“Fiduciary,” a word that my fellow Certified Financial Planners ™ know very well; however, most of the financial “advisor” world and employers still struggle to understand.
Here is the thing, I had to pass exams (Series 66), build financial plans and become a CFP® to officially become a fiduciary in the eyes of the financial world. I am very proud to be a fiduciary; however, it is sad that we have to put the word “fiduciary” with an advisor to make sure they put their client’s best interest first. Are you kidding me? You are paid to HELP your clients, do it! Today, this is part of the reason why TRUE financial planners have to spend time explaining why there are great planners and why there are still used car salespeople hiding behind a title on their business card.
SO LET’S GET TO HOW YOUR EMPLOYER IS DESTROYING YOUR RETIREMENT.
Today, the Human Resources (HR) director who doesn’t know much about investments in the first place is now the “in-house fiduciary.” As the 401k fiduciary you are responsible for fees, fund line-ups and wait for it…being a fiduciary! In defense of the HR team, how the heck are they supposed to be knowledgeable enough to know high fees and/or what is a bad fund line-up? Hell, most financial “advisors” don’t know how to do this.
Recently, Disney employees sued their retirement plan committee because of a fund known as the Sequioa Fund. The Sequioa Fund had MORE THAN 30% in one holding (diversification 101 = bad idea). That holding was Valeant Pharmaceuticals which went from $262.52 per share on August 5, 2015 to $23.05 per share today (7/26/16). Now call me crazy but how in the heck is the guy dressed up as Mickey Mouse supposed to know his “Large Growth” fund (according to MorningStar) has 30% in one stock. It doesn’t even matter that the stock tanked; 30% in one holding shouldn’t be happening with novice investors’ 401k plan. Mickey Mouse shouldn’t even have the opportunity to put that fund in his 401k. That is an epic fail on Disney’s “retirement committee.”
Disney is not the only one dropping the ball; Lockheed Martin had a $62 million settlement recently and in June, the Supreme Court heard a case against Edison International. Here is the sad and scary part, those are HUGE corporations that have full teams and committees to “help” their employees with their retirement accounts. What about all the employees that work for local and/or small-medium sized corporation where the HR team is comprised of a few people…pretty frightening to think about.
EXAMPLES I SEE EVERY DAY.
I see these trash 401ks every day when we help clients analyze their 401k. I am shocked by the fees and lack of diversification options. I recently helped a client with her 401k and wanted to share some insights for her employer’s 401k. This employer’s 401k, to be left anonymous, has over 100 participants with $1.4 million in assets according to BrightScope (yes I know, it’s a small plan but that’s not an excuse).
- 26 available funds in total.
- Only 3 of 26 had fees less than 1.00%: .69%, .96% and .97%.
- The 3 highest funds: 1.81%, 1.69% and 1.66%.
- The money market fund charges .69% and a solid 5-year performance history of 0.00% (literally). Correct, not only are you losing money to inflation, you are also losing .69% in fees each year.
- The mid-cap market “index” fund comes in at .97%. I guess they missed the index fund memo on typically LOWER fees.
- Usually, I am not a target date fund fan, but this plan doesn’t even offer them…
- One positive: The plan does offer a good mix of diversification that includes most major asset classes, even energy and real estate.
Okay, I digress. It is truly upsetting to see things like this and it is no wonder why the financial world still carries a dark cloud over it. Now while I shredded this 401k apart, I could list numerous clients’ 401k plans here. This was just the most recent and the most absurd. Full disclosure: I told this client to tell her HR team they are in desperate need of a new 401k provider. Also, I do not sell 401k plans and have 0 interest in doing so because I love the personal side of financial planning, not the corporate side.
The problem is twofold. The transparency in the financial world still sucks and the education that is provided for basic investment knowledge is non-existent. Employees TRUST their employers and 401k providers to come in and educate, and be a fiduciary. Yet at the end of the day, they do neither.
The education goes like this, “Hello, I am Bob with High Fee 401k plans. Please fill out the 10 question survey to find your risk tolerance. If you don’t feel like completing it, just tell us the year you want to retire and select the closest target date fund. If you have any questions, just hold on to them until next year when I come back to give the same boring speech.”
I won’t even get started on the fiduciary role. Whether the employer is the fiduciary or the plan provider is acting as the fiduciary, both are failing…miserably.
Back to the 401k above. This new client is rather financially savvy and she had no idea how bad her 401k was. Now imagine the novice investor who does not have much or any financial knowledge. They have NO idea that they are using a money market fund for SAFETY, yet they are losing .69% per year with a 5-year rate of return at 0.00%.
SO WHERE DO WE GO FROM HERE?
As an employee, start to ask questions. Start to do your research. Call out the human resources team or better yet, call out the 401k providers. Don’t watch the news headlines and say to yourself, “Oh, my company would never do that to me.” Honestly, the odds are they are not acting as a fiduciary, and they probably have the same prehistoric 401k from decades ago because no one wants to be responsible for starting a new and better plan.
As an employer, you can start by researching your current 401k plan. Ask your 401k provider where their revenue comes from on the plan? If you are acting as the fiduciary, I would highly suggest you do this sooner than later. If not, you will probably see a class-action law suit coming your way sooner than later.
Next as an employer, you should establish an actual financial wellness program for your employees. Not the crap that your current 401k providers call “financial wellness;” that is just a fancy term for half-assed advice. I get it, you love using them because it’s “free” and part of their package. I will tell you what it is, it is a conflict of interest. You have the company that is getting paid to provide the 401k also providing “advice” on the funds to use. I hate to break it to you, but they are probably pushing you and your employees towards funds that INCREASE their compensation behind the scenes. Also, known as a conflict of interest! True financial wellness includes cash flow, budgeting, navigating employer benefits (ex: life insurance/ disability insurance), getting out of debt, buying a home, emergency funds, investing, preparing for retirement, student loan repayment plans, social security, basic estate planning (Wills, Living Wills, Power of Attorney) and many more. Investing is just a small fraction of financial wellness and happiness.
Here is a study from PricewaterhouseCoopers; notice what peoples’ top financial concerns are. The 10 question survey from your 401k provider is NOT a financial wellness program. It is a sales pitch to make you feel more “comfortable” with your investment selections that a robot completes. I don’t have the energy for this blog to get started on their “retirement calculators.” What a joke those things are!
52% of respondents were stressed with their financial situation in 2016. Something I found interesting was that Millennials and Gen X were more stressed financially than Baby Boomers. I wonder how much of that is from student loan debt? This is a great annual survey from PwC. Give it a read; the link is attached above.
Not only are employees stressed about their financial situation, they are getting bad advice from their employers who are supposed to have their best interests in mind as their fiduciary. Allow an outside fiduciary to come in and talk to your team members about true financial planning and build a real financial wellness program. Employees deserve better, and I bet if you can lower their financial stress, you may even get a better and happier employee showing up to work each day. Win-win.
You know why 37% of Baby Boomers have less than $50,000 saved for retirement? Because for the past three decades they have been financially abused. No one educated them on true financial planning and no one made it interesting and/or exciting. They put all their trust into their employer plans and the guy/gal who showed up in a suit with the 10 question survey. Now they are only a few years away from retirement and have to pray that social security will be there to avoid poverty. Bravo, financial world, bravo.
This was one of my more passionate blogs, but the financial world needs to change and it starts with the proper education and calling out the bad guys/gals. I see these horrible 401k plans with almost every new client, and I ask them what education they are receiving from their employer. “None” is the response I get every time. Recently, I started presenting to medical residents about student debt and student loan repayment options. These young medical professionals have nearly $200,000 in student debt on average, but they get ZERO education from their resident programs. It is sad.
If your employees are your greatest asset, starting treating them like it!
As always, thanks for reading! Questions and comments can always be emailed to us. That would be a great time to ask any specifics on the items above or any other questions you have!