Why the industry needs to accept some blame for 'flaws' in PBS Frontline's 'Retirement Gamble'

It all starts with the plan sponsor- they are the fiduciary to the participants. We have been witnessing the end of the corporate DB era for quite awhile as companies 'shifted’ the financial liability of retirement to the DC participants. For CFOs it was risk management- I don’t want some huge potential liability via a DB plan so I will terminate it (in some form) and shift the exposure to the participant. That’s kind of what happened.

The problem is that the plan sponsor is the fiduciary to the participant. It is their responsibility to provide adequate education, adequate options etc. to the participant. Four of five years ago I did some work for a roughly $10B 401k plan who had not had their manager lineup, investment structure, record keeper, etc. reviewed by an independent advisor/ consultant in over 8 years. So, whether it is fees, lousy structure, bad QDIA’s or whatever- it starts with the sponsor…and the sponsor may have thought they washed their hands of any liability but they haven’t. That’s a big problem and a big opportunity for advisors.

One other thought- one of the reasons for folks not being able to retire is they haven’t participated early or often enough. Even with matching contributions employee participation at some companies (retail in particular) is very low particularly with younger employees.

There are a whole bunch of things wrong in the retirement space –

Is there any evidence anyone actually watched the Frontline special? I’m having trouble finding any Nielsen-style ratings information.

Pat,

I think you are on solid ground with all your points. I know so many people personally who spend as if a big benevolent force will save them in retirement. Plan sponsors are clearly the ones on the hook legally.

But I also think it’s worth stepping back and realizing what 'plan sponsor’ translates to
in plain English: harried, overwhelmed, overstimulated small business owner whose primary
fiduciary duty is meeting payroll and surviving to fight another day.

Your average plan sponsor is an accidental fiduciary, probably, and under duress almost certainly. None of them went into business to become a plan sponsor.

In other words, it’s arguable that plan sponsor are the widows and orphans of the institutional investing world and laws, disclosures and mores around selling to them need to reflect that.

Or are plan sponsors feigning naivete, confusion and oblivousness? (I made up that word.)

As a small business owner, I am perhaps biased.

Brooke

The Frontline piece brings up very important points and is aimed at a public that has, more often than not, at best been misinformed, at worst been deliberately misled. It was dramatic, and needed to be, because outside of the investment echo chamber, there has been so much misinformation aimed squarely at regular investors. Fees are one main problem, as are the conflicts of interest that go hand in hand with high fees.

In a discussion last week, a colleague mentioned that since the FSA’s ban on commissions went into effect in the UK in 2012, average costs to investors have already come down 50bps. The effect that would have on US retirement savers is staggering. The SEC had been looking at a similar ban on commissions, although that didn’t make it into Dodd Frank. (But the SEC still does have the authority to eliminate forms of compensation that are deemed harmful to investors.) But for retirement accounts, of course, DOL is the regulator, and ERISA is the standard.

The impact of fees and fiduciary advice to retirement investors is another reason to watch for the DOL-EBSA’s re-proposal of who must be a fiduciary under ERISA — not redefining fiduciary duty, but rather who is deemed a fiduciary. Fee reasonableness and avoiding conflicts (and managing unavoidable conflicts in the investors favor) are important components of fiduciary duty.

Frontline served investors by bringing up many important questions. It may not have gone far enough in outlining answers or the strengths on the RIA side of the equation — but the questions and discussion it started are very important.

Brooke’s comments from the perspective of a small business owner are at the heart of the issue. There is not one 401k business but two, the larger plans which involve companies that have HR professionals and deal with independent consultants are one business. When it comes to the smaller plans even the business owner with the best intentions is pretty much screwed when he or she relies on a “advisor” who is acting as an agent for a provider. It is one of if not the most preditory sales approaches in the industry. Providers and their “Advisors” know that the 401k plan is ancillary and won’t get the necessary attention,they count on this benign neglect because the “accidental fiduciary” is too busy running the business and in spite of the new laws the 401k providers continue their mastery of obfiscation. The lawyers saw these new regs coming and have had plenty of time to create slight of hand ways to disclose fees without providing meaningful transparency.

So Pat is right that for a 10B plan it starts with the plan sponsor but for the smaller plans it starts and ends with the crap that is being sold with the classic sales line “ we can put this plan in with no out of pocket costs to the company”. Group Annuity contracts, the most expensive share class you can find, finder fees to move the plan, cash marketing stipends etc., when it comes to retirement the particpants in these plans are bringing a knife to a gun fight.

There is plenty of room for improvement in an agency formate where the broker or agent is employed by a distributor/vendor and simply sells a product rather than acting as an advisor, who has an obligation to act in the consumer’s best interest.

Everyone would agree that brokers and agents would like to be advisors acting in an advisory capacity—when in truth they have a fiduciary obligation to act in their employers best interest, not the consumer’s.

As long as the industry at large is insular to the best interest of the investing public and does not acknowledge or support the fiduciary standing of brokers/agents, we have not even begun to scratch the surface for shocking revelations as those in the “Retirement Gamble.”

The trade press would be well served to highlight issues counter to the best interest of the investing public, which are beyond the control of the broker/agent, which are in the broker/agent’s best interest and that of their clients.

This takes courage and leadership not voluntarily forth comming from the industry.There are plenty of principled brokers and asgents who would welcome that advocacy.

SCW

Good points, Lou and Brooke.

The fact is that even small plan sponsors are fiduciaries and ignorance, confusion and naivete, feigned or real, are no release from the fiduciary duty they have. If plan sponsors fail to fulfill their fiduciary duties on behalf of participant they can be held PERSONALLY liable, according to the DOL. If they are not capable they must bring in experts who are and do that through a diligent and documented process. Anyone who has a group annuity contract has probably not brought in an expert, but rather a salesperson.

Certainly plan sponsors who have brought in group annuity contracts or other high cost, low benefit options are extremely vulnerable to lawsuit by participants and they need to seek immediate help from an expert who can help them fulfill their duty by assisting them in understanding and fulfilling their fiduciary obligations — starting with better solutions for the Plan.

The sad truth here is that small business owners who have these egregiously high fee plans are hurting themselves the most, because they are likely the largest of the plan’s participants.

Well said, Stephen.

Blaming is the default in human nature – well some human nature and journalism — but it blocks understanding and problem solving. Apparently it emotionally satisfying to see the world in black and white – while untrue. Moralizing, b&w thinking and easy solutions invariably create more problems.

The retirement challenge of greatly expanded lifespans is historically unprecedented and we have no models to use to create entirely new ways to manage the set of problems.

We can predict there will be lots of emotions and scare headlines and predatory behavior by folks exploiting public fear. Also, human nature. Likely we will fumble along with lots of trials and mainly error.

If anyone has a magic solution, with any evidence and proof it works, now is the time to speak up.

Let’s also remember that “If it bleeds it leads” and all journalism is forced to evoke fear, even create it, to get any attention.

This is great! It doesn’t matter if you are big or small, the same responsibility exist. The big folks have advantages like they can afford a big time consultant or afford a settlement. The smaller plans have a more difficult time…but they have the same liability. What I don’t understand is why don’t plan sponsors seek some independent help- an independent advisor/ consultant who is not tied to product pushing for review, monitoring etc. Yes, there is a fee associated which might be painful particularly for smaller businesses, but consider it an insurance premium. There is reasonably priced help available. We know darn well if one receives advice from someone selling them something- the advice will, at best, be biased.

Reality check – How many FAs and even RIAs:

1. Have any experience with retirement plans?

2. Currently have more than 1-2 plans as clients?

3. Have any training or study of plan matters?

Believe these stats are available. There simply aren’t enough.

A very small number of RIAs (even smaller number of brokers) and a larger number of agents specialize in the retirement space. It is a specialization with the RIAs have a significant edge as they are not selling a product like agents and brokers but are providing a service in accord to fiduciary duty..

The point of the “Retirement Gamle” is advice products are very expensive and afford no ongoing accoutability or responsibility as required of fiduciary services. This is the difference between an IAR and an RIA.

The “Retirement Gamble” points out the cost of advice products, but not yet the differences in accountability and ongoing services. Thus the opportunity for RIAs who can control their professional standing, value proposition and margins., unlike agents and brokers..

SCW

I am a recovering broker (in Canada) who has pointed my life in the direction of helping those who need help, and not preying upon them as a professional. I saw much too much of that while I was in the industry.

Cheers and best

Larry Elford
Alberta Canada

OK, you can call it fraud – but what’s the alternative to the system as we have it now?

There is a “pitcher” and “catcher” in every transaction. Typically, the client is “catching” and calls the pitches they want. It is impossible to sell anyone anything they aren’t asking for and agree to. Are unrealistic client demands at fault?

Revolutionary change is not going to happen and it probably wouldn’t help anyway. These are very, very hard structural problems due to demographics – not brokers or advisors or even governments.

All professions face these same kinds of challenges. Again, anyone with the silver bullet or a good idea — let’s see the evidence and proof it will work.

All we really have so far is a lot of overwrought hand-wringing, finger-pointing and journalism. That just distracts from real problem identification and solutions.

Seriously, Elmer? “It is impossible to sell anyone anything they aren’t asking for and agree to. Are unrealistic client demands at fault?” You must be kidding.

What you say there is just not true. That happens to countless “customers” every day. And we are talking 401ks here, with captive participants DEPENDING on plan sponsors with a vast range of investment savvy who all too often end up duped by slick agents or brokers whose duty is to their firm and themselves, not the plan sponsor or participants , because they slip through the currently enormous loopholes in ERISA’s fiduciary net. But that will change, as investors learn about this and demand better treatment.

Elmer III says “OK, you can call it fraud – but what’s the alternative to the system as we have it now?”

I would suggest “not” fraudulently misleading clients….....for starters. Telling them UP FRONT whether you are a commission or fee based “broker” or an “advisor” giving them advice that is in their best interests. An inability to comprehend this demonstrates a real failure to grasp what the job entails.

Some of the comments made following show a clear lack of awareness of the differences between the broker-role vs the advisor role, fiduciary duties, client’s best interests etc. Much more education needed.

“Tell me how I get paid and I will tell you how I behave”

Education is important but isn’t it just a matter of actually making fiduciary standing self evident.

When a consumer deals with a fiducuary and the effort and care required to make a recommendation in the context of all the client’s holdings—it is pretty clear the clients previous brokers did not or could not do any of this.

By simply asking questions about the prospective clients existing holdings and explaining how those holding translate as a portfolio—there is an enlightenment of of what an advisor is supposed to do. This is in contrast to a broker making a series of disjointed unrelated transactions with no accountability or ongoing responsibility to determine whether value is added. It is pretty clear at the consumer level who is acting in the consumer’s best interest. This is why top advisors do not even have a brokerage liscense, so thery can avoid any appearance of conflict.

The real world proof that Elmer seeks to determine whether fiduciary standing is actually in the clients best interest is the easiest test of all prove.

Simply ask the consumer:(1) do you prefer your advisor to be accountable for their recommendations? (2) Do you prefer your advisor to look after your holdings as a whole on a ongoing basis to take afvantage of their knowledge and understanding of you needs and the changing nature of the capital markets? (3) Do you want your advisor to always act in yiour best interest rather than that of their brokerage firm or a product vendor? (4) Is the cost of investments important to you.? (5) Is the tax efficiency of your holdings important to you? (6) Is risk important to you? All of these things are overarching fiduciary duties which trigger fiduciary responsibility and liability and are not possible in abrokerage format. For that reason it is a violation of internal compliance protocol for a broker to acknowledge they render advice or have any on going fiduciary responsibilities on all their recommendations.

Tell me a consumer who doesn’t see a difference; Far superior counsel at a lower cost than commission sales.That is all that is needed to be said.

It is crystal clear to the consumer that the the brokerage industry has self selected to serve its best interest and is not intersted in the least in the best interest iof the investing public. This is why the trust and confidence of the investing public has been lost and why the SEC is trying to restore trust. Our major financial institutions have simply failed us. It is not the broker that has failed it is their supporting institutions to include regulators who have for too long let the industry have its way assuming the industry’s interests were the same as the consumer.

Very sad. Sorry Elmer is on the wrong side of the arguement since he claims to be such a long standing supporter of fiduciary duty.

SCW

If anyone takes these issues seriously, then the problems need to be carefully studied. Solutions need to be developed from the studies and then tested before wide spread use. However, that will not happen.

Instead we have lots of opinions. As always, the sharpest opinions get the most press.

If just personal opinions and ignoring verified information, study and testing worked — clients wouldn’t need advisors, or doctors, or accountants or professional help of any kind. And, in fact, very few people either use. or follow the recommendations of, professionals.

Elmer,

It boils down to a question of trust and the consumer being taken avantage of. There are actually advisors who work in the consumer’s best interest. They have built very large businesses some with 50 to 500 billion. That is a capital “B”..

Every advisor wants to emulate these folks and have found it is not possible in a brokerage format. Is that the broker’s fault or the broker/dealer’s?

SCW

It comes down to how and how much people are compensated. If I am compensated for my perceived 'advice’ via the placement of product then my advice is conflicted. I believe that is the brokerage model. If I am compensated for my 'advice’ via a fee- then my advice would not be conflicted…it may not be any good but it is not conflicted. The sponsor can decide whether my advice has value or not. When the 'advice’ is wrapped in product placement- the sponsor does not have clarity regarding how much one is paid for advice versus products. If a sponsor seeks an independent advisor/ consultant to provide un conflicted advice they have to write a check…not positive but I believe that is an expense the sponsor incurs and is not charged back to the participants. In the case of the 'advice’ imbedded in product placement there is no check to write…it comes out in the wash. It’s up to the sponsor, big or small. Let me ask you this- if you were to build a house and hire a contractor (similar to an advisor)- wouldn’t you want to know how much the contractor is paid for their services? Or, would you rather they have their fee imbedded in the overall cost? My preference would be to know how much he is paid.

There are a number of RIA/consulting firms, as Stephen points out, which advise to billions of dollars based on providing independent advice. I would also agree with Stephen based on my understanding that many advisors would like to participate in this business. One of the difficulties for the typical RIA is to establish the institutional resources, education base, brand etc. to effectively market to and service the middle market institutional business. So Elmer- I agree with you that the typical RIA may need some help like education, research, execution support. To that I would say…'watch this space’.

Pat,
Only in the retail investment business is it expected that help should be provided with the “difficulties” of being truly independent. Almost everyone in the industry, RIAs and Brokers alike have their hands out for resources that are provided and paid for by a broker-dealer. Are the Schwab, TD and Fidelity platforms unbiased in any way? But they thrive on the promoting their “independence” and “open architecture” and most are happy to jump on the bandwagon and take whatever software and other perks that are offered.
There is only one way to be an independent operation that has total control of a value proposition, you write a check and pay for the resources you need with your own money. That is what determines an independent business owner, more people in this industry should try it, they would find it very freeing and well worth the money.

Well Said Lou,

But there are large scale firms like Savant which afford the enabling resources to support expert fiduciary standing. To join you have to have significant assets, but with eSavant further leveraging the Savant value proposition lowering their minimum, it is not too far down the road that advisors will have a conscious choice to act in the consumer’s best interest at a lower cost than commission sales and make as much as 50% more with the same asset base.

That is what will move the market, not Wall Strret suddenly getting religon.

SCW

Blam it on the DVR.
I watched this program the other night and must say, I was amazed at the lack of accountability that all parties shared for the problem. To begin with, the reporting was irresponsible at best. The program was a poorly shrouded attempt to advocate for low expense, passive investing and gave short shrift to arguments for active management and higher fees, when justified of course. The statistics used were not rooted in fact and had no effect beyond panic and shock value.
The investors interviewed largely admitted that they had no interest in planning for their retirement until the performance of their accounts reached alarming levels. It seemed to me be akin to going to the car dealer, giving them $30,000 and telling them to deliver to me whatever vehicle they choose then complaining a number of years later that you should have been given a compact car because of the bad gas mileage your SUV attained. One investor seemed to be unaware that there was a possibility for a decline in their account (you mean my car is not always going to have this mirror shine and new car smell?) while another had no idea that she had purchased an illiquid annuity. Presumably the teacher who bought the annuity had the additional protection of a union who vetted the composition of the retirement plan.
The journalist interviewed all of the wrong people at investment firms, except for Jack Bogle. They were “financial advisors” who were trained to sell a product, not dispense advice. In short, the program missed an opportunity to warn investors that they usually get what they pay for and if they spent the same amount of time in understanding their retirement options as they do in buying a new care, everything would probably be alright.

Brian,

Great points. The differentiating poit between brokerage advisory firms is brokers have no control over their value proposition, cost, margins and professional standing afford asdmonistration but no management. Advisors are held to professional standing and accordingly professionally managed to an expert fiduciary standard unwelcome in a brokerage format.

The significance of this professional management distinction is that it explains why all industry innovation is comming from the advisory side and why advisors compete very favorably on the basis of value proposition, cost, margins and professional standing relative to brokers withas much as a 50% incresae in advisor compensation at a lower cost to the consumer with a preemptive consumer value proposition.

So, it really does not matter what the brokerage industry self selects to thwart counter to the consumer’s best interest, it is simply the orchestration of crital mass around a truely expert and authenticated fiduciary support infrastucture that safely brings scale and expert standing to every advisor who wishes to act in their client’s best interest. This is easily achieved through an (a) expert authenticated prudent investmernt process (asset/liability study, investment polict, portfolio construction, monitioring and management) which makes it safe to acknowledge fiduciary status, (b) advanced technology which supports (i) continuous comprehensive cousel, (ii) transparency, (iii) more modern approaches to portfolio construction which streamlines cost, which is required for fiduciary standing, (c) work flow management tied to a functional didision of labor (advisor, CIO, CAO) which makes advice sacalable, easy to execute and manage as a low cost high margin business at the advisor level, and© conflict of interest management mitigation going far beyond disclosure which simply perpetuates conflicts.

This sort of innovation will come from large scale RIAs not roll-ups which simply perpetuate the brokerage approach to advisory services which trats advice as a product that is sold not an expert process that is managed in the consumer’s best interest.

Think in the context of Savant, CapTrust, and other private large scale RIAs that are now acting in a fiduciary capacity and casn prove it.

There are not many of these large scale RIAs but they have none of the inpediments of a brokerage format that cripples roll-ups in advancing fiduciary standing.

Brian, get to know these firma as they are delineated by expert professional management, and business accumen, know how and ability to execute uncommon in a brokerage setting.

This is the future of advisory services and professional standing which will restore the trust and confidence of the investing public.

SCW

OK, lots of blame, fingering pointing, name calling, demonizing, moral judgements and pitches for simplistic solutions are standard fare in the media. That we already know.

These are global and demographic challenges unprecedented in human history – let alone the industry. No firm(s) or individual(s) have solved any of these challenges. Yes, efforts are being made but usually haphazardly – which is normal.

If any one firm or individual has any answers many government and firms would love to hear about the evidence and data proving them out.

How about some professional, dispassionate, evidence based problem analysis and problem-solving? “I have a dream….” lol, it won’t happen. Carry on.

Elmer,

The dispassionate evidence to which everyone can agreebased on facts and “problem analysis” is straight forward. Retail investors must be hald to the same standards and consumer protections afforded to other investors as required by the “equal protection under the law under the US Constitution. This requires a change from the” current state.”

The brokerage industry argues that terrible unintended consequences will result which is absurd as change is required in the consumers best interest. These consequences are not unintented but very specifically intended in the consumer’s best interest. Anything less than the industry’s full support for fiduciary standing is the industry putting its interest ahead of that of the consumers. This is indisputable.

Thus, the trust and confidence of the investing public is put into play and the industry is on the wrong side of the calculus.

Pretty simple “problem solving” if you ask the investing public. Right?

SCW

Not sure how the word“simple” applies to anything to do with professional investing – especially of people’s life savings.

Elmer,

You are correct about simplicity.

It is simple only for those that know what they are doing.

This is a particulaly insightful observation on brokerage, which does not acknowledge or support advice.

SCW