If you thought the mutual fund scandal would end with your regular fund account, you were wrong!
Most Americans have significant dollars in a 401(k) plan. Most 401(k) plans contain mutual funds. Like other investments, most 401(k) plans are sold to employers from mutual fund companies, brokerage firms, insurance companies, brokers, insurance agents, financial planners, etc. You can probably already hear this train comin'…yep…you're right…these friendly folks find it very convenient to make sure the average participant in a 401(k) plan has no idea what they are paying. And while your employer is legally obligated to keep a close watch on the total fees associated with your 401(k) plan, the majority have not been paying close attention. Of course, you, the employee can't do much about it because you are locked into the options that your employer has picked.
The good news is this is about to change. Thanks to people like FundPolice, Elliot Spitzer and John Bogle, the SEC is finally paying some attention.
If you understand the 12 Deadly Sins of Mutual funds it should come as no surprise to find out that there are a variety of "revenue sharing" arrangements that take place between the various parties on your 401(k) plan. What is revenue sharing? It could be any or all of the following, which means someone may be siphoning money from the funds used in your 401k plan:
The mutual fund, insurance company or money manager pays an initial or ongoing fee:
Back to the agent who sold the plan.
Back to the employer sponsor of the plan.
Back to the company that provides administrative services for the plan, who also charges the plan a separate fee for these administrative services.
To the consulting firm that was, get this, paid a separate fee by the employer to provide "independent advice" to the employer sponsor of the plan.
Another sham is this:
The company hires a consulting firm who is paid a fee to provide "independent advice" to the employer sponsor of the plan. The consulting firm is also "hired" by certain money management firms. Those "certain" money management firms then are by some "coincidence" recommended to various employers above other money managers who have not "paid their bounty."
What can you do? Force your employer to review your 401(k) plan and inform employees the total disclosed and undisclosed expenses associated with the plan.
Below are linksto a variety of good sources dealing with the next big scandal in the financial services industry, that all the people getting their skids greased hope you never read.
SEC Investigating Merrill Lynch Pension Funds
Money Management Executive, 12/2/05 Merrill Lynch has received a subpoena from the Securities and Exchange Commission for possible conflicts of interests within Merrill’s pension consulting unit in Florida. Allegedly, the consultants to the pension funds where receiving compensation from the money managers they recommended to their fund clients. Recently, the SEC has been keeping a close eye for potential conflicts of interests in pension funds due to the increasing number of funds that have failed. www.mmexecutive.com Marsh’s Retirement Work is an Issue
Wall Street Journal, 3/10/05 Marsh is in hot water again with regulators over business practices for retirement-plan sponsorship. Regulators are investigating Marsh’s dealings with its Mercer consulting and Putnam Investments mutual-fund management units. Compensation arrangements between Marsh, investment consultants, and the money managers they select on behalf of their clients are under suspicion for conflict of interest. www.wallstreetjournal.com Cost-Cutting Plans
Investment Advisor, December 2004 A newly created program called “Invest n Retire” helps advisors build managed accounts and offer their clients a low-cost alternative to more expensive 401(k) plans. The article also warns against a new type of asset allocation mix called “lifestyle funds.” These higher-costing funds allocate stocks and bonds in a portfolio based on the person’s age. Two people who are the same age may not have the same investment needs or goals. www.investmentadvisor.com Few Changes to 401(k)s Despite Probes
Money Management Executive, 12/08/04 Few employers have made any changes to their 401(k) plans, despite the inclusion of tainted funds from the mutual fund scandals. Of the retirement plans that held funds involved with the scandals, only half have made any changes. A recent study shows employers are beginning to make changes in their plans but at a slower rate than expected. www.mmexecutive.com “New York Life Unit Volunteers Data“
Wall Street Journal, 12/01/04 New York Life Insurance Co. will begin to voluntarily disclose to plan sponsors information on payments it receives from mutual fund firms. The SEC is currently reviewing fee-sharing arrangements for retirement plans. The concern is over whether or not these arrangements influence which plans are sold to companies and the fees they pay to cover the administrative and record keeping costs associated with managing 401(k) plans. www.wallstreetjournal.com “Pension Sponsors Raise Concerns“
Wall Street Journal, 11/03/04 Sponsors of retirement plans were polled about concerns from advisers recommending asset managers for commissions. 85% of plan sponsors want advisers to be entirely free of conflicts, while 15% conceited that conflicts were ok, but should be disclosed. www.wallstreetjournal.com “Advisers selling DC plans must improve fee disclosure“
Investment News, 11/01/04 The commissions earned on sales of defined contribution plans are unclear. The U.S. Department of Labor’s CEO wants advisors to be more proactive in disclosing their fees and fee arrangements. Recommendations from the Employee Retirement Income Security Act council will be out later in the month. www.investmentnews.com “SEC Sees Indications of Fund Payments to Pension Planners”
Wall Street Journal, 10/25/04 The SEC is now reviewing retirement-fund consulting and has found the mutual-fund companies and money managers were paying retirement-plan consultants to be recommended to their clients. Mercer Investment Consulting Inc, a unit of Marsh and McLennan is being questioned about some of the retirement-fund advice it provided for clients. www.wallstreetjournal.com “Big Fees Hit Small Plans“
Wall Street Journal, 10/21/04 Small Businesses are charged high fees by insurance companies for them to administer the 401(k) plans. Large-company peers do not pay as much in fees since the insurance companies are able to spread the cost of fees over the higher number of employees enrolled in the plan. Also, mutual fund companies that administer the plans don't offer their services to smaller companies. www.wallstreetjournal.com
“Calpers and Cronyism”
Wall Street Journal, 10/18/04 The opinion page states that Calpers is having a problem with transparency. Calpers has a reputation for promoting good corporate governance, but some of their recent investments have raised some eyebrows, questioning the reason behind some of their strategies. The story suggests political ties are behind some of the California state pension fund’s decisions. www.wallstreetjournal.com “How You Can Tell If Your 401(k) Fees Are Too High”
Wall Street Journal, 9/14/04 This article lists the different ways an individual with a 401(k) plan can check to see that their company’s 401(k) is being managed correctly. Employees need to push their employers for more information about the fees they are paying, review the plan’s expense ratio, request the employer prove the plan’s expenses are appropriate in a comparative review, analyze the plan’s investment strategies, and/or observe who answers the investment questions at the fund company. www.wallstreetjournal.com
