What is wrong with having a 401k Insurance Group Annuity Contract based Retirement Plan?
Sorry to say, pretty much everything. (If you are working with an Insurance company for your 401k you have one of these.)
Administrative fees are higher and there are more of them. At least the administrative fees are reported to you. And your accountant gets to do the Audit.
Additionally, the insurance company keeps 1% to 5% of returns earned on your money before passing what remains on to you. That means you earned 1% to 5% more on your investments than what was reported. That is money participants earned they will never see.
How do Insurance Companies skim off the returns? The insurance company owns the investments, not the participant. So, investment earnings go to the insurance company, they take their fee, put the net in the participant account, reporting the net return to participants, not the gross.
Look on Schedule C of the 5500 Form you signed as Plan Sponsor where the Insurance Company and others checked the box for “Yes Received InDirect Compensation.” The InDirect Compensation is the participant earnings they withhold.
Insurance company and agent wins, employer and participants lose.
At VPA the account balance charge is .26% max! There is no markup, all costs are reported, participants own the investments, and there is no revenue sharing to VPA from the mutual funds (all returns go directly to the participants). And, if a fund doesn’t perform, our Financial Advisor pulls them. Very simply, employers and participants win.
401k Plan Insurance Group Annuity Contracts cut your Plan performance by at least 1% a year, and more likely 5% or more. That means you are going to work longer until retirement, or have less at retirement, so your insurance company and agent can make more money and retire earlier – not you. Plus, as a Plan Sponsor under ERISA fiduciary liability, you can be personally liable if participants successfully sue you for their losses due to poor plan performance from bad Plan management decisions, like signing a poor performing insurance annuity contract. (http://wpdev.valuepointassociates.com/blog/does-your-401k-plan-meet-erisa-requirements-you-might-be-betting-your-house-it ).
Hard to believe? Don’t take our word for it, check out this “Retirement Plans from Hell” article from Forbes: http://forbes.com/forbes/2009/0713/group-annuity-aig-retirement-plans-from-hell.html#6d285df219f8, where they explain why these Plans are costly, have many restrictions, you don’t actually own any shares (the insurance company does, takes the return, and passes on a net amount after fees), and there is limited fee transparency. Oh, and the tax advantages go to the insurance company.
So what? How big of a difference does even 1% make?
Imagine an individual making $60,000/yr needs $600K to retire after 30 years, (using a general rule of thumb of 10x current earnings to retire). That is $720.93/month at a 5% rate of return for 30 years to save $600K. However, at 6% they only need $597.30/month to get the same $600K. $123.63 less a month for the same result! At 8% they only need $402.59/month! You could lease a nice new car with the $318.34/month difference, for 30 years.
Time more valuable than money? Earning 5% instead of 6% requires participants working almost 4 (3.93) more years to get to $600K. The difference in years between 5% and 8% is 9.59 years.
On a half million-dollar Plan, a 3% improvement in return (either performance or reduced costs) from 5% to 8% over just 10 years results in $265K more income, or 15.77 less years to achieve what the 5% would have returned.
Poor performance as a result of bad management decisions is one of the reasons Plan participants successfully sue sponsors to recover what they would have earned at a higher rate of interest and make them whole. (What you owe could add up fast compounded over many years.) Under ERISA Fiduciary Liability the Plan sponsor is NOT protected by the “corporate veil” and can be held personally liable if there is insufficient fiduciary liability insurance. You have that, right?
Are you working for your insurance company, or are they working for you? Is your relationship with the insurance company and agent worth you and all your participants working 10 more years to retirement? Really?
So, what to do?
Employers who join the Value Point Associates (VPA) employer member association solve these problems because VPA is the Plan sponsor, greatly reducing liability, administrative hassle, and costs; and offers great investment performance. VPA does not profit from the 401k Plan, no revenue sharing, no markup, is not beholden to the insurance company or mutual funds for revenue, so they don’t perform, they are out of the lineup, period. VPA is the Plan Sponsor, and they leverage the size of the association to get much better rates than you can get individually.
Recent federal regulatory changes make this even easier, and you can read about the model here. The good news is VPA already has the model in place, you don’t have to form your own association or have someone do it for you, all you need to do is sign up!
Let’s schedule a time to do a free analysis of your Plan and a comparison to the VPA offering to see how you can reduce costs, gain back some administrative time, greatly reduce liability, make your employees happier, and retire earlier!