Not All Employer Retirement Plan Providers are Created Equally

 In Investments, News, Retirement

We have had some clients or prospective clients ask us why they wouldn’t want to just keep assets with a previous employer plan. While in theory this can work if someone doesn’t need management of their assets, there are many pitfalls to this and not all employer retirement plan providers are completely transparent in their business practices. Just recently we were reminded of this in several ways.

We had a prospective client come to us where the employer plan provider had encouraged them to rollover a previous 401(k) and then had the participant purchase an annuity sold by the provider. After the purchase they started to wonder why the assets were not growing by a large amount and discovered that the annuity had a very high initial sales commission that was paid to the advisor and that ongoing fees within the plan were over 3%. Many people think that retirement plan providers are by their nature low fee, however, that is not necessarily true.

In another instance we read an article recently that described two recent SEC actions. In aggregate, VALIC Financial Advisors agreed to pay $40 million dollars in fines based on two alleged actions. Both of these involved the Florida teachers retirement plan. VALIC is a firm that we have seen offered to many state employees. In one action, a for profit company owned by the Florida K-12 teachers’ union was provided cash and other incentives to refer its members to VALIC. Among the allegations asserted by the SEC, the union allowed VALIC employees to pose as representatives of the teachers’ union’s for-profit company and only endorsing VALIC’s products and services. VALIC earned more than $30 million dollars on products sold to these teachers. We would call this deceptive at best as the teachers thought they were receiving independent advice from their union.

In another suit VALIC had its third party advisor that managed its wrap fee program (a model investment portfolio program) select from funds that had no transaction fee. Although this sounds positive, these funds carry higher ongoing management fees to the client and provide VALIC with a revenue share on an ongoing basis. This was in addition to the fee payment that they were getting for access to the wrap fee program.

To see the original article from Financial Advisor Magazine, click here: VALIC Financial to Pay $40M for Deceiving Florida Teachers, SEC Says.

When we have helped clients rollover former employer plans from VALIC, our experience is that they are one of the hardest firms to work with and they put up roadblocks to try to get clients to leave their assets in the plan. In most cases, when a plan is directly through the employer (meaning that it is still a 401(k), 403(b) or 457) the costs are reasonable as the employer works with the provider to make sure of this. The biggest issues are often when someone leaves the employer plan and they now have the option to move the assets outside of the employer plan provider. It can often make sense to roll assets out of an employer plan as the investment choices within the plan are normally limited. The account will also be subject to the various 401(k) administrative expenses and generally, there is not much in the way of services offered to the account holder paying the administrative expenses. We think an individual should not just assume that the former employer plan is the best choice about where to invest these assets.

At River Capital Advisors, we do not share in any fees charged by the mutual funds or other investments that we utilize for clients. It is our fiduciary duty to make sure that our clients’ best interests are being met at all times. We are able to utilize institutional share classes of many funds that provide the lowest cost access to the manager. In most cases an individual client would not be able to access these share classes without an advisor since they require large amounts of assets be held at the fund company. In addition, our services only start at asset management where this is often where the services end for the employer plan providers. In addition to this we provide our clients with advice in insurance, retirement planning, estate planning, and any other matters going on in their financial life.

If you have concerns about your current or former employer plan we can review it for you and let you know what you are paying and help you assess what is best for you to do.

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