Is The Los Angeles Lakers Violating ERISA In their 401k Plan?
As soon as I saw that there was a life insurance company providing the Lakers a 401k plan, I knew for certain the plan sponsor did not consider the employee’s best interest. For more information about participants best interest click on ERISA. As it states: ERISA requires plans to “give participants the right to sue for benefits and breaches of fiduciary duty.” The life insurance company in this case was Prudential. I cannot explain it better than how Chris Tobe has explained why annuities are a fiduciary breach but check out his post for more detailed info. The Laker’s 401k plan is breaching fiduciary duty because they provided their participants with variable annuities. They are not even genuine mutual funds. They are just a contract. A piece of paper that mimics what a fund does. Why are they provided by Prudential? Because now they can provide hidden fees within the annuities. These variable annuities never perform better than the mutual fund alternative and in fact perform worse. They do not even have a current price. Prudential can sit here and say participants own the investments in these variable annuities, but they do not because there are no real investments in a variable annuity. They are not even registered with the SEC, and they only require an insurance license to sell. Do you see the conflict of interest here?
The T. Rowe Price Growth Stock Strategy Fund is a breach of fiduciary duty because it is an annuity. There are mutual funds out there that perform much better than this. As Chris Tobe mentions in his previous blog “Prudential in a 2013 conference documented by Bloomberg bragged that they had secret hidden spread fees of over 200 basis Points.”. Ask yourself a simple question, why can’t you get the current ticker price on this annuity like another mutual fund?
Since the investment options in the variable annuities are not real investments, there is no ticker symbol. So, the T. Rowe ticker that I pulled up here is not even the one the participants own but I am using it as a measure. I am using $PRGFX as a measure because it is better than the variable annuity version. So, if $PRGFX cannot even beat the better mutual fund I am suggesting, imagine how much worse variable annuity could be. Assuming participants owned this mutual fund, it would have never held up to the low-cost Vanguard Growth Index fund $VUG. Why am I using $VUG for this comparison? Because it is an identical alternative. $VUG has the same growth stocks as $PRGFX. Well, why does the Vanguard one have better returns then? Because it costs less to own Vanguard. When it costs you less to own a mutual fund, you can buy more shares of that same mutual fund. Thus, increase returns. How would you feel as the participant in the lakers 401k plan knowing you could have been over 200% higher? Even in this down market.
When you are not exercising prudence in picking the investment menu, you are violating ERISA period. It is the plan sponsors job to pick the best options out there and these are not the best. The employees best interest needs to taken seriously by the plan sponsor. After all, they are the ones retiring with this plan. I never understood why executives do not push for this. I mean they are also benefitting too. Are they not contributing to their 401k’s?
It is not management’s fault. It is lack of education on how the entire system of the 401k sales market is corrupt. Life insurance companies provide an investment menu that is not registered with the SEC because they are not deemed real investments. Unsuspecting participants see no difference because life insurance companies hide the fees to siphon from their contributions. They tell you things are the same when they are not. They tell you the returns are the same when they are worse. They tell you whatever it takes to charge the participants more fees than usual. They only way to see how life insurance companies are taking advantage of you as an employee or plan sponsor is to ask them a fee disclosure form. If you are lucky, they will give you the basis points they charge you on everything. I have seen instances where they just give you the percentage and leave you to do the math. They do not want to be that transparent. It was not enough to make decent money in this industry. They want to bleed you dry. And they will.
Sammy Khalil is a 401k Fiduciary from Nyx Moros, a firm which advises on Company 401k plans. Sammy conducts full analysis by benchmarking retirement plans holistically. This ensures the entire plan is in the plan sponsor's best interest. Being independent means we can be transparent in all advice we provide. For more information please visit www.nyxmoros.com.