Comments on the revised LLNS 401 (k) plan

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Comments on the revised LLNS 401 (k) plan

Being prepared for new federal rules demanding more transparent fee disclosure for 401k plans, LLNS joined many other 401k sponsors nation-wide to reduce 401k expenses and fees this year. Lawrence Livermore National Laboratory’s employees now have a new set of investment options. Overall, the move was a positive correction to a long-overdue 401k problem. But it still does not correct the excessive annual bookkeeping/administration fees. Also, some actively managed investment options are difficult to be explaind if LLNS is asked how they are acting under their fiduciary duty to protect the benefits of participants/beneficiaries.

The first trouble is the excessive annual $86 bookkeeping fee. Many 401 k plans do charge employees flat admin fees. But the fees are usually around $25 per participant per year. Wal-mart, the latest company sued by its employees for expensive retail class investment options in an institutional 401k plan, charged only $1 annually per participant.

To give some context, the LLNS 401k plan started without any participant fees in 2007. It is believed that there was a competitive bid. Fidelity won the bid based on the overall proposed service quality and expenses. In 2008, the financial crisis caused massive damages to almost every person and organization in USA. Fidelity, somehow, decided to recover some of their loss by charging $86 per year per participant for the LLNS 401k plan. It is unknown if LLNS tried to object the charges or not, considering that lab participants also suffered huge loss at the same time. It is very disturbing to know that Fidelity, as a financial institution, could partially recover their loss by adding salts into individual investors’ injuries. Also, the new charges could be interpreted as a classic bait-and-switch tactic used by Fidelity, regardless the excuse of the financial meltdown. Anyway, the fees started somewhat deceptively. Fidelity now charges each account every quarter and spread the charges across different funds. For inexperienced investors, the fees just look like regular expenses arisen from each fund. But the fees actually come from Fidelity. Also, Fidelity did not charge the full amount in the first 2 years (2009 and 2010). They rollover-ed the “forgotten” charges into 2011 so the total charge in 2011 per account is more than $110.

The excessive annual participant fees were even more difficult to be justified considering what Fidelity was already profited from the plan by selling Fidelity funds to lab employees. Many of the Fidelity funds sold were expensive retail class funds, including Fidelity Contrafund (FCNTX), Fidelity Diversified International Fund (FDIVX), and Fidelity Growth Company Fund (FDGRX). It is still unclear how much Fidelity gained. But the 2010 Form 5500 should shed some light. The form reports that there was 3649 participants. Out of the 228.7 million plan asset in the end of 2010, 36% of the money (totalled 83 millions) went into Fidelity’s mutual funds and manged income portfolio. The plan asset in 2011 was reported to be more than 400 millions so we can roughly estimate that 144 million (36%) went into Fidelity funds, which mostly are actively managed funds with expense ratios around 1%. So in total, it is estimated that Fidelity could at least directly gained from the LLNS 401k plan by 1.5 million in 2011 (3649x $110 = $401, 390 participant fees + 114 million x 1% = $1,14 million fund expenses), not counting indirect gains (or kick-backs) by selling other mutual funds in the plan.
The new investment options, especially the passively managed index options in the LLNS 401k plan are in general improved choices. Among them are some very competitive stock and bond indexing investment options with expense ratios ranging from 0.03% to 0.1%. But some of the active options are hard to be explained to experienced investors.

* For example, the International Equity Fund, which invests solely in the Fidelity Diversified International Fund Class K (FDIKX), has an expense ratio of 0.79% for lab participants. But FDIKX is only rated as a 3-star fund with an expense ratio of 0.77% on Morningstar. It looks like Fidelity charges lab employees more than they charge retail customers. In additiona, a close examination reveals that FDIKX has almost identical performance in the past years as a comparable index (MSCI EAFE) has. It is reasonable to suspect that this is yet another passively managed fund which is claimed to be actively managed to justify the higher expenses.

* Large Cap Growth Equity Fund: an investment option with an expense ratio of 0.47%. It is very difficult to find any online information about this option since it is a secretive separate account without the same transparency and regulations as mutual funds do. Anyway, even the fund’s own unaudited fact sheet reports that this large cap growth equity fund was beaten by its benchmark (Russell 200 Growth Index) in the past 3, 5, and 10 years. Overall, it underperforms the benchmark by 2.29 percent (annualized) since its inception. Wise investors would wonder why not invest a cheaper, regulated, transparent, and better performing index fund tracking the Russell 2000 Growth index.

* Small-Mid Cap Equity Fund is a separate account mixing two options together. It is not clear how the two options are mixed, who is managing it , or even which company is mixing them. The fund fact sheets only mentions that manager is “Management Team” and Company is “Multiple Advisor”. One of the options is Cramer Rosenthal McGlynn Small/Mid Cap Value Fund , which should be identical to its public institutional mutual fund (CRIAX) rated with only 3 stars on Morningstar. The other one, Wells Capital Fundamental SMID Cap Growth Equity, does have better return than Russell 2500 Growth Index according to its online fact sheet. But unlike mutual funds, information from separate accounts is not audited. The methodology of calculating returns is not regulated for separate accounts neither. Yes, financial firms have proven to be very creative when reporting unregulated data.

* The CORE plus bond is more interesting. It is claimed to be a relabeled PIMCO Total Return Fund (PTTRX). But it has very different share price (NAV) from PTTRX although both share the same expense ratio (0.46%). It cannot be tracked anywhere, at least for now. The question here is how investors can know it is really what it claims.


A fundamental problem with the LLNS 401k plan, also all other private 401k plans, is that participants/beneficiaries don’t have too much to say for the fees and investment strategies of the plan. Participants’ hands are tied, even if they hate the greedy service provider and absurd investment options. They can only make changes (rollover to a better plan) if they change jobs. Some participants may had spent hours on choosing funds with a long term goal. But all of sudden, LLNS decided to overhall the entire investment options without notice. For lab participants, it is advised to consider the volatility of the plan management when making long-term investment choices. The Thrift Saving Plan, a 401k-like plan for federal employees, consults with the employee advisory council for advice. Unfortunately, private 401k plans usually don’t have the same protection for participants. It is only up to individual participants to voice their opinions and concerns and hopefully employers can listen before lawsuits come.

In summary, the revised LLNS 401k plan is definitely a big improvement. But it is very disappointing to see that the excessive annual participant fees are still there. It is also very confusing why some inferior, or even expensive, actively managed investment options are added. Another troubling aspect is that with the introduction of separate accounts and commingled pools, the transparency and regulation protection participants had with mutual funds are gone. It looks like LLNS only tried to passively react to the the fee disclosure pressure from the labor department and not motivated by their legal fiduciary duty for beneficiaries.

References
* Form 5500/5500-SF Filing Search, http://www.efast.dol.gov/portal/app/disseminate?execution=e1s1
* Walmart, Merrill Lynch Agree To Pay $13.5 Million To Settle 401(k) Fiduciary Lawsuit, http://www.forbes.com/sites/williampbarrett/2011/12/05/walmart-merrill-lynch-agree-to-pay-13-5-million-to-settle-401k-fiduciary-lawsuit/
*The Federal Retirement Thrift Savings Plan https://www.tsp.gov/index.shtml
* Will 401(k) Fee Disclosures Bring Clarity to Perplexed Workers?
http://abcnews.go.com/Business/401k-plan-best-employer-choose/story?id=14729357#.TvjtaNRSSVM
* DOL Aligns Deadlines for Retirement Plan Fee Disclosures http://www.shrm.org/hrdisciplines/benefits/Articles/Pages/disclosuredeadlines.aspx
* http://www.gpo.gov/fdsys/pkg/FR-2011-07-19/pdf/2011-18029.pdf
* Stern Advice: Companies shake up 401(k)plans, cut fees, http://www.reuters.com/article/2011/12/08/us-column-personalfinance-idUSTRE7B623Q20111208
* Wells Capital Fundamental SMID, http://www.wellsfargoadvantagefunds.com/pdf/managedaccounts/FactSheet_FundamentalSMIDCapGrowth.pdf
* Separately Managed Accounts: A Mutual Fund Alternative, http://www.investopedia.com/articles/mutualfund/08/managed-separate-account.asp#axzz1hbI7KCGT