DIRTY SECRETS: ARE HIDDEN FEES EATING UP YOUR RETIREMENT?

 

Find out why they want to keep you in the dark:



Do you have a vague recollection of the massive string of corporate accounting frauds that plagued financial markets beginning in 2000 through 2010?  Perhaps most famous was the “Enron” nightmare, whereby Kenneth Lay and Jeffrey Skilling were convicted of securities fraud by cooking Enron’s books: the stock market collapse that began in the year 2000 became the trigger point for exposing dozens of companies like Enron because it is generally ‘investor losses’ that spur on official government investigations by the Securities and Exchange Commission (SEC) and FINRA that ultimately bring to justice those corporate executives that violate the securities laws that are supposed to protect investors.

During the stock market boom years, however,  fraudulent corporate activities often go unnoticed…until investors begin to lose money and someone smells a rat, then all hell generally breaks loose.

Interestingly enough, Kenneth Lay was convicted of 10 counts of securities fraud and died in prison from a heart attack at age 64.  Ken Skilling who was sentenced to 24 years in prison, is due for release in 2017 as a result of a 2013 court decision reducing his sentence by 10 years.

We understand that you want to know that the money you invest now will be there later when you need it most. We’ll focus on how you can safely navigate successfully within the traditional world of investment choices and challenges and avoid the future “Enrons” of the world.  “Dirty Secrets” will expose you to many of financial realities that impact typical Americans like you…those of you that may contribute to a 401(k) and are considering doing so or have done so in the past.  

Learn to Avoid Maket Losses:



We use the Enron reality to illustrate that we should follow prudent rules of safe investing and when dealing with our own investments and retirement plan, we should exercise restraint by not over-investing in the stock market or in any one particular stock, for any reason, no matter how good it sounds. Imagine the pain resulting in the Enron employees that invested all of their retirement money in Enron stock? I’m sure you’re glad that wasn’t you but you are still faced with the difficult task of navigating through many different investment choices and strategies.

A better plan for most of you is to limit your investment in stocks, mutual funds and ETFs to 25% with strong diversification including owning Gold and investing in safe, tax exempt opportunities available with insurance based investment products (see Smarter Retirement tab).

We’ll illustrate how purposely ‘hidden and excessive fees’ often eat up a large percentage of retirement dollars in traditional 401K’s. Later, we’ll explore how market losses associated with equity investments (stocks, mutual funds, ETFs) combined with taxation associated with traditional investing can create headwinds for your money that can be reduced in part by focusing on a portion of your investment portfolio in insurance based investment strategies that protect against downside risk and are exempt from taxes.

Tax-Free Investing is possible. Find out how:



The problem and the “Dirty Secrets” reference is that many of the fees are not readily disclosed and are hidden in fine print and even omitted from the prospectus documents.

The financial services industry employs one of the strongest ‘lobby organizations’ whereby even common sense legislation that would require basic disclosures regarding many of the ‘hidden fees’ was blocked from even going to vote:

Fighting directly with that ‘lobby’, State Representative George Miller of California, back in 2012, tried to expose the problems with excessive fees in the 401(k) system. In a report back in May of 2012 from the Government Accountability Office (GAO) released by Rep. George Miller (D-Calif.), shows that many employers GAO surveyed do not understand or were unable to identify the 401(k) fees that they and their employees pay.

What did the report show?

The report showed that without the ability to determine the fees charged to both employers that sponsor 401(k) plans and the workers who participate in them, employers and employees may be paying much higher costs than they are aware of, resulting in reduced retirement. “Middle class families who rely on a 401(k) don’t have a chance if an employer doesn’t understand how their own plan works,” said Rep. Miller, the senior Democratic member of the House Education and the Workforce Committee. “For too long, confusing business arrangements and hidden fees have skimmed money from workers’ hard-earned savings without full disclosure.”

Through these practices, neither workers nor their employers know how much they are being charged or why. Financial service firms need to be more up front about the fees they take from workers’ accounts. “While I’m hopeful that efforts by the Obama administration to require greater fee disclosure will shine a much needed light on these practices, it is clear that Congress, the Department of Labor and employers need to be doing more to protect working families and their retirement savings.”  That never happened under the Obama administration.

Hidden fees must no longer be hidden:

The need for all fees to be disclosed to employers by 401(k) service providers in a clear and easy-to-understand format was articulated by the GOA. “For example, nearly six in ten sponsors said they are “completely” or “very confident” that service providers fully disclose all fees to the plan and its participants. Yet, at the same time, half of employers admitted they did not know if they or their workers pay investment management fees or mistakenly believed that such fees were waived. GAO noted that investment management fees account for the majority of all 401(k) fees.”

The report goes on to explain that, “in addition, 48 percent of employers did not know whether their plan provider engaged in revenue sharing arrangements whereby service providers compensate another provider for administrative or other charges.  For example, one employer with a large 401(k) was unaware of a revenue sharing agreement that underestimated the amount the employer was charged by a service provider for recordkeeping by 16 times. Another employer with a small plan reported paying nothing at all to service providers for recordkeeping when in fact the employer paid $10,700 in 2010. Nearly half of that recordkeeping fee ($4,800) was taken from employee accounts.”

“If sponsors do not understand these arrangements, it could result in the plan sponsor and participants paying more for services as assets grow, although the level of service provided tends to remain the same, GAO wrote.”

“In other words, many workers and businesses are paying higher fees than they may be aware. As previously uncovered by GAO, many fees in 401(k) plans are hidden and even a small difference in fees could make a big difference in the retirement savings for workers. The Department of Labor estimated that a one-percentage point difference could reduce a worker’s retirement savings by 28 percent at the end of his or her career.”

The bad news is that most Americans are unaware of the severe flaws in the fee structure of the 401(k) industry.

The Good News:

Perhaps some lessons can be gleaned from the fact that “there has been an increase in 401(k)-fee lawsuits against financial services companies can be attributed in part to the general success such cases have had,” said Carl Engstrom, an associate attorney at law firm Nichols Kaster who’s involved in the 401(k) litigation practice.  Greg Lacurci of Investment News outlined these suits:

1- Wildman et al v. American Century Services, LLC et al, alleged breach of fiduciary duty under the Employee Retirement Income security Act of 1974 for excessive record-keeping  and investment management fees, for self-dealing by American Century, which plaintiffs contend filled the retirement plan with proprietary investment options for its own benefit and  imprudent fund selection.

According to Engstrom,, “the plaintiffs claimed that “Defendants have used the Plan as an opportunity to promote American Century’s mutual fund business and maximize profits at the expense of the Plan and its participants,” the plaintiffs said in the complaint, claiming the firm earned millions of dollars in fees by retaining proprietary investments.”

“Plan fiduciaries also allowed “grossly excessive” revenue-sharing payments to be made to JP Morgan Retirement Plan Services and Schwab Retirement Plan Services Inc., the plan’s two record keepers over the relevant time period, according to the complaint, filed Jun. 30 in the U.S. District Court for the Western District of Missouri.”

2- Allianz Global Investors, Pacific Investment Management Co. and their parent company Allianz Asset Management were sued by employees in October last year, as was Putnam Investments in November.

3- Ameriprise Financial and Fidelity Investments paid out $27.5 million and $12 million settlements, respectively, over the last two years.

4- Supreme Court’s ruling in the Tibble v. Edison lawsuit in 2015 weakened a “statute of limitations” argument that could be used by defense, which contended that fiduciaries couldn’t be sued over allegations concerning funds in a 401(k) plan for longer than six years.