08/04/04 - Completely Clueless
By: Frank Armstrong, CFP, AIF
After several weeks of annoying ding-dings and blinking lights from my car's warning system, I decided that I really should refill the windshield washer system. After just a few tries I was able to find the hood release. Hose in hand I began searching for the washer's reservoir. About a half hour, just as I was about to admit total defeat, I finally spotted a white cover treacherously hidden in plain sight with a neat little windshield washer logo on it. Victory!!! The rest of the mission was completed without incident.
By now, you may have deduced that as a mechanic, I am completely clueless. This is not a good thing for a wannabe macho guy to admit, but it's true. I was not the kind of kid that enjoyed taking apart lawn mowers. If the mower didn't start after a few pulls, I just figured it was God's way of telling me not to cut the lawn. Later, as a pilot, my responsibility for maintenance was to enter into a log book that an engine overheated on start. It was somebody else's problem to figure out why and fix it.
In a specialized economy, most of us can do several things well, fake our way through a few other things, and are completely clueless about lots of other things. We can't be good, or even competent at everything. That's OK. I'm completely comfortable letting someone else interpret my EKG, or fix my car.
So, when I tell you that many retirement plan fiduciaries are completely clueless, I'm not saying that they are bad people, stupid, or irresponsible. But, they have as little business overseeing pension plans as I might have overhauling a jet engine.
Success as a business owner, physician, attorney, accountant, or HR director does not translate into competent retirement plan administration. Notice I didn't say that success in these other fields precluded competence as a plan administrator. But, except for a few very rare exceptions, those particular skill sets are not found in the same people. In fact, designing and administering a decent pension takes several different high level skills.
You don't have to meet these people personally to know that they are completely clueless. You just have to look at the plans that they provide. The footprints of clueless-ness are easy to spot:
- High total expenses
- Funds that reliably underperform their appropriate indexes
- No process in place to monitor costs or performance
- No investment policy statement
- Funds with duplicate and/or overlapping investment objectives
- Insufficient representation of critical asset classes
- Inappropriate asset allocation
- Deficient participant education
- Inappropriate plan design to meet the firm's objectives
- Cross testing, reporting and compliance problems
- Low plan participation
In short the fiduciaries are simply failing to do their job as required by the law and good common sense.
I see a wide variety of plans in the normal course of my business. We review our clients' plans as part of their financial planning. And we solicit plans to act as their investment advisor. The vast majority of plans we encounter are fatally flawed. By that I mean that they are so deficient that participants are unlikely to find them a useful tool to meet their retirement objectives.
So, how do responsible, successful professionals and business owners end up with such terrible plans? It's not like they set out to provide an awful fringe benefit for their participants. In most cases, the plan fiduciaries are also plan participants, so it's in their best interest to secure the best possible plan. But, few of them understand the issues enough to even ask the right questions, and there is a huge difference between just providing a plan, and providing a great plan.
In the real world, it's rare for the pension plan to be an employer's very top priority. That's natural. They are in business to provide goods and services. Many employers believe that their responsibility ends when they make a timely deposit of the payroll deductions. Most see a pension plan for employees as a necessary evil, a distraction, and/or a burdensome additional duty. There are no training classes for part time fiduciaries, so it's not a big surprise that few of them have any idea what they are supposed to be doing under ERISA, the various state uniform prudent investor acts, or the expanded federal prudent man rule.
There is one step down from completely clueless. That's a person that is completely clueless, but never-theless thinks he knows it all. It's hard to know if most plan administrators fall into this lower category. Or perhaps they just trust the wrong people - in this case commissioned salespeople from the various brokerage houses and insurance companies. No matter, the results are the same: grossly expensive, cumbersome, and ineffective retirement plans.
Because many plan sponsors are completely clueless they are easy pickings for Wall Street's sales machine. They are hopelessly outclassed, outgunned, and outmaneuvered on an uneven playing field. When an earnest bright young person from a household name Wall Street firm shows up offering to handle the whole plan and all those awful details for free, it sounds too good to be true. The household name and offer for free plan administration seal the deal. You can just hear the sigh of relief as the plan sponsor signs the documents.
A few firms just don't care. Because most plan expenses are born by the employee, savings there do not contribute to the firm's bottom line. The employees aren't yet in open revolt, so why bother? Pension administration is not a profit center, and few staff members ever get promoted by saving employees money.
More than just a few municipal and state plans are awarded as a political pay off to friends or contributors. State and municipal plans are not covered by ERISA, so there are wide open opportunities for mischief and graft. If employees understood just how badly they are being gouged by pension costs they could take some form of collective action. If enough of them express concern, it's likely to get the attention of management and prompt reform. They should begin to educate themselves, ask questions, and demand thoughtful answers. After all, it's there money and their future.
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