ERISA Law Responsible for High 401k Fees Cost Investors $7.6 Billion A Year

Often times people complain about the high fees of 401k plans. However, people don't stop to think about why the fees are high in the first place. Unless you are in the financial planning/finance world you most likely don't know about the mandated regulation/compliance that 401k plans have to go through (which can be time consuming/costly/counter productive).

In a study done by Deloitte in 2013 that studied the fees for 401k plans of various companies and found that the median "all-in fee" the cost for record keeping, administration, investment management was was .67%. which is actually a reduction in fees from 2009 when the "all in fee" was .72% which is actually a 7% decrease in 401k expenses! People complain about 401k fees but as a percentage basis realtors charge 6% yet I don't hear many people complain about that. What is interesting is that record keeping and administrative fees made up at least 18% of the total 401k "all-in fee". The rest of the fees are related to investment management fees which represent 82%. However, the report mentions that some of the investment fees include administrative/record keeping fees. Also it is important to remember that the mutual funds that many 401k plans use have their own regulations which are summarized here (as you can see this is government regulation on top of government regulation). If employees believe their 401k plans are invested in funds that are too expensive they can always tell management to switch to cheaper index funds (index funds are a fraction of the cost of mutual funds). Another compliant is that people won't know how to invest their 401k plan. I don't know everything about medicine but I know I can hire a doctor to help me with my medical affairs. In the financial world people can hire a fee only financial advisor who can provide advice on what to do. Usually financial advisors charge either a percentage of the assets they manage, an hourly rate, or a flat rate. However, they usually assist people with more than just investing (things like estate planning, insurance, retirement planning, etc.)

So let's do some quick math here. If the average 401k plan has a "all-in fee" of .72% and to be conservative we will say 18% of the fees are due to administrative/record keeping fees (thanks to ERISA) and as of 2013 401k plans held $5.9 trillion in assets this would mean that ERISA and regulations cost 401k plans at least $7.6 billion per year! I didn't even include the ERISA compliance cost related to employee benefits.

One major body of legislation that governs 401k and other employee benefits is a law known as ERISA (Employment Retirement Income Security Act of 1974). ERISA was created because if an employer went bankrupt and had to terminate its pension plan the employees of the company would lose their pension benefits. A nice summary of ERISA can be found here. The law now requires companies to set aside monies for the specific purpose of paying pensions and other employee benefits. If you are a company and have a defined benefit pension plan the ERISA law requires you to be fully funded (of course the government isn't subject to this for their pension plans).

Companies have over time moved away from defined benefit plan (were the employer was in charge of managing the investments) to a defined contribution plan (401k where employees contribute and therefore determine their own retirement). Of course the government deprives us already of our retirement fund by taking about 15% off the top (6.2% for Social Security and 1.45% for Medicare for both the employer and employee and obligates people to invest in Social Security. Not only does the government force you to contribute into Social Security but if you want to invest in a 401k under ERISA you can only contribute a maximum of $18,000 for 2015 to your 401k plan. If you are over 50 the government let's you contribute an additional $6,000 to your 401k (the government likes to let people defer more for missing out in earlier years). Not only are there limits of how much you can put in as an employee there is a limit of how much can be contributed between the employee and the company ($53,000 for 2015).

Also you shouldn't worry because the government gets to tell you when you distribute the monies. Once you are 70 1/2 monies are required by law to be distributed (known as required minimum distributions) which are taxed at ordinary tax rates. Oh and don't worry if you don't take your required minimum distribution the IRS slaps a 50% penalty tax along with taxing your distribution as well. The IRS also has rules on when distributions can be taken from a 401k without penalty (there are 16 exceptions which can be found here). As you can see the government likes to make sure they have control in how much you can save, when you can save, and when you take distributions from what you saved in your 401k plan.

The regulation and compliance with 401k plans and benefit plans can be burdensome. Let's go through some of the ERISA code and just see some of the regulations companies have to face (remember the regulation are passed through to workers). 401k plans must provide a summary description which is a written description of the plan and what the plan offers.  Section 103 requires an annual report be filed that tells the government how the plan is operated, the assets of the plan, and the investments of the 401k plan. The plan also has to have detailed financial statements and these statements have to be made available to plan participants on a regular basis. All this information is then filed out on a form that is filed with the Department of Labor (known as the Form 5500). ERISA even tells companies who can be included or excluded for a 401k plan! Under ERISA 202(a)(1)(A) a 401k plan can exclude an individual who isn't 21 or hasn't worked a 1 year (1 year they define as working 1,000 hours in the course of a year). Companies on a 401k usually offer a matching contribution. Some people say this is "free money" of course this is utter nonsense because the company has to get the money from somewhere (the company gets a deduction for the match though-reducing their own taxes) and they could offer you more money instead of matching your contributions. Anyways, when an employer makes a matching contributing as an employees you don't have access to those monies to 401k monies under ERISA rule 203(b) until the 6th year of employment (companies can be more generous if they want and make the time period shorter).  

Not only do companies have to comply with these rules but the penalties can be extraordinary burdensome. No worries Section 501 of ERISA provides what the consequences are. Under ERISA if a person violates the reporting or disclosure of information the fine can be up to $100,000 and up to 10 years of prison times. Companies can be fined up to $500,000. Section 411 bars people from even working for a benefit plan if they have convicted crimes. Oh and if you hire someone who has a criminal record you could get a fine of $10,000 and spend 5 years in jail. 

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In general ERISA states that plan benefits have to be offered in a nondiscriminatory manner. This means that if you offer a benefit (health, 401k, life insurance) it has to be offered to everyone. The law evolved to this because executives were setting up company plan benefits for themselves and leaving out the rank and file employee which of course made regulators add more regulations requiring that company benefit must benefit at least 70% of non highly compensated employees (nondiscriminatory testing). Of course government plans are exempt from these nondiscriminatory tests! You might ask who are highly compensated employees (don't worry the government defines this!). For 2015, the government defines anyone who has a 5% ownership interest in a company or more than $120,000. As Walter E. Williams would say $120,000 doesn't classify anyone as rich (that isn't even Lear Jet money as he would say). The company has to look through their entire employee list and analyze total compensation and calculate whether or not they are meeting these tests (this can take time and is burdensome which forces companies to hire a 401k consulting firm to assist with the calculations). Not only does the company have to test to make sure enough people are participating in the 401k but also have to do this same testing on any benefit that the company offers employees.

Congress should consider repealing the ERISA law and allow companies in order to reduce the time, effort, and money that companies have to pay to comply with running a 401k plan and telling companies how many employees need to receive company benefits. Compliance costs/administrative cost for 401k plans are costing workers $7.6 billion a year. Why can't employers discriminate in terms of who gets company benefits and who doesn't.? Employers already discriminate on employees based on their salary. More importantly the government has no right telling companies who they have to offer benefits to, how much they can offer, and when these benefits can be distributed. 

Koch 2015 Seminar, Charles Koch Washington Post Interview, and "Climate Change"

So over the past few weeks so there has been some Koch news so I thought I would let people know my take on what is going on (after all I believe my blog has more posts about Koch than any other site on the internet).

The semi-annual seminars have been taking place since 2003. With a meeting from August 1-August 3, 2015 with private donors in Dana Point, California at the St. Regis Monarch Beach resort (as I write this rooms start at $655/night) 450 wealth donors (people who have created tremendous value in society) gathered for the semi-annual "Koch Seminar" which was has the title of "Unleashing Our Free Society". Membership fees are around $100,000 per year. Only 9 organizations were invited to the seminar. The conditions were that the media could not interview donors without there permission and had could only take notes pad and paper (very old-school indeed). Although the list of donors are not known this leaked memo from a previous seminar would give you a pretty idea of who would be at the seminar. In the note that Charles Koch sent out to attendees he also attached this 2014 Wall-Street Journal article about William Gladstone who was the 19th century Prime Minster of Britain. Charles Koch said that this current battle is for "the life or death of this country".

The actual text of the speech that Charles gave donors can be found here from Bloomberg. He says that "our mission, as we say, is to unleash our free society and expand opportunity for everyone". He goes on to talk about a free society being a "society that maximizes peace, civility, and well being for everybody". Charles then goes on to discuss how GDP is a bad measure for the economy. This article from FEE does a good job of explaining why GDP is a bad measure for the economy. Charles then goes on to talk about if we can achieve a 4% growth rate we can take the average American from $42,000 per year to $100,000 (just the magic of compound interest).

One area that I think liberals actually agree with the Koch brothers on is criminal justice reform. Even President Obama mentioned the Koch brothers effort on criminal justice saying "You've got to give them credit. You've got to call it like you see it" as this WSJ article discusses. In a recent interview with the Washington Post to the surprise of some people when talking about crime Koch says "to me, if someone is committing a crime, to deal with it to use minimum force necessary to prevent the crime..there has got to be a way to stop that. I mean, I'd let the guy go. No big deal. He's not really hurting-maybe he's avoiding taxes or something, but to end  up in death is outrageous". Perhaps to Charles Koch Black Lives Matter.

In a rare interview with the Washington Post Koch talked about the 2016 election and his views. People claim that the Koch brothers have so much power. This of course is just nonsense. Has a Koch brother ever forced you to pay taxes, stop at a stop sign, or get a permit? The answer to all these questions is obviously no. However, government can force people into doing all of these things since they are truly the ones with power. When asked about seeing a Republican in the White House Charles Koch replies that he is a "classical liberal". The problem is that Republicans do pretty much the same thing as Democrats once in office. The best quote from Charles in the whole interview is when he says "I think the Democrats are taking us down the road of serfdom at 100 miles an hour, and I think Republicans are taking us at 70 miles an hour". He is a big fan of Calvin Coolidge who would make modern day Republicans look like middle of the road candidates. One item that Charles would eliminate is welfare for both the rich (corporate) and poor. Koch then goes on to discuss in this article how the banks are the biggest proponents of corporate welfare.The banks he says "got massive bailouts,virtually free money from the Fed, and regulations that are crushing the smaller banks, the community banks". The Federal Reserve now decides what banks can do now, what products they can offer, and even can decide when a bank pays out a dividend. Of course the largest banks are major contributors to both political parties.

Koch Industries benefits from the fact that U.S. based companies are not allowed to export natural gas overseas to foreign countries where the price is actually much higher than it is here in the U.S. Something that I didn't know was that Koch Industries uses about 4% of the industrial consumption of natural gas (the division in charge of this is Koch Global Supply and Gas-company information can be found here. Currently, natural gas prices are near all time lows. Anyways, Koch benefits and as other liberal bloggers have reported Koch has received millions in corporate subsidies. However, Koch is still for abolishing all corporate subsidies. To be perfectly honest Koch does roughly $115 billion in revenue (profit as I estimated in this blog post is roughly $6-$10 billion/year). Koch could still be profitable without the subsidies. Charles Koch relies on the principal of treating everyone equal (this is a libertarian concept after all).

When asked about climate change Koch admits "well, I mean I believe it's been warming some". He goes on to say though there could be a measurement problem with how the temperature is measured (on ground vs. in the sky).  What he doesn't agree with is that it will be "catastrophic". According to Koch, "there is no evidence of that. they have these models that show it but the models don't work..to be scientific, it has to be testable and refutable". Let's remember that science is not a democracy. Charles also has a couple of masters degrees in engineering from M.I.T. too. The question is whether you want to reduce economic growth for something that may have a very small chance of happening. Charles Koch even had dinner with Bill Gates in which they discussed climate change (for the record Gates who is a big Democrat pointed out that Koch was a "very nice person". I honestly believe that if there was enough evidence to show that there was a large possibility of "climate change" destroying the earth Koch would shift his opinion on the subject. Brother David Koch has said that global warming is actually a positive since extending the growing seasons in the northern hemisphere which will allow more land will be able to produce food. In a breakfast speech that Bill Koch gave to 600 people at the Palm Beach Chamber of Commerce October 17, 2013 said he isn't a believe in global warming and actually believe we could be lead to a mini-ice age. Bill Koch has some science background since he has a PhD in chemical engineering from M.I.T. saying that people who are calling for carbon dioxide emissions are "on acid". He goes on to say the best way to reduce carbon emissions is to plant trees. Koch says that "to get away from carbon dioxide the human race will have to move to another planet".

It appears that the Kochs are being less secretive as they are now allowing the media to attend their events (although some of them complain about the access as reported here). Let's remember that this is a private party and people can either decide to be there or not. On the other side in this recent WSJ article Koch donors are tired of being demonized. Donors recently wrote a letter to the Dallas Morning News describing what the Koch brothers want.

If I were in charge of the seminar I would videotape and record all the sessions to show the public that these people are really not evil and just want to see more freedom and liberty. Part of the reason I don't think the media continues not to like the Koch brothers is because they still see them as secretive.  I personally don't think even some of the crazy liberals would go after 450 individuals who have different beliefs. If there were only 4 donors I might change my view. Part of the reason why I think Koch has been more open recently is the number of death threats, cyber attacks, and name calling that has been going on for years. This transformation was recently talked about by the New York Times here. If I would were advising the Koch brothers I would tell them to continue to be even more open so people can understand their values, beliefs, in order to not distort them which I would think in the long run lead to fewer death threats, cyber attacks, and just fundamental misunderstanding.