A Recent Government Report revealed 401k Participants May Have High Fees and Poor Performance in 401k Managed Accounts
Raise your hand if you know what a QDIA is or a Managed Account. Wall Street and the Department of Labor have quietly changed the business of 401k investing, without much fanfare from the 4th estate like the New York Times to NPR or MPR Marketplace to your local newspaper. Seems like those personal finance writers/economic editors may just be working for Wall Street.
Whoops, seems like a pretty critical piece of the retirement savings world was not covered for mainstream Americans and after five years of skimming from 401k plans, another study belatedly shows Wall Street has once again duped the retirement investor in their 401k plan.
Qualified Default Investment Alternative (QDIA)
In many companies today, if you do not sign up for a your 401k or “Opt-Out” of making contributions, your Employer will automatically take money from your paycheck, up to 3%- 6%. And just where do they put your money, without your knowledge? Typically in a managed account in your 401k. Why? It is best for Wall Street, since they do not have to bother with worrying about such a silly thing as audited performance against a benchmark. That matters to you, not Wall Street.
This new arrangement was approved by the Department of Labor back in 2006. Wall Street executives, such as Larry Fink of Blackrock, are pushing to take up to 10% of your paycheck on a mandatory basis. CNBC: Blackrock’s Fink: U.S. Needs Retirement Savings Policy.
What is a Managed Account?
A Managed Account is a fee-based investment management product. They were used for years to manage the tax implications of investment portfolios for high-net-worth investors. Today in 401k’s, managed accounts are often passive investments, like ETF’s, with an additional management fee. Unlike a mutual fund, which is a “registered investment company” under the Investment Company Act of 1940, a managed account does not have to file their performance with the SEC.
In 2006, Wall Street convinced the Department of Labor to allow Managed Accounts as a new Qualified Default Investment Alternative (QDIA). Other QDIA’s are Target Date Funds and Balanced Funds. Managed accounts are the most popular of the three QDIA’s.
Financial Engines is the largest investment advisor providing “Managed Accounts” to retirement accounts, 401k’s. They do not provide any performance information on their website, nor file it at the SEC. They equate “their performance” or their “numbers” with how many sales they have made of their services to participants. This is taken from Financial Engines’s website today: “Our experience produces results”…
Ironically, they forgot to “prove” their numbers to your employer, as a recent GAO report revealed and appeared to convince your employer on their worth with a fancy pedigree and “advanced technology” over actual performance numbers.
A Recent Government Report Cites Significant Issues with Managed Accounts in 401k Plans
The GAO recently released its findings on significant issues with Managed Accounts in 401k plans. Here is a link to that report, 401K Plans: Improvements Can be Made to Better Protect Participants in Managed Accounts.
What are the significant issues, detailed in this report?
- Your employer failed to ask what the performance of these new “Managed Accounts” are, after all fees! Or one could say the Managed Accounts providers pulled a fast one on your employer, hyping their economists and fancy “technology.”
- The Managed Account providers, such as Financial Engines, may be breaching their fiduciary duty on rollovers at retirement or when you leave your employer for a new job, since they make more money if you keep your account managed by them in your old 401k.
Not On My Nickel believes in the old-fashioned way of evaluating and picking a service when significant dollars are involved, such as for a retirement account. Our seven criteria would have eliminated Financial Engines. Let’s review each criteria:
Financial Engines Evaluated Against Not On My Nickel Seven Criteria
(1) Superior long term results – Failed – Financial Engines is automatically eliminated by NOMN criteria, as they do not publish their performance. NOMN prefers a minimum of five years of performance that out-performs the relevant benchmark.
(2) Low management fees – Failed- Their fees are redundant, since in the workplace you already pay a fee for each portfolio manager, so if you pay for Financial Engines’ advice on what mutual fund to select, you are paying twice for investment management selection. NOMN’s upcoming retirement platform eliminates this redundancy, savings millions for retirement investors.
(3) Low portfolio turnover – Failed. They do not publish their turnover to employees or publicly.
(4) Sustainable economic value – Failed. The Financial Engines model is not sustainable. About their website reference “advanced portfolio management technology”–appears someone thinks they stole it. Financial Engines is being sued for patent infringement, Lawsuit Regarding Computer Generated Advice to 401(k) Participants Revs up Against Financial Engines
(5) N/A – Without performance measurement, portfolio turnover and published investment strategy, we have no idea how dedicated their portfolio management team is, since it seems to have a singular focus of an unproven computer model and not experienced investment management team.
(6) Approved NOMN custodian - N/A
(7) “Operating philosophy that proves clients come first” – Failed, employees are not given sufficient information from Financial Engines to make an informed decision on whether or not their service is in their best interest. Without a minimum of five years published performance against other available QDIA’s in their 401k account, an employee cannot make an informed decision.
We all learned in 2008, Wall Street looks out for their interests, not yours. The recent GAO report on Managed Accounts in your 401k’s without any published performance is your wake-up call. Where is your paycheck going? Why are your falling behind? Financial Engines’ executive compensation grew over 173% from 2012 to 2013, all from taking fees from your retirement nest egg, without even bothering to report their management performance to your Employer, according to the GAO.
Time to Not On Your Nickel your retirement savings with our seven criteria and upcoming platform/tools to make sure your nest egg has the best performance and the lowest costs. Tools and data now readily available help you find the portfolio managers that do act in your best interest and deliver superior performance, without fancy, questionable academic theories and undefined advanced computer modeling. With charts and tools, you can see right through any undefined advanced theories— you have the hard numbers in one chart to make an informed decision.