John Turner suspected that brokers were encouraging federal workers to ditch their top-flight retirement plan. So he went under cover.
The former U.S. Labor Department economist called representatives at companies such as Bank of America Corp., Charles Schwab Corp. and Wells Fargo & Co. He identified himself as a potential client grappling with what to do with his own nest egg.
Turner thought he knew the right answer: Leave it alone. As a legacy of his government service, he kept his money in the Thrift Savings Plan, considered the gold standard of 401(k)-type programs for its rock-bottom fees. Yet all but one company told him to roll over all his money into individual retirement accounts. On average, stock funds charge almost 50 times more than the government plan.
“It’s a scandal,” said Turner, director of the Pension Policy Center in Washington. “They are trying to sell me an IRA clearly not in my interest. It’s in their interest. They want to get the fees.”
The pitches are persuasive. Workers who leave jobs with the federal government transferred $10 billion last year out of the Thrift Savings Plan. Forty-five percent of participants who left federal service in 2012 removed all of their funds from the plan and closed their accounts by the end of 2013. To investigate this exodus, the government expects to survey departing workers later this year.
‘Popular Target’
“Swayed by the financial industry’s marketing efforts,” Thrift Savings Plan members in recent years “have become an even more popular target” for companies luring them into higher-cost IRAs, Gregory Long, the plan’s executive director, wrote in a May memo to board members.
Companies offering IRAs said they aren’t advising Thrift Savings Plan holders to leave and are merely offering attractive options, such as funds with superior returns. Former federal employees and other customers roll over their retirement money because they want more choices and advice and are seeking to consolidate accounts in one place, they said.
“If they want the relationship and advice, then they will have the expenses and fees of an IRA,” said Wells Fargo Advisors spokeswoman Rachelle Rowe.
Bloomberg News found one company that caters to the military promised “no-fee” IRAs -- language that the financial industry’s own self-regulatory group has called misleading -- and another offered a $200 bonus to roll over. Other companies are advertising “Gold IRAs,” which invest in precious metals that can subject buyers to huge price swings and markups.
Cash Flood
The federal departures are part of a flood of cash cascading out of 401(k) and similar plans. Former employees transferred $324 billion into individual retirement accounts in 2013, up about 60 percent in a decade, according to Cerulli Associates, a Boston-based research firm. As a result, IRAs hold $6.5 trillion, more than the $5.9 trillion in 401(k)-style accounts.
Former employees at major companies such as AT&T Inc., Hewlett-Packard Co. and United Parcel Service Inc. have complained that sales representatives persuaded them to roll over their 401(k)s into high-cost, unsuitable IRA investments, according to a three-month Bloomberg News investigation in June.
The Labor Department has said it will propose rules in January that brokers and other advisers act in clients’ best interest during rollovers, a so-called fiduciary standard. Brokers are generally held to the lower standard of selling products that are suitable for their customers, meaning they don’t have to put their clients’ interests first as long as they select appropriate investments.
Tempting Target
Federal employees are a tempting target for financial companies. To supplement their traditional pensions, they participate in the Thrift Savings Plan, the largest 401(k)-type plan in the U.S. It oversees $418 billion for 4.6 million current and former federal employees, including the armed forces, park rangers, FBI agents and members of Congress. As in a 401(k), an employee sets aside money in a menu of mutual funds that isn’t taxed until withdrawal.
Benefiting from economies of scale, the Thrift Savings Plan offers funds far cheaper than most 401(k)s. Its average fee is .029 percent -- or 29 cents per $1,000 invested. The average 401(k) plan participant pays about 20 times as much for a stock mutual fund, according to a July study by the Investment Company Institute, a Washington-based mutual-fund trade group.
Investors who bought mutual funds on their own pay even more; stock funds charge almost 50 times as much, on average. An investor with $500,000 in the government plan who shifted to retail stock mutual funds with average expenses would pay almost $7,000 a year more.
The government program has 10 options. Employees can build a portfolio from five low-cost vehicles: three stock funds tracking U.S. and international indexes, a bond index fund and a “G Fund” that invests in government securities. The federal government guarantees that the G Fund won’t lose principal, unlike options available to the general public.
Workers can also choose from five “life-cycle funds.” These offerings invest in the same five options in proportions reflecting the years that employees have left until retirement, growing more conservative as they age.
Funds Outperform
Aided by their low expenses, the funds in the government plan generated superior investment performance. In the 10 years ended in 2013, all five underlying funds outperformed the average return of similar offerings, according to an analysis by Morningstar Inc., the Chicago-based fund-tracker. The G fund and the option that invests in an index of small and medium-sized companies bested more than 90 percent of similar funds.
Brokers Lure Soldiers Out Of Low-Fee Federal Retirement Plan
August 12, 2014
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Comments
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I made two comments 4 months ago. Why are you running this garbage again. Don't you have anything better to print or is it too close to the holidays and you are desperate for filling space. It was totally invalid 4 months ago and nothing has changed.
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I am surprised the article mentions nothing about the distribution options to non-spouse beneficiaries. Seems to me, this is important for participants to understand.
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Well, now it's tomorrow, and I wanted to review this again to see if it was truly as offensive as I originally believed. The title jumped right out at me as soon as I logged on. "Brokers LURE Solidiers..." LURE. That's what tricksters, hucksters, con men, and thieves do. They LURE their prey. I am glad I slept on it. This is so much more offensive than I originally thought, even as offended as I was. This magazine owes a lot of people a HUGE apology for this.
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I am still fired up about this article having been prominently advertised by FA Mag in an email i received. Sounds like it struck a chord with others as well. I have taken myself off the distribution list going forward. Truly unfortunate that absolute garbage is emailed out to a wide audience like this and allowed to go. I'd love to know the authors name so i can personally reach out to him/her and express how truly insulted I am.
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There is so much inaccurate with this article that I forgot several key points in my initial discussion. In the case of the military they do not receive any sort of matching dollars to their TSP contributions like civil service employees so that incentive is not part of the equation. TSP like other 401K plans do not have as much plan flexibility as IRAs do concerning stretching assets to beneficiaries and even the Roth version requires mandatory distributions beginning April after the 70th birthday. When the owner dies the beneficiary has to roll the TSP over into a IRA anyway and the list of differences goes on....... not to mention all the investment flexibility and much better client service offered by many fund companies versus the TSP administrator. It would be interesting to have Dalbar do an assessment of the TSP administrator for customer service support. All that without going into the customer service and advice offered by the financial planner.
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The most amazing thing about this article is the fact that Bloomberg News .... who claims to be a financial media outlet actually printed this trash without vetting the content. The TSP may have done well in 2013 but then almost everything did well. Obviously Turner read the thrift saving plan false advertising discussing that their fees are only .25%. That is the fee the Thrift Saving Plan administrator assesses for operating the plan and does not include any of the expenses associated with the funds that make up the Thrift Savings Plan. One of the other com mentors discussed the results of the Congressional Budget office study that documents the overall cost to the participant being around 7% (not counting the Government subsidy). That same Administrator had to relocate their operations from Louisiana when hurricane Katrina flooded their operations building. Participants were assessed the cost of rebuilding the operation in Alabama. I think the total cost for the new operation was around $35 million. If any other administrator tried to bill participants for a facility loss they would be barred from the industry. If memory serves, the S fund and the I fund were both under performing Desdner funds with little cash in them that were offered with incentives to the government by the purchaser of the defunct fund company assets. In the case of index funds unless the fund has significant new cash flow the adjustments made based on the cap weighting of the index most likely results in having to sell something that has gone down in value to buy more of something that has gone up in value. Just backwards to the intended goal. Vanguard is one of only a few that has the tremendous cash flow to not be affected by this much. In 2013 there were S&P index funds that had tracking errors as high as 9% because of this cash flow problem. Indexing did well in the 90's when the index industry went from only the Vanguard 500 fund to over 300 S&P index funds and many hundreds of ETFs tracking indexes as the sheer volume expanded the bubble at the top of the index. Many stocks in that bubble still have not come close to selling for the same offering price 14 years later. Most ETFs are synthetic meaning they don't actually own the stocks in the index so do not receive dividends. If dividends represent 40% of the overall return of the S&P then ETFs that don't own stocks probably won't match the long term returns of the S&P. At any rate, indexing makes up about 20% of all transactions on the market today .... which in many ways artificially moves the indexes. As someone that has worked in the industry for a couple decades when some light weight says brokers are not held to the same standard as investment advisers it makes me ill. Between firm supervision and FINRA every client transaction has many more "eyes" on them than a fee management shop. In fact, two FINRA representatives spent the day in my office last month and in addition to reviewing every client transaction my brokerage firm inspects my complete operation every 3 years. Many investment advisers will never be "inspected". Simple math proves that paying a small commission up front is much cheaper over the long term than paying some fee manager 1% or much more out of the individual's growing assets especially if a fund company is used that offers all the required investment categories. The more the individual has under investment the better the break point. Invest a million dollars with a fund company and there is no sales charge. Many fee managers won't even handle clients under a million dollars.
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Additionally, if we're talking about costs and the TSP, there is a Congressional Budget Office study on the program that indicates that the overall cost to the participant in the TSP is about 7 percent and to the government the cost is about 26%. So, no matter how low the internal fund management fees are, there is still a substantial cost involved in this program that nobody is addressing. I am a member of a retired senior military officers group where I have found that even at the high ranks involved, many of these people do not understand even the basics of the TSP, especially the ramifications after leaving service, and if they stay in the TSP it's because they are afraid to take any action due to lack of knowledge. They are bound to run into major problems trying to navigate a government program on their own in retirement. After all, it is a government program, and we all know how well they work.
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It is quite possible to hire a financial planner and stay in these low cost, strongly performing investments. Planners have the option of working with clients on a fee based, hourly based, commission based, or other arrangement. Why are so many planners "stuck" in a commission mode and feel compelled to take a large lump sum and roll it over to a product that can actually be a windfall for the planner. You might feel it is appropriate to have a client lose $5750 per $100,000 rollover. I would rather receive an hourly amount paid for with non-invested assets. If that sounds not self-centered enough for you, so be it!
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I cannot begin to explain how insulting this article is to my profession. Are doctors evaluated based on "cost" vs the government?! it seems to me this is the govt trying to keep investors assets, and only telling a small part of the story (fees), vs all the value that financial planners offer (eg. cashflow analysis, risk analysis, determining how much income should be withdrawn, how to interpret daily news and volatility)...the list goes on - it's almost to suggest that a financial planner should work for FREE or they are a crook.....wow, I really hope the author (could not locate conveniently.....) gets better educated before they write something like this again. I have literally never taken the time to write a response post, but I had to...I'm literally stunned and insulted....
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Correction to my initial post: ""Paying a lower expense ratio does not mathematically insure higher returns or better quality management"> I mistakenly said "higher"
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I don't understand why the only qualitative and/or quantitative consideration regulators and other pundits focus on is the expense ratio. It is only a small part of the issue, and paying a higher expense ratio does not mathematically insure higher returns or better quality management. The TSP is a great program for those who are currently in the employment of the Federal Government, but being familiar with the TSP as a former service member, and understand the inner workings of the TSP, the whole story is not in the expense ratios of the funds. The booklet entitled "Withdrawing Your TSP After Leaving Federal Service" published by the TSP needs to read and understood by participants and advisors. There are features, complexities, and more importantly limitations and restrictions that the participant may not have in an IRA account. I don't believe the average participant can navigate this or understand the ramifications, let along keep track of all of it over time. For some individuals the right answer may be to leave their money in the TSP, but for others, the choice to leave may provide more security and YES, MORE OPTIONS in the future, with fewer trip wires to created irreversible mistakes. Expense ratios are not the holy grail of investing, and not necessarily the holy grail of fiduciary responsibility either.
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If your only concern is fees then stick with the TSP. If you want someone to explain options, provide monitoring and asset allocation, other benefits/features, different investment options then you'll have to pay for them. This is the typical federal employee/retiree who thinks because they have an advanced degree, they are suddenly a financial guru. While he may be able to figure out how much longer we have until the financial apocalypse occurs due to excessive government borrowing, what he DOESN'T have access to is the myriad choices and financial tools that come available to market all the time. The agent/broker/advisor has a CAREER to evaluate these new plans and price is certainly not the sole determinant. This is like saying, "I keep getting these terrible headaches, but the doctor charges $300 for an appointment and diagnostic tests. So instead, since I took some courses 30 years, I self-diagnosed, took two aspirin and saved a lot of money!" Yeah, okay sport.
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I have one more comment. Your assessment is identical to saying that every employer should hire the cheapest worker they can find, regardless of any other factors including skill, motivation, desire for advancement, reputation, work ethic, and so on. No criteria other than anyone who walks through the door willing to take the lowest wage. You'd be out of business in no time.
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This story would make sense if fees were the only factor in determining results. But it isn't. "Low fees" does not necessarily equal good performance. It also does not necessarily indicate suitability. I do not know, but would guess that none of these funds equal that of Warren Buffet, or John Templeton, or many other outstanding investors who charge higher fees. But even if it does, a broker has to consider many more factors than fees. For example, volatility, conflicts, cash flow requirements, tax consequence, and time remaining before change in any of these factors may occur. Your assessment based on no factor other than fees shows your lack of investment knowledge, and concern for customer satisfaction.
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What the studies fail to address is what Carl Richards calls the "behavior gap." Left to themselves, Federal Employees' returns do not match those of the funds--because they chase returns and sell at the bottom or try to avoid risk at all cost, and thus miss available returns. What is missing from the Federal plan as well as most 401(k) plans is the personal advice that addresses this behavior gap. The true cost of the Federal Plan includes the return lost to neglect, fear, greed, and misinformation.
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This seems like an incredible stretch. Almost slanderous and definately should be considered financial planning although not a financial plan, therefore carelously close to CFP board infringement. This article is upsetting in many ways, despite being a one trick, non-informing piece af trash one dimension article, it paints the entire industry in a bad light as money grubbing capitalist pigs only feasting on the hard work and sacrifice of our countriy's most proud and brave citizens. Shame on you.
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Does anyone but me get sick to high heaven of all these articles and supposed "research" done by academicians who have never, ever done a single financial plan, nor ever, ever sat in front of a client - about how financial advisors are "evil" because they don't offer the cheapest possible products all of the time - AND work for free to boot? While the TSP is certainly a low-cost solution - it isn't all that and a bag of chips. So the G fund outperformed most money-market equivalents! How did it do against low-duration funds that also included high yield bonds in the portfolios? Not well. So the S fund outperformed 90% of the small-cap funds last year? So - big deal - so did the ETF's that track that index. Lets discuss the I fund - the international fund within the TSP. How well did it do against most top tier, actively managed international funds like Oakmark or Dodge and Cox? VERY poorly. Let's talk about asset allocation. Show me the following investment options within the TSP: Total Return, High Yield, World Bond, Mid Cap, Floating Rate/Bank Loan, Emerging Markets, Real Estate, and Utilities. Where are these BASIC building blocks of a well-diversified portfolio?? They don't exist. The TSP does well in a bull-market if one is invested only in the C,S, G, and F funds - and suddenly all of these academicians suddenly think they are Einstein because they say "The TSP is Cheap. If you compare only FEES, the TSP is cheaper and it must be better." This is research? This is journalism? No. This is TRIPE. Hogwash. Wikipedia research and should be thrown into the garbage can where it belongs. Instead, show me where the TSP portfolio optimizes on the Efficient Frontier, compared to professionally designed portfolio using all of the available asset classes. Show me how we can insulate the TSP portfolio against rising interest rates while still generating a return for conservative investors! Show me how the TSP is superior in its ability to allow an investor to to pick and choose WHICH countries one can invest in - and which countries one can avoid - based upon active management needs and varying economic cycles instead of being stuck to an arbitrary index. Show me those things, and perhaps I'll respect your research and your journalism. But stick to the same tired old "hey this account is cheaper so it must be better" and I'll keep throwing your articles and your research into the garbage where it belongs.