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Guest Commentary The Little Secret Your Insurance and Stockbroker Doesn't Want You to KnowBy Terrence Morgan, President of Ok401k.com which is an independent 401k consultant based in Oklahoma City. Morgan is a registered representative of Wilbanks Securities member NASD & SIPC. Securities activities supervised from Wilbanks Securities, Inc. at 4334 Northwest Expressway, Suite 222, Oklahoma City, OK. You can contact Terrence at the following email address: terrencemorgan AT ok401k.com Employees, after all, are counting on you to choose the right vendor to manage their retirement money. As their fiduciary, you are legally responsible for managing their 401k money in their best interests. But ask the insurance agent or broker you hired to stand behind the 401k vendor they're recommending, and they likely will head for the hills. Their companies won't allow them to help you select the 401k vendor, and select the specific funds to be offered by the 401k. That would make them a co-fiduciary and at risk of being sued by employees who may assert the plan was improperly managed or carried unnecessarily high fees. Claiming the latter, the St. Louis law firm of Schlichter, Bogard & Denton just a few months ago filed a wave of class action suits against a number of Fortune 500 companies for high hidden fees that hurt the employees. Many employers don't realize their broker or agent --to which they may be paying big commissions that are typically netted out of the returns of their 401k investment funds-- don't provide their workers with investment advice. Brokers or agents, unless they're willing to be co-fiduciaries, simply hand out enrollment literature and wish employees good luck at being their own chief investment officers. In the securities industry this is called investment education, not investment advice. A big difference when it comes to helping your employees. However, many studies show employees aren't good investors. They're more lost than Gilligan on an island, when it comes to picking their own funds in their retirement plans. For example, according to a recent Dalbar study, the average investor from 1984 to 2004 had a 3.7 percent return on their money, compared with a 12.7 percent by the S&P 500 during the same time period. Moreover, the Internet and toll-free telephone services 401k providers are a resounding failure in my opinion. Most employees who access them are merely checking balances. Under the Pension Protection Act of 2006, 401k vendors starting in 2008 can provide employees with investment advice. But that could be like the proverbial fox watching the hen house. If a bank, insurance or mutual company have their own proprietary funds inside the a 401k plan, which funds do you think they'll recommend to your employees? I bet it is likely to be their own. Though the new act includes some protections, there's still plenty of room for employee neglect and abuse. Fire Your Agent? Why not lower investment fees by replacing the advisor who isn't providing any real consulting? Commissions given to brokers and agents typically run one half of one percent to as much as one percent. This extra fee may be debilitating to employees. For example, based on a nine percent return, an employee who has $50,000 in his 401k and invests $100 a month for the next 25 years will have $537,685 at retirement -- compared to $433,908 with a one percent fee, or virtually eight percent rate of return on his money. Remember, as the fiduciary on your 401k plan, you have a duty to your employees to review fees and investments yearly. That doesn't mean letting your 401k insurance or stockbroker conduct an annual audit. They may be the last people to tell you the fees on their funds are higher than necessary, or that there are better funds available. The new Pension Protection Act, which encourages greater 401k participation and allows for investor education by the 401k providers, is a step in the right direction. But we have a long way to go. Employers must learn to be savvy buyers and recognize the true meaning of being a fiduciary on someone else's retirement money. They have to learn what their consultant can and can't do for them. They have to recognize the fee structure in 401k plans and how it can potentially hurt their employee's investments. They especially need to be aware what their broker is getting paid and how it affects their employees money. Most important, we need state and federal authorities to recognize a life or health insurance license and the ability to sell securities as a stockbroker is simply not enough to help American workers save for retirement. We need a more accountable system to the employee and an accreditation system that recognizes true retirement plan consultants. Until we change the current 401k sales/delivery systems, abuses will continue and 401k participants will limp into retirement hugely under prepared. ### 401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise. | ||||
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