The Quiet Emergence of the Most Destructive Monopoly of the Past Three Decades Its Labor Day 2014.
No amount of minimum wage increases will ever compensate American workers or level the playing field for the quiet emergence of the greatest monopoly in the United States history in the past 100 years. This monopoly has wreaked havoc with every sector of American society. The Department of Labor has allowed American’s retirement nest eggs to serve as guinea pigs for unproven investment strategies–from managed accounts to Target Date funds. Retirement nest eggs are not Wall Street’s training platform for their latest and greatest.
They have allowed Wall Street firms to deduct directly from employee’s accounts without prior approval by the employee. The employee must “opt-out”, if they find it in the fine print. As the main regulator of American’s retirement savings, in both IRA’s and 401k’s, the Department of Labor has simply looked the other way and allowed Wall Street, the financial services industry, to steal billions from the retirement nest eggs of most every American. Wall Street’s Retirement Cartel – The Monopoly the DOJ Refuses to Address Employees trust that their employers are acting in their best interest. Why would their employer not choose the best retirement plan for them?
The recent Government Accountability Office (GAO) report confirms the worst. 401k Plans: Improvements Can be Made to Better Protect Employees in Managed Accounts. Reports, such as PBS’s The Retirement Gamble, have decried the high fees in plans, but still not discussed or addressed are the high fees, poor performance and the simple fact there exist better alternatives that Wall Street is not giving employees access to. In the latest GAO report it is now clear, employers never bothered to even look at the performance of what they were selecting for their employee’s 401k’s. The largest 401k managed account provider, Financial Engines, is a publicly held corporation whose largest shareholders are Wall Street firms. Further, Financial Engines is being sued for “patent infringement” for the very model they use in 401k plans. Here are key elements of product that the DOL approved for 401k plans, for example, for the largest 401k Managed Account provider, Financial Engines:
- No performance reporting is mandated for employees, prior to investment selection, which is a breach of ERISA
- Multiple fees – “advice” fees for the firm Financial Engines and for management fees for the mutual fund manager or ETF manager
- Fiduciary breaches with rollovers and conflicted “education”
- A flawed asset allocation computer model that delivers returns substandard to top balanced funds (Not to mention a lawsuit that the firm Financial Engines “stole” the model.)
The DOL has allowed Wall Street to skim from every American’s nest egg to benefit Wall Street’s pockets. In turn, employers receive money from Wall Street to allow them access to their employee’s life savings and employee emails to push them more decadent product, such as high fee variable annuities, that benefit Wall Street, not the worker. Review the Elements of the monopoly that began over 30 years ago (Read more here from The Derivative Project: The Whys Behind the Super Normal Profits in 401k Plans - see box below on Yale Professor Ayres’ Proposed DOL Financial Sophistication Test)
- Wall Street Eliminated free market competition- No competition allows inferior product to thrive in a monopoly – Employers were paid by Wall Street to place poorly performing, high fee mutual funds into 401k plans. The employee did not have free choice. They were forced to place their nest egg in substandard mutual funds, with high fees and poor performance, Why are there 8000 poorly performing funds–employers allow Wall Street to place their employees in them, because Wall Street pays the employer for access.
- Information Imbalance – Employees were trained, according to a DOL ERISA mandate, that Wall Street provide the information on how to select investments. Yes, Wall Street effectively created a “learned helplessness” and overwhelmed employees with many poor investment options and no proper tools to learn how to evaluate which investment selection was in their best interest. Yes, poor financial literacy is in the best interest of Wall Street….and according to the experts, financial literacy about investment selection is rampant.
- Regulatory Capture – The Department of Labor has approved managed accounts without any performance reporting or standards for 401k’s, Qualified Default Investment Alternatives. The Department of Labor allows the wolves of Wall Street to “educate” employees on investment selection. The Department of Labor has approved a deficient computer model, asset allocation model, that has been proven to lead to substandard returns. Why? All these actions benefit Wall Street to the detriment of society overall. Wall Street paid off Congress, DOL/SEC and the DOJ to remain silent through lobbying and campaign contributions.
- Violation of Individual’s Constitutional Due Process Under Law to a “Day in Court” - This is by far the most egregious offense, yet a most brilliantly crafted web of confusion by Wall Street. In an IRA, one cannot go to the courts, there is “no private right of action.” If an IRA investor claims they have lost money due to a breach of fiduciary duty, when a fee is paid for investment advice, the IRA investor is forced to bring the claim to Wall Street’s kangaroo court, FINRA, who most naturally decides in Wall Street’s favor. Further, when the arbitration panel agrees, there was a breach of fiduciary duty, and Wall Street admits to it, FINRA arbitrators then state: “Congress has not yet given us the right to enforce fiduciary breaches under the Investment Advisers Act of 1940, only the SEC can do that.” The IRA investor then goes to the SEC and the SEC states sorry FINRA has already ruled, there is nothing we can do and you cannot appeal directly to the Federal Courts, since FINRA has already ruled. The DOL confirms the IRA holder, although harmed, has no “private right of action” based on IRS rulings and it is up to the IRS to change the IRA code. Whoa, now that is clever.
Department of Justice – Please Respond to Every Retirement Saver in an IRA or 401k on this Simple Question Is there any doubt that there is not a monopoly in the retirement sector, robbing millions of their life savings? DOJ, simply explain this situation: There are over 10,000 mutual funds and over 80% are high fee and deliver results below their relevant index. There have been super normal profits in 401k plans. Hints for the DOJ – Is this evidence of a monopoly?
- Why would a consumer choose a mutual fund that performs below the relevant index when there are funds that outperform?
- Why would a consumer pay a fee for a mutual fund (load) when there exist better performing, lower cost alternatives, without paying an additional fee/load?
- Would a consumer want training on what car to pick from a car salesman? Don’t you think the Ford dealer might push the consumer to the Ford or the sale that would most benefit the car dealer?
- If there is normal supply and demand forces at work in the retirement industry, why are there over 8000 substandard mutual funds? Lack of free choice?
- If the Investment Advisers Act of 1940 states a fee paid for investment advice makes an advisor a fiduciary, why are you allowing Wall Street to violate this securities law, day in and day out, at the expense of the retail retirement investor’s nest egg in Wrap Accounts and FINRA arbitration cases?
- Why won’t the IRS give a retirement investor the right to go to the courts when securities laws are broken in their IRA?
- What hasn’t Congress given FINRA the right to enforce fiduciary breaches in IRA’s, when FINRA subjects the IRA to mandatory arbitration, yet FINRA then tells the IRA investor we cannot enforce that securities law?
- The IRA investor has no legal due process when there is a fiduciary breach in an IRA. Further, the DOL allows investment advisors, who charge fees, to allow language that states, “We are NOT an ERISA fiduciary.” Why are “fiduciary” standards lower in IRA’s than 401k’s when many Americans do not have access to 401k’s? Shouldn’t the fiduciary standard be the same, regardless of retirement savings vehicle? Please explain in 300 words or less to the retirement investor.
Playing By the Rules, Secretary Perez, is No Longer Enough, When the System is a Monopoly One questions where taxpayer dollars have been going to regulate the industry, that the DOL’s ERISA and SEC have overseen to ensure Wall Street act as fiduciaries of most American’s retirement nest eggs. The Derivative Project requested assistance from the SEC in 2012 on this monopoly and blatant obstruction of justice that is allowing an industry to extract “supernormal profits” at the expense of the worker. They refused to take action. New York Times columnist, Gretchen Morgenson, reported on the kangaroo court of the brokerage industry, FINRA, in her column yesterday, “What the Arbitration Panel Did Not Want to Hear”.
However, the impact of FINRA’S kangaroo court has had far greater widespread damage on every American’s retirement nest egg, for more widespread than the implications in Gretchen Morgenson’s column this weekend. Where is the press on this abuse? The Derivative Project filed, April 3, 2012, a Petition to ban mandatory arbitration, allow a right of private action, a ban of wrap accounts to protect retirement investors and permit a right to access the courts when there have been fiduciary breaches in IRA accounts. To the right is a shot of the SEC filing, linked to above in Petition. The DOL refuses to work with the IRS to allow a private right of action and the SEC refuses to investigate and take action when existing securities laws are being broken. However, it appears current SEC Chairman White may take a look at this outrageous breach of basic legal rights in retirement plans, according to this August 19, 2014 Reuters article, “US SEC launches broad compliance review into wrap fee accounts.” Doubtful that much will come of it within the decade, when it will be too late for most retirement savers. Yet, on this Labor Day there is hope. There are a very few active fiduciary portfolio managers that not only have outperformed their index for over 10 years, but are true fiduciaries and act in the best interest for retirement investors. They invest for the long-term, have very defined investment strategies, file regular performance at the SEC—these are the portfolio managers that should be investing America’s nest eggs.
But Wall Street has conveniently made it impossible for the retirement investor to identify what is in their best interest. What Do You Think the Department of Labor Did When we Gave them the Chart Below of the Performance of their Approved Target Date Fund vs a simple top performing Balanced Fund? The Derivative Project and Not On My Nickel had a meeting scheduled with DOL’s Phyllis Borzi on the emergency need for bona-fide, independent employee investment selection information in 401k plans, with 21 st century tools and technology.
The Employee Benefit Security department of the DOL cancelled our meeting with DOL Deputy Secretary Borzi, once they received this chart below–five minutes before the scheduled meeting.. This is a 401K retirement Target Date Fund,(NLHAX) that first invested in passive indices, mainly managed by Blackrock. Blackrock then switched to active, then commodities–whoa, they are doing everything a fiduciary should not do–moving in and out of strategies. One would think the DOL would demand employers only select managers with proven track records and defined strategies that have withstood the test of time. Experimenting with portfolio strategies should be banned in employee retirement accounts.
The DOL is a Captive Regulator
But the DOL is a captive regulator. They exist and are directed by Wall Street, to the detriment of every retirement investor.Another DOL approved Wall Street invention to extract more blood from a turnip, is to charge advice fees for employees, since they have been so overwhelmed by Wall Street “education” they now must pay a fee to select from the morass of poorly performing investment options or managed accounts with no performance history filed with the SEC, The retirement saver is now also forced to pay a fee to Charles Schwab/Guided Choice, for example, on an “opt-out” basis for the right to invest in a passive or now active Target Date Fund, such as NLHAX. The DOL has approved this arrangement where the 401k investor is automatically charged Charles Schwab’s/Guided Choice’s fees for “advice” on how to invest in a passive fund in their 401k plan. The impact for the retirement investor over just five years is a loss of over $20,000 by being in a DOL approved Target Date Fund over a Balanced Fund (PRWCX) they could select directly with Not On My Nickel tools and technology. This must change.
Not On My Nickel encourages every retirement investor to join with us to end this monopoly and stem the needless losses to retirement accounts. We supply the (1) bona-fide independent information and (2) technology and tools to determine how to select where to invest a retirement nest in the lowest cost, best performing fiduciary manager that meet Not On My Nickel seven criteria from our home page here. But the retirement investor has to agree to take charge and end “the learned helplessness’. An unhealthy dependency can be ended with proper support, information and tools, contrary to academics’ financial models that say it is not possible, as we wrote in this Blog Post. Do Not Throw the Baby out with the Bath Water! The Latest Wall Street Marketing Scam So-called “robo advisors” like a Betterment or Wealthfront are also the subject of the GAO Managed Accounts report. They must be avoided –they do not file performance and holdings with the SEC and may provide poor trades through payment for order flows in dark pools. Why would anyone settle for the index minus their fees, uncertain performance, diversification based on a flawed computer model, when you can NOMN and outperform the index with the best? Yes, 80% of active managers have underperformed, because they were not eliminated with free market competition. Because a monopoly, enabled by millions of employers’ investment selections in 401k plans, has allowed retirement investors to support 8000 poorly performing active funds, is no reason to jump to uncertain passive strategies, based on a flawed computer model, with no performance history. The latest Wall Street scam, the so-called “passive revolution” is for all those lazy portfolio managers, who could not make it as active managers, to take a fee, with no responsibility or work. The fee guarantees income to the advisor and uncertainty to the retirement investor, who is guaranteed to underperform the index, in a yet-to-be proven diversified portfolio, based on a flawed model, with no history, —simply “brilliant” as the British would say.
How To End the “Learned Helplessness” and Dependency on an Industry that Operates in their Interest, not Your Retirement Nest Egg’s? Ask your employer to give you access at your firm to Not On My Nickel. What is there to lose and there is so much to gain with the power of compounding, for each day one must wait in poorly performing mutual funds or new “passive” strategies that present unproven performance and a guarantee to underperform the relevant index.
According to Wall Street and the DOL, they are looking for ways to engage retirement investors in retirement savings. Pass this along to your benefit department and tell them you are ready to take charge at Not On My Nickel. -
Check back next Labor Day and see the progress of an engaged and empowered retirement investor who finally has access to the proper tools to take charge. It not only benefits every retirement investor, It benefits a sector of our economy, other than financial services and will provide larger nest eggs for those in retirement, propelling consumer spending.