Earlier this year, John Oliver and his team decided to offer a 401(k) plan.
Vetted by their parent company, the team was told they had a new 401(k) plan with John Hancock. The team celebrated the new benefit and went back to what they normally did: unearth obscure treasures in the troves of the internet. (John Oliver hosts a weekly, late night comedy program on HBO – if you didn’t already know that this blog post wouldn’t make much sense at all!)**But when their new 401(k) provider, John Hancock, came on-site to deliver their typical 401(k) seminar, things quickly unraveled. **
They learned that 401(k) plans are a gold mine for financial service companies. There can be A LOT of different fees.And people can easily make small mistakes which could seriously cost you down the line. John cites an example of someone with a portfolio seeing a 7% return, but paying 2% in fees. After 50 years, because of those fees, two-thirds of what you would have had are gone. The team went through the documents and started adding up their fees, which came out to a combined 1.69%. And this was before they paid a $24 per participant per year fee AND the fees on the funds. When asked why the fees were so high, John Hancock responded these fees were normal for a start up plan at a smaller company (the fees go down once the company gets larger). (Translation: small businesses pay more in fees than larger companies). Independent of John Oliver’s exploration, our team at ForUsAll recently analyzed John Hancock cost data from our clients using their recordkeeping services and found that they charged similarly sized plans vastly different amounts ranging from .97% to 2.5% of assets!
NEXT John Oliver’s team found an intermediary fee to pay for a broker! And this broker was charging each person in the plan 1% for the first year, and 0.5% the year after.As for the fees, the broker said the fees would come down and explained how they would come down as the fund assets grew. Except the chart the broker sent them was wrong, and he quickly sent a new version showing that his original math estimating the fund’s assets was off by $10 million.
The bad math and high fees led John Oliver and his team to ask, “What does a financial advisor do? And what qualifications do they actually have?”
What they learned is that, according to FINRA (the Financial Industry Regulatory Authority), the terms “financial analyst, financial advisor, financial consultant, etc.” are just fancy terms which don’t alwaysrequire a license or qualification to use them.
They also learned that even many well-credentialed financial advisors are paid on commissions. So if they recommend something for you, it may be because they stand to make money.
**In fact, sometimes your financial advisor could be actively incentivized to not act in your best interest. Unless they are a fiduciary. **
Because not all financial advisors are bound to act in your best interest, but fiduciaries are.
If you don’t pay close attention, all of this can really get away from you. And now might be a very good time to ask whether your 401(k) provider is a fiduciary.
The good news is, back in April, the Department of Labor finalized a rule that all advisors handling retirement accounts must act as a fiduciary by the beginning of 2017.
It took both the research and accounting team at John Oliver’s TV production group a lot of time and effort to understand their own 401(k), including the fees they were being charged.
It shouldn’t be this confusing.