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Avoiding 401(k) Charges
Tyler Mathisen's Interview with Brent Glading
CNBC's Open Exchange -- September 17, 2003
TRANSCRIPT
[Promo] Your Plan Sponsor may be paying too much, and it may be costing you.
We'll tell you what you can do about it.
Tyler:Welcome back everyone. If you take part in your employer's 401(k) or
other retirement savings plan. Listen up. Ditto if you are a CEO responsible for your plan. Our
next guest says that some mutual funds, insurance companies and money management firms make so
much money off of 401(k)'s that they may be willing to cut your plan a break, a break that could
save your company tens of thousands, maybe even millions of dollars. And better yet, it can
fatten the nesteggs of each and every
401(k) account holder.
Brent Glading is Managing Director of the Glading Group, a Montclair, New Jersey firm that
consults to employers offering defined contribution plans. Mr. Glading, welcome.
Brent:Thank you very much.
Tyler:You know, it's no surprise that the money management business is highly
profitable. I guess that we should not be shocked that the 401(k) business is very profitable
too. How much money are these plan service providers making off of these accounts?
Brent: Well, what's happening Tyler, as you mentioned, is there's a fiduciary
responsibility for corporations to ensure that there employees are, in fact, paying reasonable
fees for their retirement plan services. Mostly 401(k)'s . . . is what we're focused on today. And
that's just not happening. I mean, what we are seeing is that they generate so much revenue
through their mutual fund investment fees that they are able to pretty much able to obtain a
profit north of 500% in many cases. And I don't know about your definition about reasonable, but
obviously . . .
Tyler: ...that would not be a reasonable fee by my standard. Now we can talk
about aggregate dollars, and the profits probably run into the hundreds of millions, potentially
maybe even billions. But it really drives the point home to me . . . you brought a couple of
examples, of a large company plan you are aware of, we're not going to name names here. Just take
us through this example.
Brent:Yes, we have two examples here. One is a large company example.
Obviously, it is not just large companies that have this opportunity. Here I think it spells
things out clearly. A plan with 22,000 employees, 2 billion dollars in assets was generating
revenue for the service provider on an annual basis of ten million dollars every year. Their cost
basis was 2 million dollars to service this plan, so there you have an 8 million dollar . . .
401(k) Overcharges
Large-Company Plan |
| Plan Participants |
22,000 |
| Plan Assets |
$2B |
|
Vendor's Revenue |
$10M |
| Vendor's Annual Cost |
$ 2M |
| Vendor's Annual Profit |
$ 8M |
Tyler: . . . an 8 million dollar profit that's going into the service
provider's pocket, not into your shareholders' pockets. It's not just big company plans that are prone
to this kind of overcharging, and even the profit margins can be higher in a medium sized plan.
Brent: That's true. And here I have another example. It's a 110 million dollar
plan with a thousand participants. This plan only cost the service provider 80 thousand dollars, and
as you can see, we're talking about a 600% profit margin.
401(k) Overcharges
Medium-Sized Plans |
Plan Participants |
1,000 |
| Plan Assets |
$110M |
|
Vendor's Revenue |
$600K |
| Vendor's Annual Cost |
$ 80K |
| Vendor's Annual Profit |
$520K |
Tyler:And as those profits...as those plan assets go up, the revenue that the service
provider gets goes up, but their costs per subscriber. . .
Brent: . . . will stay the same.
Tyler: What does it cost per head for a company to run a plan
Brent: It's driven by the complexity of the plan, the investments . . . So you really
can't say that this plan costs X amount of money to service. Obviously you have to look at each plan
individually.
Tyler: So why don't these fiduciaries, my employer, pay more attention to these costs.
Brent: Well the issue is, . .. because the 401(k) service provider's generating so
much profit on these plans that they will turn around to the corporation and say heh, we're going to waive
any type of fee for recordkeeping and administration. So the corporation doesn't pay an out-of-pocket
cost. And so they think they are getting a great deal, which is obviously not the case.
Tyler: So let's say I am the CEO of a company and I've come to your consulting
company, and I have said, Brent, dance me through this here.
Brent: Right
Tyler: What do I do. Do I call in my HR chief and say "Doofus, go to Fidelity
right now and renegotiate my Plan." What's the service provider likely to do? Are they going to cut
me . . .Are they going to send the money back? What are they going to do?
Brent: Well, it's not an easy process. We do get into it in a little more detail on
our web site, but this information is just not made readily available. Corporations do not have access to
this information, industry consultants do not have access to this information. You have to know what the
cost basis is for the service provider. It's like walking into a car dealership wanting to buy a car, and
not know what their cost basis is. You are just not going to be able to negotiate a very good deal for
yourself.
Tyler: So if I go in . . ., and you know this information 'cause you've worked on the
insides of these businesses, and I say to them, "I want a better deal," are they going to share
revenue back with you?
Brent: As a matter of fact, the good news is yes. In the sense that you just have to
know how to evaluate the plan, do a profitability study, be able to identify what the cost savings
opportunity happens to be . . . But most service vendors are willing to share back these excessive profits
Tyler: . . . They are willing to make a little less money because they are desperate
to hold onto those assets.
Brent: Absolutely. They're going to hold onto a profitable plan.
Tyler: You know they'll cut their profit margin from 800% to a pauper-like 200%, or
something like that.
Brent: Right.
Tyler: Now if I am an employee listening to what you are just telling me, I am getting
hopping mad and getting ready to call up the CEO. What are the telltale signs that maybe my plan is one
that is suffering from this overcharging.
Brent: Right.
Tyler: My words, not yours.
Brent: There are a number of telltale signs. The first is if your plan has over 50
million dollars or an average account balance of $25,000 per employee. If you are not paying a
recordkeeping fee, if your services were placed by a broker or by a consultant whose commission
was paid by the plan, or if in fact the plan has investment options that are group annuity type investment
options or wrap-fee type products.
401(k) Overcharges
What To Look For |
·
Low or no recordkeeping fee
·
Average account size more than $25,000
·
Plan paid
a broker to secure services
·
Plan has group
annuity or wrap-fee products
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Tyler: So the four things are no or low recordkeeping fees, an average account size of
more than 25,000 dollars or what, 50 million in assets.
Brent: 50 million in assets
Tyler: The plan paid (say that ten times fast) a broker to secure those services, whatever
they happen to be .
Brent: Right
Tyler: . . . or a plan has group annuity or wrap-fee products. And those could be some of
the telltales that maybe there are cost savings to be had.
Brent: Yes. If your plan has any one of those, we would suggest you look into it.
Tyler: Brent Glading, thanks very much. Helpful stuff for a lot of people . . . of the
Glading Group in my town, Montclair, New Jersey.
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