401k investment choices offered to your employees was managed by Bernie Madoff? What responsibility would you have? And, how did this investment get on your 401k menu offerings? And, do you have a fiduciary problem? This actually happened to some pension committee members in the past 8 weeks. Read our main story called ..."Could Your 401k Plan Ever Be Madoffed? "
Bernie Madoff The New Ponzi?
Bernie Madoff next to a bust of Charles Ponzi. Is the name Ponzi Scheme going to be replaced in the 21st century with Madoff Scheme?
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