Yale Professor Ian Ayres has the solution for any retirement investor that might dare to opt-out of a poorly performing 401k plan default option and seek to select an investment that is in his or her best interest. Here is the link to his proposal, in a February 2014 white paper, co-authored with Professor Curtis, at the University of Virginia,
We congratulate Professor Ayres and Professor Curtis for once again highlighting the incredible losses retirement investors are suffering from 401k plans stuffed full of poorly performing funds and excessive fees, which they succinctly define in this paper. However, Professors Ayres and Curtis join the recent explosion in academic literature that provides fancy formulas to mandate the necessity that for the average American to retire with an adequate nest egg, they must use sales personnel to achieve their goals and pay an additional and redundant intermediary fee that academics have yet to prove of any value to society and is most likely contributing to unnecessary taxpayer regulatory costs, Ponzi schemes and elder abuse/financial fraud.
Further, Professor Ayres eloquently defines how it is a necessity to achieve a “politically palatable” reform, to place the revenues of financial services firms over the economic welfare of the masses, achieved through newly-proposed government regulations that inhibit free choice.
In a multiple part series, The Derivative Project will highlight the emergence of anti-competitive, monopolistic trends that are developing in the defined contribution retirement marketplace. Recent academic literature, presented by many Professors that receive income from financial services firms, justifies an archaic distribution system that ignores current technological innovations and more cost-effective, efficient delivery platforms. These “papers” are being used to justify the now very apparent monopolistic trends that are inhibiting free market competition who are (1) charging a higher price than in a more competitive market, (2) restricting choice for consumers and (3) impacting economic welfare for society overall.
Professor Ayres is joined with similar academic rationale, as highlighted in the White Paper below, a financial advisor rationale ‘formula’ created by Professor Olivia Mitchell, Wharton School, University of Pennsylvania, in her August 2013 White Paper:
It should be noted that Professor Mitchell, is the International Foundation of Employee Benefit Plans Professor, at Wharton, in addition to serving as a Director, since 2006, of the Wells Fargo Advantage Trust Board to which she earns an annual salary of $252,500, as publicly disclosed by Wells Fargo.
Both Professor Ayres and Professor Mitchell have developed an academic thesis that a retirement investor is not capable of selecting a money manager on their own or as Professor Mitchell’s formula has determined does not have the time to invest to learn to choose an investment on their own to assure proper diversification and negative behavioral biases that impend rational investment selections, as evidenced by this formula taken from Professor Mitchell’s “Time is Money” white paper linked to above.
Professor Mitchell’s Formula – Rationale for Financial Intermediaries – Sales Personnel in Defined Contribution Plans:
Wells Fargo reported in Forbes, July 12, 2014, record profits in its Wealth Management division, Forbes wrote:
“No one does it better than Wells Fargo with its 15,268 financial advisors who on average cross-sell 10 products per household making it a leader among wealth management firms.” ”
It gets even more impressive on the profit side where wealth management at Wells reported a 29% increase year over year and was up 27% from the previous quarter. The unit took in $434 million for net income making it the smallest of the bank’s segments but also the fastest growing.
It’s no wonder then that almost every big bank has made wealth management a big priority. The fees are steady and the assets are sticky especially when banks can reel clients in on both the banking and brokerage side.”
The model is clear: These out-sized profits come directly from the retirement nest egg of every American.
Further, Professor Robert Merton recently wrote in the July 2014 Harvard Business Review, “The Crisis in Retirement Planning” where he stated: ‘To begin with, putting relatively complex investment decisions in the hands of individuals with little or no financial expertise is problematic.” Professor Merton is Professor of Finance at MIT Sloan School of Management and a University Professor Emeritus at Harvard.
Professor Merton is also a “resident scientist’ at Dimensional Fund Advisors, a Texas-based asset management firm, that manages retirement assets, sold through an army of sales personnel that charge a 1.25% fee (up to $500,000) to access the Funds that Dimensional Fund Advisors packages, as highlighted in this ADV filed at the SEC by Buckingham Asset Management LLC.
Professor Merton, Professor Ayres, and Professor Mitchell have all failed to factor into their formulas that if an individual investor pays an intermediary 1.25%, in the case of distributors for Dimensional Fund Advisors, for predominantly passive mutual funds, in addition to brokerage fees, administrative plan costs, the retirement investor is simply better off not participating in the retirement plan, unless there is at least a 10% corporate match to compensate for the fees.
The Derivative Project agrees completely with Professor Merton that individuals should have professional money managers, fiduciaries, managing their retirement nest egg. Financial intermediaries, such as those at Buckingham, that distribute Dimensional Funds, are sales personnel, not money managers that file holdings, portfolio turnover and performance after all fees at the SEC on a regular basis. The retirement investor has no bona fide price discovery with the introduction of these financial intermediaries contributing to anti-competitive factors and has no knowledge of actual performance after all fees.
The Derivative Project, believes in a competitive marketplace, with bona fide price discovery, tools and information, investment selection of core “qualified default investment alternatives” in defined contribution plans is best accomplished by an engaged retirement investor who takes charge and is not dependent on conflicted sales personnel, with a potentially fraudulent/misrepresentative label of “Advisor.”
The Derivative Project contends that conflicted financial services firms in defined contribution plans have breached their ERISA mandate on providing mandated investment selection information in a coherent fashion, an anti-competiive factor and breach of ERISA.
The Derivative Project is soon to launch a new retirement platform that addresses the elimination of conflicted and redundant sales distribution fees, such as those at Buckingham Asset Management, linked to above. Professor Ayres’ Department of Labor proposal described in his paper above, presents anti-competitive roadblocks that limit retirement plan participation in such a platform and limit free consumer choice. Further, it appears to be seeking to codify a predatory and costly distribution system through misrepresentative formulas/research to maintain financial service industry revenues, at the expense of economic welfare for society overall.
Part II, which is forthcoming, will review flaws in these academic analyses, as background for examination of Professor Ayres’ brilliant Department of Labor financial sophistication test.