The Whys Behind Super Normal Profits for Wall Street in 401k Plans:
What is Yale Professor Ayres’ proposed solution to protect consumers from Wall Street shenanigans in 401k plans? Double down! Now that the facts and transparency are coming out about the skimming, over the last 30 years, from workers’ retirement accounts, let’s ensure that consumers cannot escape the rampant looting. Lock them in to protect the financial services revenue streams. It is the most “politically palatable” solution states Professor Ayres, in his published paper: “Beyond Diversification: The Pervasive Problem of Excessive Fees and”Dominated Funds” in 401k Plans.”
To re-enforce Professor Ayres’ proposed Department of Labor mandated financial sophistication test, ensure top Ivy League East-Coast academics have laid the “academic” groundwork to justify that consumers are “financially illiterate” and are not capable, no matter how much ERISA-mandated investment selection education, on how to select a portfolio manager. Remember, since the inception of 401k’s, all “financial education” has been provided by Wall Street, as studies have now shown, all designed to increase “learned helplessness” and a dependency on a financial advisor to increase financial services firms’ revenues.
Not On My Nickel research supports the fact that with the proper tools and transparency, every retirement plan participant is capable of making an informed choice. Not On My Nickel research has determined that it has been the massive advertising assault, subliminal messaging and conflicted financial education provided by Wall Street, that has created a behavioral state of “learned helplessness” in the workplace. Retirement investors have been overwhelmed by conflicting theories, false advertising, and a regulatory environment that has created a monopolistic 401k environment, where high fee, poorly performing asset management schemes have been allowed to thrive, in concert with a “captured” Department of Labor and SEC. It is now apparent the Department of Labor ERISA rules and interpretations have been relying on these “quasi-academic” papers that are funded by the financial services industry to advance Wall Street’s latest revenue scheme, at the expense of the worker.
Monopolistic Trend Number One – Regulatory Capture Has Prevented Normal Price and Value Discovery for the Consumer in Retirement Plans
A US Regulatory environment (Department of Labor and SEC) have allowed poorly performing product and fraudulent representation of sales personnel as “financial advisors” in ERISA and IRA plans for over 30 years. Normal supply and demand forces would allow price discovery and normal consumer behavior to (1) Have the means to select the most-cost effective option in their best interest and (2) determine if an intermediary is adding value, based on performance and all-in fees. The current regulations are further supported by the courts and self-regulation. Fiduciary breaches in IRA plans are subject to mandatory arbitration by a Wall Street kangaroo court and no private right of action. 401k plans allow a private right of action, but the web of fiduciary law is so complex that it is years before, if ever, a harmed consumer can get justice and his nest egg returned to him due to fiduciary breaches.
For example, the courts ruled in Hecker v Deere that fiduciary duty was not breached due to very high fee investment options, since the plan participant could go to their Brokerage Window. However, it is abundantly clear, through Not On My Nickel participant plan research, every 401k DOL mandate to educate a plan participant on every investment option was breached. No Wall Street ERISA-mandated educational seminar has ever educated a plan participant on what a “Brokerage Window” is and when to use it. Why? The conflicts of interest are too great by the Advisor delivering the “financial education.”
Monopolistic Trend Number Two – Agencies, Such as the FDA Require Analysis, Years of Testing and Approval Before, a new Product (Drug) is Brought on the Market
The Department of Labor does not test Wall Street product recommendations, before implementation. The Department of Labor is presented a “quasi-academic” study, funded by Wall Street and allows Wall Street to implement their new “products” without years of parallel performance analysis, comparable to FDA studies, to determine if the “new product” is in the consumer’s best interest. Consumers have lost billions of dollars in retirement savings, due to lack of performance analysis, prior to product implementation.
For example, in 2008, the new-fangled “Target Date Funds”, such as Oppenheimer’s Target Date 2010, lost close to 45% of its value. Many retirees were forced backed to work. There were and are many acceptable alternatives for Qualified Default Investment Alternatives (QDIA’s) that should have been run in a parallel test against proposed Target Date Funds, prior to their use by consumers. Consumers suffer the losses due to failed products and Wall Street suffers no consequences, while ever-increasing revenues continue to explode, without delivering commensurate value to the consumer. Read the Kiplinger article, linked to above. Kiplinger infers it is the investors own ignorance for not understanding how Target Date Funds, work. What happened to the ERISA mandate for employee education to plan participants on how Target Date Funds work? The article faults the consumer vs a very conflicted financial education provider, Wall Street.
We explore below the latest failed “product” offered by Wall Street, Managed Accounts,that simply loots from the consumer, with no recourse. In this instance, following a just-released GAO report, the Department of Labor, after billions of dollars of unnecessary losses to retirement nest eggs, now agrees to “study” the losses and perhaps propose new regulations to protect the consumer, that might be implemented in 30-40 years—based on Wall Street’s stellar lobbying record.
Monopolistic Trend Number Three – When It looks like Free choice and full transparency may end a revenue stream; Seek regulation to mandate the revenue stream
Yale Professor Ian Ayres’ proposes a new Department of Labor Financial sophistication test. The consumer, would have to pass a test to get out of their “EQDIA”,(enhanced qualified default investment alternative) such as a passive investment or managed account. What is the danger in that? Well it is now becoming dreadfully apparent, these Managed Accounts and a thrown together “portfolio of passive funds” are not suitable options:
(1) There are no standards for financial advisors or mandated experience on who is picking the choices in a Managed Account. The SEC Investment adviser registration (ADV) requires disclosure to the Consumer: “Please note that the use of the term “registered investment adviser” and description of our firm’s wealth management and/or our associates as “registered” does not imply a certain level of skill or training.” The real world knows these “Advisors” are but sales personnel, with no portfolio manager training or experience, conflicted due to compensation schemes and now they are playing the role of money manager in Managed Accounts, with no prior experience. Retirement investors deserve access to the best money manager. Performance matters.
The DOL allows these conflicts, as long as they are disclosed in size two font, in a six page document.
Does 401k Plan Performance Really Matter?
The most recent and blatant example of this ongoing Department of Labor brilliant control by Wall Street, is this GAO report on the conflicts of 401K Plan Managed Accounts: “401k Plans: Improvements Can be Made to Better Protect Participants in Managed Accounts.”
“GAO found that the potential long-term effect of managed accounts could vary significantly, sometimes resulting in managed account participants paying substantial additional fees and experiencing lower account balances over time compared to other managed account participants. Further, participants generally do not receive performance and benchmarking information for their managed accounts. Without this information, participants cannot accurately evaluate the service and make effective decisions about their retirement investments. Even though DOL has required disclosure of similar information for 401(k) plan investments, it generally does not require sponsors to provided this type of information for managed accounts”.
Not On My Nickel wrote on July 29, 2013, “Advisors and No Audited Performance Standards: Simply Too Great a Risk”.
The Recent GAO Report Determines DOL Allows Potential Fiduciary Conflicts and Employers (or “Fiduciary Advisors”) Forgot to Consider Performance When Selecting Managed Accounts
Whoops, how convenient for Wall Street. How to get a new product into 401k plans and not have to worry about performance? Just collect the fees. Employees will never figure it out, they are “financially illiterate.”
The GAO agreed with Not On My Nickel. Yes, performance does matter, as do fees, to the growth of a 401K nest egg. The question for academics to address is what is so wrong with the Department of Labor and SEC that they are putting Wall Street’s interests before the interests of society overall. What is the role quasi-academic studies are playing in advising the DOL on poor choices for retirement investors? How simple would it have been to test the efficacy of Managed Accounts and Target Date Funds
prior to putting retirement nest eggs at risk? The FDA tests drugs and other items before release. One would assume the retirement nest egg would only be placed by fiduciaries in fully-tested products, with a minimum of five year performance results, after all fees, as compared to what are deemed leading investment defined contribution plan solutions. Employees believe employers are acting in their best interest.
The solution proposed by Professor Ayres’ “enhanced default option” is also flawed, as these products/default alternatives have not yet been tested. These products have been pushed by academic studies funded by Wall Street. Review the contributions by two Wharton Professors, Professor Olivia Mitchell and Professor Kent Smetters 2013 Oxford University Press publication, The Market for Retirement Financial Advice.
Professor Mitchell serves on the Board of Wells Fargo Advantage Funds, where she receives compensation of over $252,000 and Professor Smetters, was actually also a “financial advisor” as ThinkAdvisor wrote here: “Smetters, though primarily a scholar, actually rolled up his sleeves and created a full-service financial services firm called Veritat, which sought to provide comprehensive and affordable advice to middle-class investors. He sold the firm last month to LPL.”
Financial Engines derives its revenues from workplace asset management, managed accounts. They were contributors to Market for Retirement Financial Advice,. Purveyors of products, also serving as authorities in academic analysis, without vigorous critique, could be deemed rather conflicted. One would have thought academics would insist on a mathematical analysis of the bottom line for plan participants, after all fees—trailing 12 month returns, after all fees, for a minimum of five years, compared to appropriate benchmarks. However, if one analyzes the “Senior Partners” of the Pension Research Council, it is no surprise there is no accountability for Wall Street. The “Pension Research Council” is Wall Street and DOL takes quasi academic justifications from these papers, as overseen by Wall Street, who designs the products. One would think there would be an independent review process and independent analysis, when retirement investors’ life savings are at risk.
Wall Street defines policy, implements policy, fine tunes the regulations through their lobbyists, self-regulates through FINRA, mandates arbitration through their judge and jury and prohibits a private right of action in IRAs, where there are now more assets than in defined contribution plans.
Professor Ayres’ Brillant Department of Labor Financial Sophistication Test
Professor Ayres wrote: “Finally, we recommend that participants be required to demonstrate a minimum degree of sophistication by passing a DOL-approved test before being allowed to invest in any funds that would not satisfy the enhanced default requirement.”
The Derivative Project DOL Mandated Financial Advisor Sophistication Test – Prepared For Review and Comment by Professor Ian Ayres, Yale University
We propose Professor Ayres first give this Derivative Project “financial sophistication” test to every financial advisor that is currently providing workplace “education” to a plan participant. Penalty if they fail: Not On My Nickel replaces the Advisor as the new financial education provider.
Professor Ayres, here are Four Categories for the first DOL Financial Advisor 401k Plan Educator Sophistication test. We recommend a sample of 25% of the approximate 300,000 “financial advisors.” We look forward to seeing your survey results, based on these four key categories:
Role of Voluntary Recapture in Retirement Accounts – When Interest Rates inevitably Rise
1) What is voluntary recapture in a money market fund? Do you believe that retirement investors should pay Wall Street a percent of the interest rate that a money market fund returns, when interest rates rise? Why or why not, please explain in 300 words or less.
How to Select from QDIA’s and the Role of Brokerage Windows/ Analyze the Performance of a newly-proposed “Enhanced default option”
2.) What tools do you provide your retirement plan participant to assist them in selecting from a range of investment options in their 401k plan? Why should a 25-year old 401k plan participant have a “customized” managed account in 300 words or less? What return benefit, after all fees, does this participant accrue from a personalized managed account? How do you measure performance of a Managed Account and determine if a managed account is in the best interest of the plan participant, compared to other QDIA’s or Enhanced Default options? Have you ever explained a “Brokerage Window” to a Plan Participant and when to use one in a 401k plan? Do you believe it is part of your ERISA mandate to explain Brokerage Windows, if not why not?
Financial Statement Analysis and Lessons from the 2008 Financial Crisis on Protecting Retirement Nest Eggs
3.) Do you know how to analyze a balance sheet? How many years experience have you had in balance sheet analysis? Have you ever prepared a cash flow statement? Do you know the role counter party credit risk played in US taxpayer funding to AIG in September 2008? Why does this question matter? Do you know the role Berkshire Hathaway’s existing speculative derivative positions may play in BRK.A investor losses, given a significant drop in the S&P 500 index? Based on the 2008 financial crisis, do you think it is important to understand what the actual underlying securities are in asset-backed entities in money market mutual funds? If not, why not? What is shadow banking and what is a VIE? Do you believe there are risks with funding short-term debt of charter schools, for example, with stand-by letters of credits, for long-term funding needs? Should the FSOC be concerned about systemic risk posed by money market mutual funds? If not, why not? If you sell an asset-backed security, what due diligence do you perform to see if the securitized asset is in the best interest of your retirement plan participant?
Does Performance Matter to the Growth of a 401k Plan Balance? What Impact Does Compounding Have and the Role of Opportunity Costs? Does Performance Matter to Society Overall? If not, why not in 300 words or less?
4.) Your plan participant is 25 years old. She asks you about the effect of performance and the power of compounding. She wants to know why her nest egg is in a Managed Account that generated a Trailing monthly return for the 15 -year period ending July 31, 2014 of 4.2%, in lieu of selecting in her Brokerage Window T. Rowe Price’s mutual fund, a moderately aggressive allocation fund (PRWCX) that returned 10.12% for the same period and a newly proposed Enhanced Default alternative Morningstar Index fund, that returned 6.44% for the trailing month-end 15-year period. Please calculate the opportunity costs for each option (1) the Managed Account or the (2) Enhanced default option or (3) PRWCX accessed through her Brokerage Window. Plan balance account was $64,000 and she plans to retire in 40 years. Please state lump sum in the year 2054, for each alternative, based on compounding, Are they significant? Should this 25 year-old worry about performance over the long-haul, when she is young? Does performance really matter at a younger age? If not, why not? Is her employer a fiduciary or is the pension consultant that encouraged the Employer to use the managed account a fiduciary? What would be the impact of this one nest egg opportunity cost, times 100,000,000 plan participants, on social programs, such as social security? Does performance of retirement nest eggs matter to society overall?
Chart is Prepared by Morningstar – Financial Advisor to use these returns figures and 4.12% for the Managed Account for the 15-year period.
Please, no coaching or Google searches. We are happy to provide more questions for the new DOL Financial Advisor Sophistication test. Please email us at firstname.lastname@example.org for more questions and please supply us with test results, when available. We will keep our readers updated on Professor Ayres’ response on the first DOL mandated financial advisor sophistication test.