If you work in the retirement plan industry, you most likely know that a very common place for service providers (primarily insurance companies) to play games with fees is with the Fixed Account such as Stable Value, GIC, etc. The logic being, why give a client 2.00% as a guaranteed return when you can give them 1.5% and keep the other 0.5% for yourself?
It’s in this way that pricing games get played. Providers will ratchet down the yield (return) on this fund in order to ensure the fees they receive for the plan are where they want them to be. Doing this enables them to be perceived as less expensive because…shockingly…this reduction in yield is not required to be disclosed with any kind of specificity as a cost to the plan.
Big deal you say? I say, heck yes it is a big deal!
Let’s say you’re working on a $25 million plan with $5 million in the Fixed Account. The Stable Value fees are 0.68% Gross Expenses.
So for investment expenses associated with that asset class we have $5 million times 0.68%. That’s $34,000 in fully disclosed expenses. For that cost, the participants are receiving 2.35% return (net of those fees).
Some competitors can take their equivalent fund (for simplicity, let’s say they are identical) and reduce the yield to 1.50%. In doing so, they are shaving off 0.85% in return and tell the client that the expense of the portfolio is ZERO; that’s right, GRATIS, FREE! This example with fully disclosed fees looks $34,000 more expensive than its competitor. Meanwhile, the competitor is actually collecting $42,500 in expenses. Not so fair, right!?
But, many advisors miss this shell game and, clients certainly do unless explicitly pointed out. They never identify that the 0.85% in lost yield was available to begin with and so don’t perceive the opportunity cost.
Well, good news! Someone is finally doing something about it.
Cedars-Sinai Medical Center 403(b) is my new favorite non-client plan sponsor, as they fight to take down this unethical (my opinion) practice. They have filed a lawsuit against Voya Retirement Insurance and Annuity Co. on behalf of the plan and all other similarly situated clients of Voya. In their lawsuit, they state Voya collects “hundreds of millions of dollars annually in undisclosed compensation.” The suit filed in Connecticut, Dezelan v. Voya alleges that Voya is setting their own comp and in doing so has breached its fiduciary duties to the plans. While it’s still uncertain if the client will be able to prove that Voya is a fiduciary, it does shed public light on this issue; and it’s about time!
My favorite line from the filing states that the “defendant’s non-disclosure of the amount of the income gave it a competitive advantage over other plan service providers who disclosed all of their fees.” We have experienced this competitive disadvantage ourselves.
To be clear, this isn’t isolated to Voya. This is a common industry practice. The same attorneys on this case, Izard Kindall & Raabe, LLP have also filed similar lawsuits against Prudential, New York Life and Mass Mutual. We are hoping they prevail and this practice is no longer accepted in the industry.