A recent article in Bloomberg by Ben Silverman asks whether opaque and excessive fees in 401(k) plans can be solved by technology. The answer, unfortunately, is a resounding no. The article profiles an Israeli startup called FeeX which purports to analyze your 401(k) and give you recommendations about rollovers based upon cost. The problem of opaque and excessive 401(k) fees is real, and I’ve written about it here often, but the service that FeeX offers doesn’t offer much value.
First, FeeX’s algorithm will “recommend” rollover IRAs to you only from among IRA providers who will pay FeeX a referral fee for the recommendation. This commission-based model of course limits the range of options. FeeX isn’t really in the business of providing a service for ordinary investors, but in selling an online distribution platform and referral service to discount brokerages.
Second, and more importantly, the most egregious 401(k) plans cannot be analyzed by an algorithm. Often, they can’t even be analyzed by a financial specialist. This is because many retirement plans come “wrapped” in a group variable annuity contract that isn’t a publicly registered security and so lacks clear and available information about its true costs. When insurance companies like Principal Financial Group, Nationwide, TIAA-CREF, MassMutual or Transamerica service 401(k) or 403(b) plans, the actual investment vehicles they offer aren’t really the advertised mutual funds, but obscure insurance products misleadingly called “separate accounts.” These separate accounts, which often come loaded with extra hidden feeds, invest in the advertised mutual funds and add a layer of financial complexity that doesn’t benefit the ordinary investor in any way.
The only way to figure out what the real costs of an annuity-wrapped retirement plan is for a specialist to pour over a host of different disclosure documents, prospectuses, plan agreements, and custodial statements. Insurance company providers don’t generally make these documents available, so it’s practically impossible for most retirement plan participants to figure out the true costs of their plans. This situation was improved to some degree by the Department of Labor’s 2012 fee disclosure requirements, but not all that much.
So what is the solution to the problem? The only way corporate plan sponsors and their employee participants can know what they’re really paying, and be sure that their plan really works for them, instead of for Wall Street, is to have a fiduciary investment advisor design and oversee their plan. An investment fiduciary, unlike conventional Wall Street banks, brokers, and insurers, is required to act exclusively in the best interests of its clients.