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| > Investing > Fiduciary Focus |
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| Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 4) |
| by
W. Scott Simon
| 07-05-07 |
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Continued from page
2.
6. Be super-duper responsible and offer a menu of prudent model portfolios comprised of low cost, risk-based passively managed mutual funds. Fiduciaries of many retirement plans have jumped on the band wagon of age-based "lifecycle" fund portfolios. These portfolios are invested with an eye towards the target date that a particular plan participant will retire, say, 2030. As the portfolio advances in time towards that date, the portfolio will grow more conservative by adding more bonds and shedding more stocks as the retirement date draws nearer.
The problem with age-based fund portfolios is that two people of the same age (42 in this example) could have $50,000 and $500,000 in their respective retirement accounts. Perhaps the participant with the larger account should become more conservative in its investment strategy as time goes on but is that a reasonable strategy for the participant with the smaller account? On the contrary, it may be that this participant should become less conservative by adding a greater stock component to increase long term return in order to catch up. Most age-based fund portfolios are actively managed and are therefore subject inherently to higher costs and risks.
Better fiduciary conduct is to offer 403(b) participants a menu of prudent risk-based "lifestyle" fund portfolios. Each participant determines which portfolio is appropriate for it based on its age, and risk tolerance determined through a short online exercise. A participant tends to stay invested in a risk-based fund portfolio because it's geared towards the participant's own comfort zone vis-à-vis risk. The kind of prudent portfolios that I've suggested for a model 403(b) plan (see suggestions nos. 5 and 6) are focused on what investors can control - management of risk and reduction of costs--rather than the attempting to corral the random variable of return. This approach makes risk-based fund portfolios a more rational choice for participants in 403(b) plans.
7. Don't allow revenue-sharing. Revenue-sharing is a legacy of the cost structure that needs to be in place to support a very inefficient system of gathering assets and a very inefficient system of distributing 403(b) benefits on the basis of individual contracts with individual participants. The current system is based on a retail model, not a wholesale one that could efficiently provide a true group benefit. There's no institutional aspect about the current system: no institutional provider and no institutional client.
All my previous suggestions have been made with the intention of simplifying a 403(b) plan. To further simplify a 403(b) plan, get rid of revenue-sharing; there is no need for it. Insurance companies and other retirement plan services providers have bamboozled school districts into thinking that revenue-sharing is a way of life in 403(b) plans; it isn't. There's just no need for school district officials to have to deal with insolent insurance salesmen such as the one in the Los Angeles Unified School District example noted previously.
Now, there's nothing illegal about revenue sharing per se. The problem, rather, lies squarely with retirement plan services providers that aren't transparent about revenue-sharing fees and refuse to be forthcoming about them. This refusal implies that there's something rotten in the state of Denmark. That's why I wonder: isn't it a bit ridiculous for any retirement plan services provider in the 21st century to purposely hide its fees? Even the hint of fee camouflage and a provider saying that it's impossible to know what is being shared on a fund basis is simply absurd. Think about it: why would anyone want to do business with a retirement plan services provider that claims it has no way of knowing how much money it's really making? Any company that spews this kind of nonsense should be immediately removed from consideration as a retirement plan services provider by school district officials.
8. Get rid of unnecessary costs and fees. Jettisoning annuities as investment options in 403(b) plans (see suggestion no. 2) gets rid of mortality and expense risk fees, death benefit charges, administrative fees and surrender charges. There's also no need to pay commissions on investment products, any revenue-sharing fees (including sub-transfer agent fees, shareholder servicing fees and 12(b)-1 fees) or allow excessive brokerage commissions under SEC rule 28(e) "soft dollars" trading revenue since the prudent portfolios I've suggested for a 403(b) plan (see suggestion nos. 5 and 6) need to pay for little or no "research." In addition, don't pay finder's fees or placement fees.
9. Don't allow a self-directed brokerage option (SDBO) or give plan participants the ability to borrow from their 403(b) accounts. Let the small minority of plan participants demanding a SDBO in order to trade exotic mutual funds or annuities do it in their own personal non-retirement plan accounts. A SDBO is a plan expense that other participants shouldn't have to subsidize. Sometimes the cost of an SDBO is actually wrapped into the overall cost of a 403(b) plan; that's a very big no-no.
Officials at many retirement plans give in to the small but loud minority of participants that want the ability to borrow from their 403(b) accounts. This capitulation is often a response to those who insist that participants won't enroll in a 403(b) plan unless they can get their money out through a loan. That's a lot of baloney. Those who scream loudest for loans are the same ones who should avoid them like the destroyer of accumulating wealth that they are. This is yet another plan expense that other participants shouldn't have to subsidize. Just say no to loans.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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