Hearings On 401k Fees Didn't Go Far Enough

TULSA, OK, March 8, 2007 -- On March 6, 2007, the U.S. House Education and Labor Committee, chaired by Rep. George Miller (D-CA), held hearings on "Hidden 401k Fees Undermining Retirement Security?"

After watching the hearings, Randy Cloud AIFA®, President of Cloud, Neff Management LLC, observed, "I am disappointed that there were not a few more pointed examples of direct industry abuses that require immediate remediation. I know that this is a complex area and that all sides of the debate must be represented. However, I am convinced that the investment lobby is too powerful to defeat without some significant public outcry – which will only come from powerful sound-bites and examples of abuse that are explained in layman’s terms."

Accordingly, Mr. Cloud has developed the following specific examples that he believes would help to frame the issue:

• Participants within the same plan do not pay the same amount. I have a bundled 401k plan on my desk for review today wherein participants invested in one mutual fund pay none of the plan administrative costs, and those in another fund pay 1.32% per year exclusively for plan administration. Remember, the only difference is the fund they choose within the Plan! Is this discrimination based on investment choice?
• Mutual funds pay different "rev share" kickbacks to various providers. In other words, if your brokerage firm does "something" to get on the preferred vendor list, they may get a .50% kickback while other platforms receive nothing. This system promotes graft, impedes the free marketplace, and effectively steals from some participants to subsidize others.
• Older employees pay more of the administrative costs. Older employees typically have the largest 401k balances since they have been contributing to the program longer and most likely have higher earnings than younger employees. Accordingly, they should pay more for investment management since they have more money being managed. However, they also pay more hidden fees for administrative services simply because they have bigger balances. In any given Plan, it is common for us to find that the top 10 – 20% of employees by 401k balance are paying 70-80% of the Plan’s administrative costs. Is this discrimination based on age?
• Administrative service providers charge more to account for plan balances based solely on asset size. Accounting services should not be based on the size of the account, but rather the number of participants with a balance, turnover, etc. Why should a company with 2,000 employees and $100 million in Plan assets pay twice as much as one that also has 2,000 employees but only $50 million in assets? Under the current system, they do.
• The free market system can not work if weak vendors and investment managers are allowed to buy business with inflated rev share kickbacks and other tactics. The legislature could simply make it illegal to pay administrative fees from Plan assets. This would force all the rev share issues to go away and would enable service providers to compete on their merits rather than via payola. It will not impede participants nor will it cause plans to shut down – the free market system in the employment world will make it necessary for companies to keep offering 401k plans. Besides, the extra costs to the employer won’t be nearly as large as those that are hidden in the system today. We know this because employers will suddenly be able to discern the true costs and demand competitiveness therein. Furthermore, the strong vendors that truly add value will be able to earn greater profitability since their "added value" will be easier to demonstrate.
• Most of the illustrations given in today’s testimony regarding the impact of fees were expressed in dollars or percentage. American workers should know that those statistics realistically mean that they have to work an additional 7 – 10 years to make up for the abuses in their retirement program. Most workers can understand 7 – 10 years more work even if they cannot fully grasp the mathematics of compound returns and hidden fees.

"I sincerely believe that the present climate may be the last time we have a real chance to force the changes that are so desperately needed," said Mr. Cloud. “Furthermore, several of my colleagues at other independent fiduciary service firms indicate that they routinely encounter the same issues in the marketplace. We all feel strongly that significant change is needed and are wiling to discuss the issues with legislators and other interested parties.”

About Cloud Neff Management LLC

Cloud, Neff Management LLC is a Tulsa, Ok, based federally registered investment advisor specializing in independent, professional fiduciary decision making. Founded in 1988, we serve individuals, ERISA plans, Foundation / Endowments, institutional investors, and other investment advisory firms nationwide. All of our services are conducted on a completely transparent, fee for services basis. For more information, visit www.cloudneff.com or call 888.399.1080.

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