Costs are out of control!!! 401(k) Committee

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pdc3610
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Costs are out of control!!! 401(k) Committee

Post by pdc3610 »

I am looking for help from others who have successfully tackled the 401(k) plan at work. I am currently on a workplace 401(k) committee looking to change the plan over the next 9 months. Our goal is to take it slow enough to get it right. My primary concern is not the expense ratios of the undlerying funds (although index options will be added) but rather the administrative costs of the plan itself. Up to this point the administrative costs have been rolled up into the funds leading to expenses of over 2%. We are looking to change this by having the company pay the administrative costs, thereby keeping the investment gains in the employee's accounts. Here is a breakdown of the proposed costs:

· Recordkeeping/TPA costs: $6,820 (0.89% of plan assets) – this is the amount the employer would cover if you want to pay for the administrative costs of the plan.
· Investment Advisor’s Fee: $5,775.86 (0.75% of plan assets)
· Revenue Sharing (paid from the investment expenses): -$1,813.17 or (-0.24% of plan assets)
· Investment Expenses: $6,717.12 (0.87% of plan assets)

As you can tell this is a small business with a total plan of less than 1 million. It is important for us to be in an "open architecture" plan in order to keep fees for the employees low.

Questions:
1) Are all of these items required under ERISA? If not, what can be eliminated and what is the alternative?
2) I'm not certain what the "Investment expenses" is paying for? I believe this is the anticipated expense ratio using the recommended actively managed funds. If so, this will also be addressed by the addition of index funds though I will need to ensure that they are included in the "pre-fab" portfolios employees can select based on risk. Any thoughts?
3) I have read the wiki article. Are there other resources anyone can recommend to help me "guide" this committee? I feel like I am the most knowledgable person on the committee with regards to the impact of expenses and overall investing but I still feel a bit overwhelmed with the regulations and potential personal liability of making an incorrect recommendation. This is very different (it feels at least) from managing my personal retirement accounts.
4) If I am fully understanding the proposal our business would pay the first three bullets (~$10,750) and leave the employees with the cost of the investment expenses. Does this seem correct?

I appreciate any help and examples of successes that can be shared.
Rupert
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Re: Costs are out of control!!! 401(k) Committee

Post by Rupert »

Read "Fixing the 401(k): What Fiduciaries Must Know (And Do) to Help Employees Retire Successfully" by Joshua P. Itzoe. You can get it at Amazon. It really helped me understand fees when my small company was restructuring our 403(b) plan from an all-inclusive insurance company plan to an open architecture plan.
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rpike
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Re: Costs are out of control!!! 401(k) Committee

Post by rpike »

Try comparing to Employee Fiduciary. From the info on their web site, it looks like their plans annual costs are 0.08% of assets + $1500 per year for up to 30 employees + $30 per each additional employee and about half their customers also hire an investment advisor - presumably to advise them on which investments to include in their plans.

Another Rick
manwithnoname
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Re: Costs are out of control!!! 401(k) Committee

Post by manwithnoname »

see link to analyzing plan fees.

http://www.brightscope.com/financial-pl ... 01K-Plans/

Small plans have higher costs per participant because there are fewer participants to share the costs.
lawman3966
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Re: Costs are out of control!!! 401(k) Committee

Post by lawman3966 »

pdc3610 wrote: · Recordkeeping/TPA costs: $6,820 (0.89% of plan assets) – this is the amount the employer would cover if you want to pay for the administrative costs of the plan.
· Investment Advisor’s Fee: $5,775.86 (0.75% of plan assets)
· Revenue Sharing (paid from the investment expenses): -$1,813.17 or (-0.24% of plan assets)
· Investment Expenses: $6,717.12 (0.87% of plan assets)
Questions:
1) Are all of these items required under ERISA? If not, what can be eliminated and what is the alternative?
2) I'm not certain what the "Investment expenses" is paying for? I believe this is the anticipated expense ratio using the recommended actively managed funds. If so, this will also be addressed by the addition of index funds though I will need to ensure that they are included in the "pre-fab" portfolios employees can select based on risk. Any thoughts?
3) I have read the wiki article. Are there other resources anyone can recommend to help me "guide" this committee? I feel like I am the most knowledgable person on the committee with regards to the impact of expenses and overall investing but I still feel a bit overwhelmed with the regulations and potential personal liability of making an incorrect recommendation. This is very different (it feels at least) from managing my personal retirement accounts.
4) If I am fully understanding the proposal our business would pay the first three bullets (~$10,750) and leave the employees with the cost of the investment expenses. Does this seem correct?
My answers:
(1 & 2) We set up a plan last year. I wasn't on the committee but proposed the name of a record-keeper and TPA (Employee Fiduciary for both) and a lineup of funds for the plan, which were both accepted. I have no doubt that record-keeping and TPA functions are necessary. Regarding costs, you could compare yours to those listed for record-keeping on Employee Fiduciary's site. You could also call and ask about their TPA services as they can provide both of those functions (I'm not sure if the TPA cost is listed on the web site).
I read the ERISA rules last year. To my knowledge there is no requirement that the plan have an advisor. (Ours doesn't). Your investment expenses seem really high. This doesn't sound like something Vanguard would charge, so I'd check into that. Investment expenses aren't required by ERISA, but they are inevitable from whatever investment company you use. Vanguard's ERs (if that's what we're talking about here) are more like 0.06%, and thus nowhere near 0.87%).
I don't know what service your "revenue sharing" fee is for, so I can't say whether ERISA requires it, but it sounds in excess of anything that we're paying our recordkeeper/tpa for.

3) I can't completely answer the personal liability issue. Our firm went with Employee Fiduciary, no advisor, and a lineup of Vanguard funds that exactly tracks the Federal Thrift Savings Plan: six low-fee index funds (with nothing complicated) and about six target date retirement funds. This simplicity was to avoid having novice investors invest their life savings in a single stock or other high risk option.
We had several insurance companies visit our firm and attempt to scare us into going with their high-fee option that all seemed to include about 30-40 funds. They can't eliminate the possibility of a lawsuit. Instead, they reassure people by offering a warranty that they'll reimburse the firm for the cost of any lawsuit that arises. One partner asked one of the reps whether there had ever been a lawsuit aimed at an employer for not providing advisory guidance, and they sheepishly said "no." They then muttered something about liability for not obeying Federal regulations, rather than a suit by an employee for lack of advisory guidance. Thankfully, they were not persuasive.

4) When getting lower fees for all, and getting good funds, the interests of the participants and managers are aligned. However, the interests of these groups are opposed when deciding how to allocate the fees. In our case, I believe that nearly all fees are imposed on the participants. As a result, in the early years, when the plan is still small in total magnitude, the hard-dollar fees represent a fairly high percentage of the asset base of the plan and of each investor's asset base. The expectation is that this percentage will decline as the plan size increases.
I don't know that there is a "standard allocation" here. I've seen a range of options pursued at different employers.

In overview, your $10.7K figure seems high to me. While I can't recall the exact figures, I think our fees were at most half of that.
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Re: Costs are out of control!!! 401(k) Committee

Post by JamesSFO »

lawman3966 wrote:
3) I can't completely answer the personal liability issue. Our firm went with Employee Fiduciary, no advisor, and a lineup of Vanguard funds that exactly tracks the Federal Thrift Savings Plan: six low-fee index funds (with nothing complicated) and about six target date retirement funds. This simplicity was to avoid having novice investors invest their life savings in a single stock or other high risk option.
We had several insurance companies visit our firm and attempt to scare us into going with their high-fee option that all seemed to include about 30-40 funds. They can't eliminate the possibility of a lawsuit. Instead, they reassure people by offering a warranty that they'll reimburse the firm for the cost of any lawsuit that arises. One partner asked one of the reps whether there had ever been a lawsuit aimed at an employer for not providing advisory guidance, and they sheepishly said "no." They then muttered something about liability for not obeying Federal regulations, rather than a suit by an employee for lack of advisory guidance. Thankfully, they were not persuasive.
This, especially. There's a huge industry of people with a stake in scaring you into paying lots of $s for fund selection. It's like a mob protection racket of sorts.

There's really no reason a small 401K cannot be run for <$3K/year.

We had a small dot-com startup where we did much like lawman, but via Fidelity and their standard lineup for small companies and I had one sales person telling me how I would be sued, 5 years later, we still have low cost funds and low total fees.
staythecourse
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Re: Costs are out of control!!! 401(k) Committee

Post by staythecourse »

JamesSFO wrote:
lawman3966 wrote:
3) I can't completely answer the personal liability issue. Our firm went with Employee Fiduciary, no advisor, and a lineup of Vanguard funds that exactly tracks the Federal Thrift Savings Plan: six low-fee index funds (with nothing complicated) and about six target date retirement funds. This simplicity was to avoid having novice investors invest their life savings in a single stock or other high risk option.
We had several insurance companies visit our firm and attempt to scare us into going with their high-fee option that all seemed to include about 30-40 funds. They can't eliminate the possibility of a lawsuit. Instead, they reassure people by offering a warranty that they'll reimburse the firm for the cost of any lawsuit that arises. One partner asked one of the reps whether there had ever been a lawsuit aimed at an employer for not providing advisory guidance, and they sheepishly said "no." They then muttered something about liability for not obeying Federal regulations, rather than a suit by an employee for lack of advisory guidance. Thankfully, they were not persuasive.
This, especially. There's a huge industry of people with a stake in scaring you into paying lots of $s for fund selection. It's like a mob protection racket of sorts.

There's really no reason a small 401K cannot be run for <$3K/year.

We had a small dot-com startup where we did much like lawman, but via Fidelity and their standard lineup for small companies and I had one sales person telling me how I would be sued, 5 years later, we still have low cost funds and low total fees.
I can almost GAURANTEE there will be lawsuits in the future. Have you looked at the number of folks retiring and their level of savings? The only problem is it will be these high cost plans which push active funds that have no leg to stand on in a court of law. There is NO data to support active and/ or high expense investing. There are MOUNDS of data and academic articles to support low cost and passive investing.

Think about a broker trying to justify in open court why an insurance wrapper INSIDE of a tax deferred account is beneficial to the employees!!

If you offer low cost and low expenses there is no reason to fear being sued.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: Costs are out of control!!! 401(k) Committee

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (401(k)).

The wiki article referenced by the OP: How to campaign for a better 401(k) plan
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Re: Costs are out of control!!! 401(k) Committee

Post by pkcrafter »

Check Employee Fiduciary and Costco.

Costco--

http://www.theonline401k.com/d401k/ecs/ ... index.html

Paul
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pdc3610
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Re: Costs are out of control!!! 401(k) Committee

Post by pdc3610 »

Thank you for the replies with great links. This gives me a bit to read/research prior to our next committee meeting. This has been a great exercise in education since joining the committee.
sport
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Re: Costs are out of control!!! 401(k) Committee

Post by sport »

pdc3610 wrote: I believe this is the anticipated expense ratio using the recommended actively managed funds. If so, this will also be addressed by the addition of index funds
If you are in a high cost plan, you cannot depend on index funds having a low cost. I was in a small plan, like yours, that was administered by an insurance company. The S&P 500 index fund had an ER of 0.90%.

Jeff
Rupert
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Re: Costs are out of control!!! 401(k) Committee

Post by Rupert »

Re the liability issue: Make sure your company's general liability insurance has an ERISA rider or recommend that your company purchase a special ERISA policy to protect the plan's fiduciaries from employee lawsuits. That is an additional expense - for a small company can be around $1500-2000 a year - but is necessary, IMHO. I think Chubb writes a lot of ERISA policies. Some insurance companies that write small business liability policies don't offer ERISA coverage at all.
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Re: Costs are out of control!!! 401(k) Committee

Post by fcirullo »

Congratulations on your decision to improve your 401(k) plan! I have read the comments, and you have been given some great advice.

Because the other 401(k) plan committee members appear to be on board with your ideas, you should switch to a lower cost administrator and get a menu of the exact index funds you want, now. Note: You only want to propose incremental changes such as changing administrators when the other committee members are not on board with your ideas. See?

You mentioned that you had read one of the wiki articles, but I'm not sure which one. So if you have not already done so, you should show the all of the committee members the following article, which includes step by step instructions on How to set up a truly low cost plan, forum discussions, and frequently asked questions: Setting up a 401(k) plan at How to campaign for a better 401(k) plan.

Best wishes,
Frank R. Cirullo

P.S. LadyGeek, I can't get the link to work. Would you please fix it? Also the link to it in the wiki article How to campaign for a better 401(k) plan is not working. Thank you! [Fixed. Note they are 2 separate articles - admin LadyGeek]
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manwithnoname
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Re: Costs are out of control!!! 401(k) Committee

Post by manwithnoname »

staythecourse wrote:
JamesSFO wrote:
lawman3966 wrote:
3) I can't completely answer the personal liability issue. Our firm went with Employee Fiduciary, no advisor, and a lineup of Vanguard funds that exactly tracks the Federal Thrift Savings Plan: six low-fee index funds (with nothing complicated) and about six target date retirement funds. This simplicity was to avoid having novice investors invest their life savings in a single stock or other high risk option.
We had several insurance companies visit our firm and attempt to scare us into going with their high-fee option that all seemed to include about 30-40 funds. They can't eliminate the possibility of a lawsuit. Instead, they reassure people by offering a warranty that they'll reimburse the firm for the cost of any lawsuit that arises. One partner asked one of the reps whether there had ever been a lawsuit aimed at an employer for not providing advisory guidance, and they sheepishly said "no." They then muttered something about liability for not obeying Federal regulations, rather than a suit by an employee for lack of advisory guidance. Thankfully, they were not persuasive.
This, especially. There's a huge industry of people with a stake in scaring you into paying lots of $s for fund selection. It's like a mob protection racket of sorts.

There's really no reason a small 401K cannot be run for <$3K/year.

We had a small dot-com startup where we did much like lawman, but via Fidelity and their standard lineup for small companies and I had one sales person telling me how I would be sued, 5 years later, we still have low cost funds and low total fees.
I can almost GAURANTEE there will be lawsuits in the future. Have you looked at the number of folks retiring and their level of savings? The only problem is it will be these high cost plans which push active funds that have no leg to stand on in a court of law. There is NO data to support active and/ or high expense investing. There are MOUNDS of data and academic articles to support low cost and passive investing.

Think about a broker trying to justify in open court why an insurance wrapper INSIDE of a tax deferred account is beneficial to the employees!!

If you offer low cost and low expenses there is no reason to fear being sued.

Good luck.
So each of the 3.7 million participants in retirement plans funded by TIAA-CREF annuity contracts can sue their employer and T/C merely because the funds are invested in an annuity?

What law allows such a suit?
By the way the broker would not be the defendant. D would be plan fiduciaries who authorized investment.
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Re: Costs are out of control!!! 401(k) Committee

Post by leonard »

Way to many and too much expenses.

If you go with Employee Fiduciary or a close runner up - total - TOTAL - plan expense ratio should be about .5% of invested plan assets averaged over the first 4 years or so. That's total including all administrative expenses AND the (index) fund expense ratios. Anything higher than that is paying for stuff employees don't need. As the invested base grows .5% should quickly become .4%.
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Re: Costs are out of control!!! 401(k) Committee

Post by nirvines88 »

If it's a small enough company, consider looking up information about the SIMPLE IRA.
"Beware of little expenses, a small leak will sink a great ship" - Poor Richard
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Re: Costs are out of control!!! 401(k) Committee

Post by MossySF »

manwithnoname wrote:So each of the 3.7 million participants in retirement plans funded by TIAA-CREF annuity contracts can sue their employer and T/C merely because the funds are invested in an annuity?
Unfortunately, the "annuity" label is used confusingly. All 403(b) plans are named annuities whether they actually sit inside an annuity wrapper or not. Here's the official description from the IRS publication:

Code: Select all

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.
Maybe at sometime in the past, you had to take your 403b payout in the form of an annuity and this is a left-over artifact. No clue.

But if you do have a retirement fund inside an additional annuity wrapper, that annuity wrapper simply adds extra fees for no purpose and the fiduciary of the plan can be liable -- assuming the plan falls under ERISA laws which some 403(b)s don't.
manwithnoname
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Re: Costs are out of control!!! 401(k) Committee

Post by manwithnoname »

leonard wrote:Way to many and too much expenses.

If you go with Employee Fiduciary or a close runner up - total - TOTAL - plan expense ratio should be about .5% of invested plan assets averaged over the first 4 years or so. That's total including all administrative expenses AND the (index) fund expense ratios. Anything higher than that is paying for stuff employees don't need. As the invested base grows .5% should quickly become .4%.
Plan participants need more than the bare minimum services. They need investment education, call centers, advice and other information because of the lack of financial literacy of US investors.

According to a 2012 SEC study :

Existing Level of Financial Literacy. Studies reviewed by the Library of Congress indicate that U.S. retail investors lack basic financial literacy. The studies demonstrate that investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud. Surveys also demonstrate that certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lack of investment knowledge than the average general population.

http://www.sec.gov/news/studies/2012/91 ... -part1.pdf

Investment education and support will increase plan cost but will result in better investment decisions by plan participants.
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Re: Costs are out of control!!! 401(k) Committee

Post by JamesSFO »

manwithnoname wrote:
...
Plan participants need more than the bare minimum services. They need investment education, call centers, advice and other information because of the lack of financial literacy of US investors.
...
Call centers = you can get call centers and other information at the price

As for "real investment education" and "advice", not sure what SPECIFIC items you want here, but aside from offering things like Financial Engines I haven't seen any employer do very much of value.
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Post by JamesSFO »

JamesSFO wrote:
manwithnoname wrote:
...
Plan participants need more than the bare minimum services. They need investment education, call centers, advice and other information because of the lack of financial literacy of US investors.
...
Call centers = you can get call centers and other information at the price

As for "real investment education" and "advice", not sure what SPECIFIC items you want here, but aside from offering things like Financial Engines I haven't seen any employer do very much of value.
Actually, to respond to myself, I think the Boston College Center for Retirement Research has shown the best things employers have done are defaulting plans to opting participants into target-date style funds with automatic increases. This is something available at the Employee Fiduciary price level.
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Re: Costs are out of control!!! 401(k) Committee

Post by lawman3966 »

manwithnoname wrote:Plan participants need more than the bare minimum services. They need investment education, call centers, advice and other information because of the lack of financial literacy of US investors.
. . . snip . . .

Investment education and support will increase plan cost but will result in better investment decisions by plan participants.
Well, it seems that some actually like high plan costs! It makes sense. The investor's cost is the advisor's income. And, therein lies the conflict of interest that will defeat any notion that the advisor will serve as an effective "financial educator." Simply stated, the advisor has a vested interest in keeping his clients as ignorant and as "illiterate" as possible. A prominent financial educator (for whom this forum is named) has stated that investment cost is the only variable in one's portfolio that can be correlated with investment success. Thus, the first thing an educated investor would do, upon learning this, is to quickly fire an advisor charging 2% of assets per year. This forum sees no shortage of people leaving high-fee, glossy firms, with famous names, upon becoming enlightened on this point. Accordingly, one can count on a 401K plan advisor to do everything in his power to conceal fee information, in order to avoid having to deal with that issue. In my own case, it was several years after our plan started that I first discovered what the total of our fees was. And, that took several phone calls and emails to arrive at.

Discussions with fellow employees over the years reveal that a decade of exposure to high-fee advisors did nothing to cure their financial ignorance on other matters. After 10 years of doing business with our high-fee 401K advisor, one colleague suffered from the most basic misconceptions. Specifically, she believed that 401K plans were synonymous with the "stock market", and that 401K account balances necessarily declined as the market tanked. When I briefed her on the topic, she responded as though she was hearing for the very first time that 401K plans included bond funds and money market funds that were independent of the stock market. She learned more from me in five minutes than she had from our advisor in ten years.

Moreover, the employees, even highly educated professionals were completely ignorant of the existence of fees, let alone the impact of the fees over long periods. Several partners were dumb-struck upon being confronted with objective data in a spreadsheet indicating that they would shed six-figure sums of money to their advisor over the course of a career. The less educated employees barely understood what "percent" meant.

To summarize: it's great that one advisor will suggest a 50/50 stock/bond split, where others will suggest a 60/40 split. However, the critical advice that "advised investors" will never hear is that their advsisor is really their adversary and that their interests are in conflict over the most critical feature of their investment plans - the outrageous fees built into most small-employer 401K plans.
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Re: Costs are out of control!!! 401(k) Committee

Post by Rupert »

The investor's cost is not always the advisor's income. It's possible to avoid the conflict of interests that you mention. My company's small 403(b) plan does not pay our advisor out of plan assets. We pay him a quarterly fixed fee to advise the plan committee on the performance of funds in the plan and to educate employees about their investment options. He does not work for the custodian or the TPA. He only works for us.
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Re: Costs are out of control!!! 401(k) Committee

Post by JamesSFO »

Rupert wrote:The investor's cost is not always the advisor's income. It's possible to avoid the conflict of interests that you mention. My company's small 403(b) plan does not pay our advisor out of plan assets. We pay him a quarterly fixed fee to advise the plan committee on the performance of funds in the plan and to educate employees about their investment options. He does not work for the custodian or the TPA. He only works for us.
I concur, however from the perspective of the company the advisor's income is a cost of the plan. If your advisor costs $1K/year and the plan has $100K of assets then from the company's perspective it is equivalent to a 1% ER. It isn't an expense that the investors bear which is good, but it is an expense of running the plan, vs doing something else.
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Re: Costs are out of control!!! 401(k) Committee

Post by lawman3966 »

Rupert wrote:The investor's cost is not always the advisor's income. It's possible to avoid the conflict of interests that you mention. My company's small 403(b) plan does not pay our advisor out of plan assets. We pay him a quarterly fixed fee to advise the plan committee on the performance of funds in the plan and to educate employees about their investment options. He does not work for the custodian or the TPA. He only works for us.
Different types of employers can provide completely different sets of incentives. It's not so much that there are exceptions to the rule as that there are different rules in different employment sectors. In the situation you describe above, the advisor concerned appears to be an advisor to the plan, rather than to the employees. If the company/plan pays him, then it is to the company/plan that the advisor owes a fiduciary obligation, and it makes sense, in that setting, that this imposes no burden on the employees. A friend of mine has a 403(b) with TIAA-CREF and seems to get excellent sevice from them at a reasonable cost. This is simply not comparable to the situation most employees of small private employers are in.

Advisor costs in most private sector 401K plans do indeed impose costs on the employees. Moreover, the costs are not limited to a single AUM fee paid to a single person or entity. High-fee plans could be better referred to as multiple-fee-to-multiple-unnamed-beneficiary plans. High fee plans tend to come with high AUM fees charged against each participant's entire balance, high expense ratios, high loan fees (for those who choose to take loans from their plans), among a plethora of other fees. If you're interested, there is a series of Bloomberg videos, dating from 2009 or so, describing the misadventures of several 401K investors who attempted to determine just what their fees were. One person was subjected to so much obstruction that she hired a private investigator to uncover the fee structure. In all, not two, but seventeen fees were charged against that investor's balance, totalling about 12% of assets per year.

For the above reasons, in case an investor does not work for one of the exceptional employers, but rather for a more typical one, it would behoove that person to investigate the fees, and, if possible, work toward getting a provider that can lower them. While I never succeeded in changing a plan that was already established at an employer, I learned enough about the system to be able to recommend a better provider upon moving to a new employer, and to have that better provider adopted.
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Re: Costs are out of control!!! 401(k) Committee

Post by Dutch »

"investment adviser" is code for sales man
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Re: Costs are out of control!!! 401(k) Committee

Post by jnet2000 »

pkcrafter wrote:Check Employee Fiduciary and Costco.

Costco--

http://www.theonline401k.com/d401k/ecs/ ... index.html

Paul
I highly recommend the Online 401k because I use them for my small business retirement plan. They are the TPA that Costco uses. However, I went with a custom plan document. I pay about a little over $ 2000 per year for administration and we use MG Trust as the custodian for our Vanguard funds. They charge .07 basis points and we have access to signal shares. Their customer service has been excellent! I did not receive the same level of customer service with Employee Fiduciary when I was researching TPAs but they are also low cost. Good luck.
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Re: Costs are out of control!!! 401(k) Committee

Post by IlliniDave »

I read threads like these and I wonder if I'm hopelessly naive and misinformed.

My employer is a moderately large public corporation with on the order of 100,000 employees. They recently retooled the 401(k) to be primarily low cost index funds (including one from VG) with extraordinary fees (in a good way, better than I'd ever receive as an individual client at VG). Fees for record keeping, legal expenses, educational material, and the like are are distributed equally (in dollars) among participants. For me they come in at around 0.05% of my total account (would be higher for people with smaller balances, less for people with more).

Most of the funds are institutional classes of funds open to the general public, and the returns are commensurate. Some of the index funds are from Northern Trust, and I can't link them with a publicly available fund, but they do appear to track their target indexes within the < 0.1% expense ratios. The plan is administered through Fidelity.

So, if someone is bilking me for 2% or more, why can't I find it? For people with 401 plans that do have unfavorable administrative expenses, is it apparent what the expenses are if you go looking for them (in statements/online account information/plan documents)?

Or, do I just have some sort of model 401(k) for which I should just count my blessings?
Don't do something. Just stand there!
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Re: Costs are out of control!!! 401(k) Committee

Post by lawman3966 »

IlliniDave wrote:I read threads like these and I wonder if I'm hopelessly naive and misinformed.

My employer is a moderately large public corporation with on the order of 100,000 employees. They recently retooled the 401(k) to be primarily low cost index funds (including one from VG) with extraordinary fees (in a good way, better than I'd ever receive as an individual client at VG). Fees for record keeping, legal expenses, educational material, and the like are are distributed equally (in dollars) among participants. For me they come in at around 0.05% of my total account (would be higher for people with smaller balances, less for people with more).

Most of the funds are institutional classes of funds open to the general public, and the returns are commensurate. Some of the index funds are from Northern Trust, and I can't link them with a publicly available fund, but they do appear to track their target indexes within the < 0.1% expense ratios. The plan is administered through Fidelity.

So, if someone is bilking me for 2% or more, why can't I find it? For people with 401 plans that do have unfavorable administrative expenses, is it apparent what the expenses are if you go looking for them (in statements/online account information/plan documents)?

Or, do I just have some sort of model 401(k) for which I should just count my blessings?
In brief, you have a model 401K, and should count your blessings.

Not all 401K plans suffer from the problems discussed above. If an employer is both (a) large; and (b) is well intentioned towards its employees, employees may be completely free of AUM type advisory fees, and could well have ERs equal to, or below, what they'd pay as private investors opening an account at Vanguard or Fidelity.

Large employers can usually open 401K plans directly with mutual fund companies like Fidelity or Vanguard. If the employer pays the administrative fees (recordkeeping and TPA fees), then the employees will usually only pay the ERs for the funds themselves which are usually low. A problem arises for smaller firms because the mutual fund companies usually won't do business directly with small firms due to the inefficiency of providing the plan administration paperwork etc for small entities. That opens the door for 401K provider firms who are willing to do this work, but only on condition that they establish high, and commonly poorly disclosed, fee arrangements.
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Re: Costs are out of control!!! 401(k) Committee

Post by manwithnoname »

MossySF wrote:
manwithnoname wrote:So each of the 3.7 million participants in retirement plans funded by TIAA-CREF annuity contracts can sue their employer and T/C merely because the funds are invested in an annuity?
Unfortunately, the "annuity" label is used confusingly. All 403(b) plans are named annuities whether they actually sit inside an annuity wrapper or not. Here's the official description from the IRS publication:

Code: Select all

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.
Maybe at sometime in the past, you had to take your 403b payout in the form of an annuity and this is a left-over artifact. No clue.

But if you do have a retirement fund inside an additional annuity wrapper, that annuity wrapper simply adds extra fees for no purpose and the fiduciary of the plan can be liable -- assuming the plan falls under ERISA laws which some 403(b)s don't.
Where do you get your information? TIAA is a legal reserve life insurance company established in 1918. Has nearly 300B in assets. CREF was established as a variable annuity company in 1952. While CREF also has mutual funds available for retirement plan, most of CREF's assets are held in the Variable annuity form.

http://en.wikipedia.org/wiki/TIAA-CREF

The TIAA annuity form serves to provide a fixed income benefit for life. One important reason a TIAA annuity is a better retirement benefit than a mutual fund is because TIAA retirement payments are not only guaranteed but increase each year because the company plows back its stock dividends to retirees annuities. No additional fee is charged to participants for such benefit. CREF provides a variable payment for life.

Where has there been a law suit against a fiduciary for funding a plan using an annuity contract which is a legal funding instrument for both 403(b) and corporate retirement plans under Section 403(b)(1) of ERISA (which is separate law from the IRC)? An annuity contract is legally permitted to be used to provide retirement benefits because the mortality charge which guarantees fixed payments for the life of each retiree is used for exclusive benefit of paying their lifetime benefits. One of the purpose of ERISA was to provide for lifetime payment to retirees. Using an annuity to pay retirement benefit is consistent with the purpose of ERISA.
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Re: Costs are out of control!!! 401(k) Committee

Post by manwithnoname »

Rupert wrote:The investor's cost is not always the advisor's income. It's possible to avoid the conflict of interests that you mention. My company's small 403(b) plan does not pay our advisor out of plan assets. We pay him a quarterly fixed fee to advise the plan committee on the performance of funds in the plan and to educate employees about their investment options. He does not work for the custodian or the TPA. He only works for us.
The reason you can pay the advisor a quarterly fee is that providing information on the performance of the funds is not a fiduciary duty since the decision to change the funds in the plan is the responsibility of the plan investment committee. Enrolling participants is a administrative role also not a fiduciary responsibility. Anyone can enroll participants. No advisor is going to perform a fiduciary duty to a retirement plan for an hourly fee.
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Re: Costs are out of control!!! 401(k) Committee

Post by Rupert »

Actually, our advisor contractually agreed to assume fiduciary responsibility along with the plan committee members and company directors. I have it in writing.
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Re: Costs are out of control!!! 401(k) Committee

Post by tom0153 »

pdc3610 wrote:I am looking for help from others who have successfully tackled the 401(k) plan at work. I am currently on a workplace 401(k) committee looking to change the plan over the next 9 months. Our goal is to take it slow enough to get it right. My primary concern is not the expense ratios of the undlerying funds (although index options will be added) but rather the administrative costs of the plan itself. Up to this point the administrative costs have been rolled up into the funds leading to expenses of over 2%. We are looking to change this by having the company pay the administrative costs, thereby keeping the investment gains in the employee's accounts. Here is a breakdown of the proposed costs:

· Recordkeeping/TPA costs: $6,820 (0.89% of plan assets) – this is the amount the employer would cover if you want to pay for the administrative costs of the plan.
· Investment Advisor’s Fee: $5,775.86 (0.75% of plan assets)
· Revenue Sharing (paid from the investment expenses): -$1,813.17 or (-0.24% of plan assets)
· Investment Expenses: $6,717.12 (0.87% of plan assets)

As you can tell this is a small business with a total plan of less than 1 million. It is important for us to be in an "open architecture" plan in order to keep fees for the employees low.

Questions:
1) Are all of these items required under ERISA? If not, what can be eliminated and what is the alternative?
2) I'm not certain what the "Investment expenses" is paying for? I believe this is the anticipated expense ratio using the recommended actively managed funds. If so, this will also be addressed by the addition of index funds though I will need to ensure that they are included in the "pre-fab" portfolios employees can select based on risk. Any thoughts?
3) I have read the wiki article. Are there other resources anyone can recommend to help me "guide" this committee? I feel like I am the most knowledgable person on the committee with regards to the impact of expenses and overall investing but I still feel a bit overwhelmed with the regulations and potential personal liability of making an incorrect recommendation. This is very different (it feels at least) from managing my personal retirement accounts.
4) If I am fully understanding the proposal our business would pay the first three bullets (~$10,750) and leave the employees with the cost of the investment expenses. Does this seem correct?

I appreciate any help and examples of successes that can be shared.
From the vantage of the sponsor: http://www.psca.org/ Some info is for members only. Dues schedule for small plans is reasonable.

For an intro to these plans, this guy does a great job: https://www.khanacademy.org/economics-f ... /v/401-k-s

This should be helfpul. You can "search" on "fees and expenses."
Best, Tom
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Re: Costs are out of control!!! 401(k) Committee

Post by manwithnoname »

Rupert wrote:Actually, our advisor contractually agreed to assume fiduciary responsibility along with the plan committee members and company directors. I have it in writing.
Is he an RUA?

Cant be a broker because he is not collecting commissions.
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Re: Costs are out of control!!! 401(k) Committee

Post by MossySF »

manwithnoname wrote: Where has there been a law suit against a fiduciary for funding a plan using an annuity contract which is a legal funding instrument for both 403(b) and corporate retirement plans under Section 403(b)(1) of ERISA (which is separate law from the IRC)? An annuity contract is legally permitted to be used to provide retirement benefits because the mortality charge which guarantees fixed payments for the life of each retiree is used for exclusive benefit of paying their lifetime benefits. One of the purpose of ERISA was to provide for lifetime payment to retirees. Using an annuity to pay retirement benefit is consistent with the purpose of ERISA.
The topic of this thread is 401Ks so the perspectives here is fully from employees putting money into mutual funds w/o an insurance company taking an extra cut for absolutely no purpose. For example, there have been many successful SEC actions against brokers who put IRA money into an annuity which has the sole purpose of providing tax-deferment which duplicates the IRA's tax structure. Any company who uses an insurance company to tack on an extra 2% fees to a 401K would be at legal risk.

403(b)s though .... shrug ... it's a strange land filled with government, union and insurance corp politics.
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Re: Costs are out of control!!! 401(k) Committee

Post by manwithnoname »

MossySF wrote:
manwithnoname wrote: Where has there been a law suit against a fiduciary for funding a plan using an annuity contract which is a legal funding instrument for both 403(b) and corporate retirement plans under Section 403(b)(1) of ERISA (which is separate law from the IRC)? An annuity contract is legally permitted to be used to provide retirement benefits because the mortality charge which guarantees fixed payments for the life of each retiree is used for exclusive benefit of paying their lifetime benefits. One of the purpose of ERISA was to provide for lifetime payment to retirees. Using an annuity to pay retirement benefit is consistent with the purpose of ERISA.
The topic of this thread is 401Ks so the perspectives here is fully from employees putting money into mutual funds w/o an insurance company taking an extra cut for absolutely no purpose. For example, there have been many successful SEC actions against brokers who put IRA money into an annuity which has the sole purpose of providing tax-deferment which duplicates the IRA's tax structure. Any company who uses an insurance company to tack on an extra 2% fees to a 401K would be at legal risk.

403(b)s though .... shrug ... it's a strange land filled with government, union and insurance corp politics.
Where does the SEC say that putting funds into an IRA that is funded with an annuity contract is a violation of the securities law when the IRC specifically allows an IRA to be funded with an annuity See IRC 408(b) - " Individual Retirement Annuity" issued by an insurance company to provide lifetime income. I have reviewed and submitted IRAs funded by an annuity contract to government agencies including the SEC without anyone ever questioning the duplicate tax deferral because the annuity is specifically permitted under all applicable laws.

See link to SEC Investor tips on Variable annuities which notes that there is no additional tax benefit provided by investing an IRA funded by a variable annuity but does not state that such investment is a violation of the securities law. The SEC bulletin states that investors should purchase a VA for reasons other than tax deferral such as a lifetime stream of income and the guaranteed death benefit but it is not prohibited to invest IRA funds in a variable annuity.

http://www.sec.gov/investor/pubs/sec-gu ... uities.pdf

I think that you are trying to BS your way out the corner you have backed your self into with your unsupportable statements.
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Re: Costs are out of control!!! 401(k) Committee

Post by MossySF »

manwithnoname wrote:I think that you are trying to BS your way out the corner you have backed your self into with your unsupportable statements.
I give sway to your legal knowledge. Companies should definitely hire you when crafting ways to put an annuity inside a retirement plan.
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Re: Costs are out of control!!! 401(k) Committee

Post by Rupert »

manwithnoname wrote:
Rupert wrote:Actually, our advisor contractually agreed to assume fiduciary responsibility along with the plan committee members and company directors. I have it in writing.
Is he an RUA?

Cant be a broker because he is not collecting commissions.
I don't know what an RUA is. He's definitely not a broker. The letters after his name on his business card are CPA, CIMC and AIF.
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Re: Costs are out of control!!! 401(k) Committee

Post by Oilburner »

The place I left earlier this year had plan assets under a million (now they are under $500,000 :D ) with near 2% ERs. What I did before I left was present the boss with a proposal from Vanguard Small Business 401k. They will do all the work and develop the proposal. The fees were under half of what my old company paid. Boss never said a word about the proposal so I found employment elsewhere and am saving $5000 a year in plan fees for the same retirement fund.

Contact Vanguard see what they can do for you.
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Re: Costs are out of control!!! 401(k) Committee

Post by meowcat »

MossySF wrote: Any company who uses an insurance company to tack on an extra 2% fees to a 401K would be at legal risk.
My company does this, as do many, many companies, and mine is much higher than 2%. My 401(k) that's wrapped up in an annuity contract with John Hancock is listed on Bright Scope as being in the top 15% of the most expensive plans in existence. Since it is virtually impossible to calculate my "all in" expenses without a forensic scientist, I'm guessing my expenses are well over 4%. According to JH and my employer, those fees are fair and reasonable and there isn't a darn thing I can do about it outside of leaving the plan. It disgusts me to no end that they can legally steal your money without you knowing about it and then lie to you when asked, and it's all perfectly legal!! Hundreds of thousands of dollars stolen, legally!!
DOL 408(b)(2) is a joke and cannot be taken seriously. The regulation still very much favors Wall Street. We need more. Mr. Bogle, HELP!
What the bold print givith, the fine print taketh away. | -meowcat
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Re: Costs are out of control!!! 401(k) Committee

Post by lawman3966 »

Oilburner wrote:The place I left earlier this year had plan assets under a million (now they are under $500,000 :D ) with near 2% ERs. What I did before I left was present the boss with a proposal from Vanguard Small Business 401k. They will do all the work and develop the proposal. The fees were under half of what my old company paid. Boss never said a word about the proposal so I found employment elsewhere and am saving $5000 a year in plan fees for the same retirement fund.

Contact Vanguard see what they can do for you.
I feel your "gain." I unsuccessfully pushed for a provider change at one employer because of 2% AUM fees. A few months later, unrelated events led to me leaving that firm for another. Rolling my 401K balance over to Vanguard instantly began saving me about $3500 a year in fees.
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Re: Costs are out of control!!! 401(k) Committee

Post by leonard »

pkcrafter wrote:Check Employee Fiduciary and Costco.

Costco--

http://www.theonline401k.com/d401k/ecs/ ... index.html

Paul
Last time I looked at the Costco plan - they had a .25 or .35% AUM fee buried in the literature. Read carefully.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: Costs are out of control!!! 401(k) Committee

Post by lawman3966 »

meowcat wrote:
MossySF wrote: Any company who uses an insurance company to tack on an extra 2% fees to a 401K would be at legal risk.
My company does this, as do many, many companies, and mine is much higher than 2%. My 401(k) that's wrapped up in an annuity contract with John Hancock is listed on Bright Scope as being in the top 15% of the most expensive plans in existence. Since it is virtually impossible to calculate my "all in" expenses without a forensic scientist, I'm guessing my expenses are well over 4%. According to JH and my employer, those fees are fair and reasonable and there isn't a darn thing I can do about it outside of leaving the plan. It disgusts me to no end that they can legally steal your money without you knowing about it and then lie to you when asked, and it's all perfectly legal!! Hundreds of thousands of dollars stolen, legally!!
DOL 408(b)(2) is a joke and cannot be taken seriously. The regulation still very much favors Wall Street. We need more. Mr. Bogle, HELP!
My understanding was that, prior to the rule change in 2012, the 401K provider didn't have to volunteer fee information, but had provide the info, if the participant specifically asked about it.

I also understood that, after the rule change, providers had to disclose all fees without being asked, though I've heard that the disclosure information is vague, and sometimes distributed over dozens of pages of plan documents, making it difficult to decipher. However, I thought that lying to you about your fees was fraud, and was a criminal offense. Is this wrong?
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Re: Costs are out of control!!! 401(k) Committee

Post by leonard »

manwithnoname wrote:
leonard wrote:Way to many and too much expenses.

If you go with Employee Fiduciary or a close runner up - total - TOTAL - plan expense ratio should be about .5% of invested plan assets averaged over the first 4 years or so. That's total including all administrative expenses AND the (index) fund expense ratios. Anything higher than that is paying for stuff employees don't need. As the invested base grows .5% should quickly become .4%.
Plan participants need more than the bare minimum services. They need investment education, call centers, advice and other information because of the lack of financial literacy of US investors.

According to a 2012 SEC study :

Existing Level of Financial Literacy. Studies reviewed by the Library of Congress indicate that U.S. retail investors lack basic financial literacy. The studies demonstrate that investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud. Surveys also demonstrate that certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lack of investment knowledge than the average general population.

http://www.sec.gov/news/studies/2012/91 ... -part1.pdf

Investment education and support will increase plan cost but will result in better investment decisions by plan participants.
So, it's only low cost investing if we are on bogleheads? but, label it "401k" and we need to spend more in order to get educated. Let's update the wiki - I am never gonna remember all these exceptions to low cost. On your non-401k investments - would you really pay an extra .25% or .5% AUM fee just to be able to call a help line?

Edit: btw - how "expensive" is a quarterly PPT covering plan options, reasoning for the plan options, and how to enroll? Or a brown bag a quarter. Pretty easy. And, cheap.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: Costs are out of control!!! 401(k) Committee

Post by meowcat »

lawman3966 wrote:
meowcat wrote:
MossySF wrote: Any company who uses an insurance company to tack on an extra 2% fees to a 401K would be at legal risk.
My company does this, as do many, many companies, and mine is much higher than 2%. My 401(k) that's wrapped up in an annuity contract with John Hancock is listed on Bright Scope as being in the top 15% of the most expensive plans in existence. Since it is virtually impossible to calculate my "all in" expenses without a forensic scientist, I'm guessing my expenses are well over 4%. According to JH and my employer, those fees are fair and reasonable and there isn't a darn thing I can do about it outside of leaving the plan. It disgusts me to no end that they can legally steal your money without you knowing about it and then lie to you when asked, and it's all perfectly legal!! Hundreds of thousands of dollars stolen, legally!!
DOL 408(b)(2) is a joke and cannot be taken seriously. The regulation still very much favors Wall Street. We need more. Mr. Bogle, HELP!
My understanding was that, prior to the rule change in 2012, the 401K provider didn't have to volunteer fee information, but had provide the info, if the participant specifically asked about it.

I also understood that, after the rule change, providers had to disclose all fees without being asked, though I've heard that the disclosure information is vague, and sometimes distributed over dozens of pages of plan documents, making it difficult to decipher. However, I thought that lying to you about your fees was fraud, and was a criminal offense. Is this wrong?
My understanding is that the DOL regulation specifically states "administrative" costs must now be fully disclosed. In a 401(k) plan that has its assets wrapped up in an annuity contract only about one fourth of the expenses can be considered "administrative", (just a guess, on my part) and those fees, according to DOL 408(b)(2) must be disclosed. A "wrap" fee alone can be over 2% and is not an administrative cost, therefore, exempt from 408(b)(2) disclosure. Mortality rate fees, also, are non administrative costs. At last count, there were at least 17 different non administrative fees that a plan could deduct from your assets without you ever knowing about it and they will never be disclosed to you. This is what I refer to as "legalized theft". I guess I didn't really mean to say they can legally lie about it but the reality is, they just don't know. In reading "The four pillars of investing" by Bill Bernstein I get a pretty clear picture of the theft and deception that is somehow "legal". See, the truth is that nobody you will ever speak with in investigating your plan costs will have a clue what they really are. This goes up higher than you might imagine. Apparently, the theft and deception run so deep and are so complex that even senior management doesn't know what the costs actually are or how they're implemented, or why. The only way for sure to get a real picture of what your actual costs are is to speak to the person that engineered them, all of them. Of course, that is a virtual impossibility, at least in an annuity contract 401(k).
What the bold print givith, the fine print taketh away. | -meowcat
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