The Fiduciary Rule: Exposing Your 401(K) Advisor’s Secrets

It’s here.  On June 9, 2017, the long awaited Fiduciary Rule for 401(k) plans will arrive.  The wirehouse and broker-dealer community within the investment industry has fought this new rule every step of the way.  Why? Because their secrets are about to be exposed.  Fee gouging in these 401(k) plans has spiraled out of control and it has gone on for way too long.  While the Fiduciary Rule was designed to better protect plan participants within these employer sponsored retirement plans, the response from the broker-dealer community, in an effort to protect themselves, may actually drive the fees in 401(k) plans higher than they are now.

If your company sponsors an employer sponsored retirement plan and your investment advisor is a broker with one of the main stream wirehouse or broker dealers then they may be approaching you within the next few months regarding a “platform change” for your 401(k) plan.  Best advice, start asking questions before you sign anything!!  The brokerage community is going to try to gift wrap this change and present this as a value added service to their current 401(k) clients when the reality is this change is being forced onto the brokerage community and they are at great risk at losing their 401(k) clients to independent registered investment advisory firms that have served as co-fiduciaries to their plans along.

The Fiduciary Rule requires all investment advisors that handle 401(k) plans to act in the best interest of their clients.  Up until now may brokers were not held to this standard. As long as they delivered the appropriate disclosure documents to the client, the regulations did not require them to act in their client’s best interest. Crazy right?  Well that’s all about to change and the response of the brokerage community will shock you.

I will preface this article by stating that there have been a variety of responses by the broker-dealer community to this new regulation.  While we cannot reasonably gather information on every broker-dealers response to the Fiduciary Rule, this article will provide information on how many of the brokerage firms are responding to the new legislation given our independent research.

SECRET #1:

Many of the brokerage dealers are restricting what 401(k) platforms their brokers can use.  If the broker currently has 401(k) clients that maintain a plan with a 401(k) platform outside of their new “approved list”, they are forcing them to move the plan to a pre-approved platform or the broker will be required to resign as the advisor to the plan.  Even though your current 401(k) platform may be better than the new proposed platform, the broker may attempt to move your plan so they can keep the plan assets.  How is this remotely in your employee’s best interest? But it’s happening.  We have been told that some of these 401(k) providers end up on the “pre-approve list” because they are willing to share fees with the broker dealer. If you don’t share fees, you don’t make the list.  Really ugly stuff!!

SECRET #2:

Because these wirehouses and broker-dealers know that their brokers are not “experts” in 401(k) plans, many of the brokerage firms are requiring their 401(k) plans to add a third-party fiduciary service which usually results in higher plan fees.  The question to ask is “if you were so concerned about our fiduciary liability why did you wait until now to present this third party fiduciary service?”  They are doing this to protect themselves, not the client.   Also, many of these third party fiduciary services could standardize the investment menu and take the control of the investment menu away from the broker.  Which begs the question, what are you paying the broker for?

SECRET #3:

Some broker-dealers are responding to the Fiduciary Rule by forcing their brokers to move all their 401(k) plans to a “fee based platform” versus a commission based platform.  The plan participants may have paid commissions on investments when they were purchased within their 401(k) account and now could be forced out of those investments and locked into a fee based fee structure after they already paid a commission on their balance.  This situation will be common for 401(k) plans that are comprised primarily of self-directed brokerage accounts.  Make sure you ask the advisor about the impact of the fee structure change and any deferred sales charges that may be imposed due to the platform change.

SECRET #4:

The plan fees are often times buried.  The 401(k) industry has gotten very good at hiding fees.  They talk in percentages and basis points but rarely talk in hard dollars.  One percent does not sound like a lot but if you have a $2 million dollar 401(k) plan that equals $20,000 in fees coming out of the plans assets every year.  Most of the fees are buried in the mutual fund expense ratios and you basically have to be an investment expert to figure out how much you are paying.  This has continued to go on because very rarely do companies write a check for their 401(k) fees. Most plans debit plan assets for their plan fees but the fees are real.

With all of these changes taking place, now is the perfect time to take a good hard look at your company’s employer sponsored retirement plan.  If your current investment advisor approaches you with a recommended “platform change” that is a red flag.  Start asking a lot of questions and it may be a good time to put your plan out to bid to see if you can negotiate a better overall solution for you and your employees.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Small Business Owners: How To Lower The Cost of Health Insurance

As an owner of a small business myself, I’ve had a front row seat to the painful rise of health insurance premiums for our employees over the past decade.   Like most of our clients, we evaluate our plan once a year and determine whether or not we should make a change.  Everyone knows the game.  After running on this hamster wheel for the past decade it led me on a campaign to consult with experts in the health insurance industry to find a better solution for both our firm and for our clients.

The Goal: Find a way to keep the employee health benefits at their current level while at the same time cutting the overall cost to the company.  For small business owners reducing the company’s outlay for health insurance costs is a challenge. In many situations, small businesses are the typical small fish in a big pond. As a small fish, they frequently receive less attention from the brokerage community which is more focused on obtaining and maintaining larger plans.

Through our research, we found that there are two key items that can lead to significant cost savings for small businesses.  First, understanding how the insurance market operates.  Second, understanding the plan design options that exist when restructuring the health insurance benefits for your employees.

Small Fish In A Big Pond

I guess it came as no surprise that there was a positive correlation between the size of the insurance brokerage firm and their focus on the large plan market.  Large plans are generally defined as 100+ employees.  Smaller employers we found were more likely to obtain insurance through their local chambers of commerce, via a “small business solution teams” within a larger insurance brokerage firm, or they sent their employees directly to the state insurance exchange.

Myth #1:  Since I’m a small business, if I get my health insurance plan through the Chamber of Commerce it will be cheaper.   I unfortunately discovered that this was not the case in most scenarios.  If you are an employer with between 1 – 100 employees you are a “community rated plan”. This means that the premium amount that you pay for a specific plan with a specific provider is the same regardless of whether you have 2 employees or 99 employee because they do not look at your “experience rating” (claims activity) to determine your premium.  This also means that it’s the same premium regardless of whether it’s through the Chamber, XYZ Health Insurance Brokers, or John Smith Broker.  Most of the brokers have access to the same plans sponsored by the same larger providers in a given geographic region.  This was not always the case but the Affordable Care Act really standardized the underwriting process.

The role of your insurance broker is to help you to not only shop the plan once a year but to evaluate the design of your overall health insurance solution.  Since small companies usually equal smaller premium dollars for brokers it was not uncommon for us to find that many small business owners just received an email each year from their broker with the new rates, a form to sign to renew, and a “call me with any questions”.   Small business owners are usually extremely busy and often times lack the HR staff to really look under the hood of their plan and drive the changes needed to improve the plan from a cost standpoint.  The way the insurance brokerage community gets paid is they typically receive a percentage of the annual premiums paid by your company.  From talking with individuals in the industry, it’s around 4%.  So if a company pays $100,000 per year in premiums for all of their employees, the insurance broker is getting paid $4,000 per year.  In return for this compensation the broker is supposed to be advocating for your company.  One would hope that for $4,000 per year the broker is at least scheduling a physical meeting with the owner or HR staff to review the plan each year and evaluate the plan design options.

Remember, you are paying your insurance broker to advocate for you and the company.  If you do not feel like they are meeting your needs, establishing a new relationship may be the start of your cost savings.   There also seemed to be a general theme that bigger is not always better in the insurance brokerage community. If you are a smaller company with under 50 employees, working with smaller brokerage firms may deliver a better overall result.

Plan Design Options

Since the legislation that governs the health insurance industry is in a constant state of flux we found through our research that it is very important to revisit the actual structure of the plan each year. Too many companies have had the same type of plan for 5 years, they have made some small tweaks here and there, but have never taken the time to really evaluate different design options.  In other words, you may need to demo the house and start from scratch to uncover true cost savings because the problem may be the actual foundation of the house.

High quality insurance brokers will consult with companies on the actual design of the plan to answer the key question like “what could the company be doing differently other than just comparing the current plan to a similar plan with other insurance providers?”   This is a key question that should be asked each year as part of the annual evaluation process.

HRA Accounts

The reason why plan design is so important is that health insurance is not a one size fits all.  As the owner of a small business you probably have a general idea as to how frequently and to what extent your employees are accessing their health insurance benefits.

For example, you may have a large concentration of younger employees that rarely utilize their health insurance benefits.  In cases like this, a company may choose to change the plan to a high deductible, fund a HRA account for each of the employees, and lower the annual premiums.

HRA stands for “Health Reimbursement Arrangement”.  These are IRS approved, 100% employer funded, tax advantage, accounts that reimburses employees for out of pocket medical expenses.  For example, let’s say I own a company that has a health insurance plan with no deductible and the company pays $1,000 per month toward the family premium ($12,000 per year).   I now replace the plan with a new plan that keeps the coverage the same for the employee, has a $3,000 deductible, and lowers the monthly premium that now only cost the company $800 per month ($9,600 per year).  As the employer, I can fund a HRA account for that employee with $3,000 at the beginning of the year which covers the full deductible.  If that employee only visits the doctors twice that year and incurs $500 in claims, at the end of the year there will be $2,500 in that HRA account for that employee that the employer can then take back and use for other purposes.  The flip side to this example is the employee has a medical event that uses the full $3,000 deductible and the company is now out of pocket $12,600 ($9,600 premiums + $3,000 HRA) instead of $12,000 under the old plan.  Think of it as a strategy to “self-insure” up to a given threshold with a stop loss that is covered by the insurance itself.  The cost savings with this “semi self-insured” approach could be significant but the company has to conduct a risk / return analysis based on their estimated employee claim rate to determine whether or not it’s a viable option.

This is just one example of the plan design options that are available to companies in an attempt to lower the overall cost of maintaining the plan.

Making The Switch

You are allowed to switch your health insurance provider prior to the plan’s renewal date.  However, note that if your current plan has a deductible and your replacement plan also carries a deductible, the employees will not get credit for the deductibles paid under the old plan and will start the new plan at zero.  Based on the number of months left in the year and the premium savings it may warrant a “band-aide solution” using HRA, HSA, or Flex Spending Accounts to execute the change prior to the renewal date. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.