Dan McConlogue is the Director of Corporate Retirement Plans at Ritholtz Wealth Management. Dan is the principal and founder of Eleven O’Clock Associates, a retirement plan consulting firm based in Florida. Dan joined RWM at the start of 2016, bringing over $70 million in assets, plus thousands of 401(k) participant clients whose assets are under advisement.
Expect to see more from Dan in the future in this space.
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The Evolution of Corporate-Sponsored Retirement Plans: From Captive Product to (almost) Enlightened Process
Defined Contribution plans are now – without ever having been intended to be – the dominant private retirement savings vehicle for nearly all working Americans. As of 2014, nearly 100 million participants and $4 Trillion dollars were invested in 401k plans alone. Yet the Defined Contribution Plan was never intended to be such a vehicle – nor was it ever designed with this end in mind.
Allow me to tell you my story, by way of a little industry history: Back in the late 1970’s, I met a man who was a mutual fund wholesaler for a well-known fund company headquartered in Boston. Back in those days – pre-internet, pre-Vanguard, pre-discount brokers – you made an appointment to have a wholesaler come to your office to ‘take your application’ to buy a mutual fund.
I learned that his up front commission on ‘the sale’ was 8% or 9% for an equity mutual fund. The typical expense ratio/marketing fee structure on these funds was ~2%. He was booked virtually nonstop, as there was no other channel through which an investor could access his products.
An even worse atmosphere existed in the world of corporate sponsored retirement plans.
Dominated in the early years by insurance companies and their products (i.e., high-priced annuities) the standard Defined Contribution plans were an easy sale. 401ks for corporations, and 403bs for non-profits like schools, hospitals, they were a huge hit with the plan sponsors. The obvious reason: They were far more cost effective and less complicated to manage than Defined Benefit type pension plans.
Try to imagine anyone coming to you today to ‘sell’ you a mutual fund with the charges and fees that were ‘average’ 35 years ago.
Yet in the world of Defined Contribution plans (aka 401ks), your choices have evolved much more slowly. In some cases, they are pretty similar to what was offered in the dark ages 35 years ago.
Annuities and other very expensive products still dominate the smaller Defined Contribution Plan space. (It is abusive and ubiquitous in teacher 403b plans).
Its not surprising that those with a vested interest in maintaining how costs and fees have moved away from this junk at a glacial pace. Why would anyone cannibalize their own hugely profitable business? They simply won’t unless they have no choice.
We, however, do have a choice. I have been reading Barry and Josh for many years, and I was aware that they believed the 401k space was ripe to be (pardon the cliché) disrupted. That was why I joined their company. I see so much wrong with the way those who recently have dominated the defined contribution field that I was thrilled to join the revolution.
The typical pitch to a Plan Sponsor I compete against comes with the false assurance “We pick up all the plan’s administrative fees.” This is of course untrue – either the fees are hidden, or passed onto to the employee/investors, or otherwise not disclosed. There is enough smoke and mirrors that even well intentioned Plan Sponsors can’t see the true revenue structure in their plan.
In nearly every case I have reviewed where the plan admin fees are touted as ‘free’ it is invariably the plan participant who is paying those fees via the expense ratios & marketing fees of the plan’s investment options.
The Department of Labor (along with the IRS) is responsible for the governance of these plans. They have steadily moved to increase the Plan Sponsors responsibility – and liability – to ‘act in the participants best interest.’ We saw a modest change a few years ago towards greater transparency in fees; next was a move to hold the plan sponsor accountable for the quality, and independence of the vendors used. Regardless of who wins this election cycle, Plan Sponsors should expect their obligation to manage their plans in the participant’s best interest. And of course, the DoL’s insistence on a fiduciary standard for all managers, advisors, consultants – really anyone who impacts the retirement plan will soon be held to a higher standard of care.
The Plan Sponsor has lagged in maintaining diligent oversight of their plan mostly due to the terrible advice they received. All too often, the plan sponsor has a personal relationship with a broker or insurance agent who is advising on the plan. We call that Brother-in-law liability – and you should expect to see some expensive fines in the future over this lack of intelligent plan guidance.
The process of maintaining a compliant, efficient and well-managed plan for the participants requires a degree of expertise and competence not found in, well, your average brother-in-law. It is a laborious task that requires the consultant a) be trained in fiduciary consulting for qualified retirement plans; b) stay current with regulatory changes; c) keep up with best industry offerings; d) provide time and effort to meet the ‘command and control’ hallmark of plan management. And much more.
However slowly, things are changing for the better. We now have far greater choice in plan design, plan transparency, and plan sponsor AND participant cost. There are incredibly cost effective investment options to offer to plan participants. Today we see plans that have low costs for plan participants – averaging less than 1% in most cases, and less than ½% in some cases. These costs are half what many older, legacy plan participants have to bear.
I’ll have more in the coming weeks – on the net impact of compounding higher fees make over time; the advantages to Plan Sponsor who pick up administrative costs; the importance of conflict of interest’ free advice; how to create a how to provide fully compliant plan that works for the employees and protects the employers; last, why competent consultants are so important – and how to find a good one.
The quality of the investment choices, the ability to help educate and encourage participants how to save and invest for their retirement, is better than its ever been. I am very excited about my new role with RWM in creating outstanding, low-cost Corporate-Sponsored Retirement Plans.
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For more information, please feel free to give me a call or email: 212-455-9122 or Dan -at- ritholtzwealth.com
