Target Date Funds & Small Plan Litigation Risk

[0:07] JD: Well, we have this conversation about Target Date Funds and so my question, did [0:11] Chad: you guys know that I invested in Target Date Funds? [0:13] Justin: Yeah. [0:13] JD: Apparently very smart 401k studying individuals is how are Target Date Funds being chosen today? By your plan sponsors, by your prospects, with help from your advisors. How do they decide amongst the universe of target Date funds which one will be appropriate for them? [0:41] Justin: It's a two step process. [0:43] JD: Always got to break it down into a process. [0:45] Justin: It is. Does the provider allow me to choose more than one Target Date Fund family? So first off, there are many out there that don't give you any choice. [0:54] JD: There's still some that don't. [0:55] Justin: You're using proprietary Target Date Suite based upon the product you're choosing. [0:58] JD: I'm not going to put you on blast. I don't want to upset any of our. [1:01] Chad: Why do we keep saying on blast? [1:04] Justin: Because Jas brought it up, actually. [1:06] JD: Oh. He's gotten very comfortable in his position over there. [1:09] Chad: Now I'm as far away from this person as possible. [1:11] JD: Are they really still. [1:12] Justin: Yeah, absolutely. [1:14] JD: Like I can. [1:14] Justin: And they're, they're. I'll be quite honest. Their approach is it's not a proprietary suite because it's a multi manager approach. They're not offering. [1:22] JD: Fair enough. [1:23] Justin: Only their underlying core menu funds and the Target Date Fund. It's a multi manager approach. [1:28] JD: I don't, I want to bring up names. I'm not going to. [1:30] Justin: No, don't. So that's the first one. So an advisor's looking and saying, is the product that's going to be chosen giving me access to multiple families or only one? The second is. I'm just being completely honest. Is Vanguard available? [1:43] JD: Oh, geez. [1:43] Justin: Because most advisors are looking to drive down the total cost of the core menu. And they know that that's a way to do it when they're in a competitive situation. [1:54] JD: I can't believe you just went there. That. So that's the one. Two. I get the one like. All right, well, do we even have a choice? Because if you decided to go with record keeper A and there's no choice, well, then you're kind of stuck. But if you're going. And can I please say, most record keepers do have a lot of choice right now. Right? [2:14] Justin: Yeah. [2:14] JD: By the way, viewers, we are in an office, so you may hear some phone calls here and there. Many of them have choice. And so then if you have a choice, how are you choosing? And okay. And you're saying, well, the next question is, do you have Vanguard? We're going to Talk about this a little. [2:32] Justin: Arguably, what many of them will say is we know that the majority of the assets are going to roll into these funds, and we know that the participants that are going to put their money in there are not going to play an active role within the decision. So let's use the lowest possible cost option that we can find because cost is a big headwind to returns. Okay. [2:51] Chad: Yeah. [2:52] Justin: So at least there's some thought there. [2:53] JD: And we're going to talk about that as we come back to this in a little more detail in terms of the passive first active, because it's definitely part of it. And so we'll get back to that. So stay tuned. During the show, we're going to dive deeper into this choice of target date funds. But for now, the most important thing is. Well, let me first welcome everybody, everybody out there in the 401k world. Advisors, industry professionals, crazy people that just watch 401k videos on YouTube, which is kind of weird. [3:28] Chad: Welcome to Retireholics. [3:30] Justin: Those are our people. [3:31] JD: Number uno. [3:33] Chad: I literally don't know. [3:35] JD: 14. [3:35] Justin: I'm pretty sure that's not how you're 14. But you just said one in four. Oh, good, Chad, what do we got? [3:41] JD: 1 4. You could say Equinox. [3:42] Justin: He's always Equinox. [3:44] JD: Hang on. Here are my friends. Justin, Chad, Mark, Jake. [3:52] Chad: Because you forgot Free hole. [3:54] JD: Oh, he ran away. Oh, my gosh. [3:56] Justin: I just noticed this. By the way, I'm not sure who bought the beer for this episode, but take a look at the top. Yeah, you can see it right there. [4:03] Chad: Well, I'm gonna try to zoom in on this. [4:05] Mark: Could get dangerous. [4:06] Justin: So let me grab this one so I can read at the same time. Laganita's Equinox, first brewed in genuine pale oat ale. The very top. It says 401K. 301K, 201K. [4:18] Mark: I'm really enjoying. [4:19] Chad: I've never been. [4:20] JD: Do me a huge favor. I'm miked up. Can you grab my little master mug right here? I love right here. [4:27] Chad: That's awesome. [4:27] Mark: Are you just noticing that? [4:28] Justin: And we've had Lagunitas a number of times, obviously local brood Petaluma. There's another great brewery up there as well. Petaluma Hills. [4:36] JD: Wow. [4:37] Justin: Plug. [4:38] Chad: Plug. [4:40] Justin: But it is a pale oat ale is what it states. [4:44] Chad: Now. [4:44] Mark: One thing we need to get back to here, Chad, is we have not have you give us your opinion. [4:49] Justin: I have not given a description the last few episodes. Smell it. Thank goodness I didn't the last one, because the last One was rough. That beer was not tasty. [4:58] JD: Do you smell beer before you drink it? [5:00] Chad: Say, about that beer we had the [5:01] Justin: other night, it was earthy smell. [5:03] JD: Earthy. [5:03] Chad: I don't smell anything, bro. [5:04] Justin: Really dirty in the one with a cold. [5:06] Chad: Adding allergy. Yeah, just no. Cuz my daughter smashed me in the face with her skull the other day. [5:13] JD: You know, that's a good thing about having a mustache is you can save beer for later. [5:17] Chad: You dip your beard beard in it. [5:19] Justin: All right, Jason, I will give you a. [5:21] Chad: By the way, is that a hockey beard? Have you seen a little bitter? [5:26] Justin: Little bitter, little bitter Giant refreshing baseball players crisp. A little malt to it. A little malty. [5:33] Chad: Did you Google like synonyms for that? [5:36] JD: Sure. [5:36] Mark: I see we're getting with the crisp. [5:38] Justin: Yes. [5:38] Mark: What'd you ask? [5:40] Justin: Did I Google? [5:40] Chad: Are you paying attention for the same [5:42] JD: word I do want frijole on the show. If you ever like. Come on, buddy, you're part of the show. I'm sorry. I'm sorry. I didn't bring your name up first. That's. [5:52] Chad: We should go specifically. [5:55] JD: All right, guys, as much as people love to watch us drink beer and chatter, I think they also want to hear a little bit about this 401k stuff. Oh, hey, bud. [6:04] Chad: Yeah, you're going front and center. [6:05] JD: So let's dive deeper into the target date fund selection. And I kind of threw along a article to you guys on Plan Sponsor magazine. Right. For us to read that. Talked about. [6:19] Chad: You were supposed to read that. [6:22] JD: The four steps, in order, mind you, of choosing a target aid fund that plan sponsors and I guess our advisor should follow. Yes. [6:30] Justin: You know how passionate I am about this because we've talked about it a number of times. Yes. Plan sponsors should follow this. I just want to see a process. I just want to see a damn process. I want to see advisors and plan sponsors consider what suite they're using, show some sort of due diligence in that process. We know that 70% of the dollars are going to flow into target Date funds. So spend some time figuring out what fits your demographic. [6:55] JD: Is it still 70%? [6:56] Chad: Has that gone up? Can you please tell me where you got that number from? [7:01] Justin: It's just about everywhere. [7:03] JD: It's 74.5. [7:05] Chad: So you're wrong. Wow. You were wrong. [7:07] Justin: I said about. So actually, I caveat it. [7:11] JD: The point is about means it's. The point is. Is that what everyone understands out there is if the lion share of the assets. If the lion's share of the assets are going into these types of Investments, then obviously they need to have the highest level of scrutiny and, or attention. And by the way, if you're not a 300 person, $20 million plan that has the time for this type of scrutiny, we still feel like it's important for advisors to walk into that 10 person, $1 million plan and say, let's still spend some time on this. Right. Let's make sure we make a logical decision. [7:51] Chad: Because not every target date fund is created equally and every type of employer has a target date fund that fits better than others based upon the demographics [8:01] JD: added to your game. Right. Yeah. [8:03] Justin: I needed both hands. [8:04] Chad: Right. [8:04] Justin: I mean, every time we talk about notyourtypical advisor, this is a great way to differentiate yourself because everyone else is [8:11] JD: just checking the box. Oh, this is your target name. So let's talk about it then. Let's dive in. Let's talk about the four points that we kind of stole here from plan sponsor number one, which isn't gonna come as a shocker. [8:23] Justin: Number one thing, I'm pretty sure it's Morningstar, isn't it? It was a Morningstar lane. [8:27] JD: Oh, can I first clarify? Thanks. Do you remember you gotta do what? First you've got to first determine who are your people, who are your participants? Right, so sorry. First determine what's your demographic, risk tolerance, all those things. [8:42] Justin: The type of people that you employ. [8:44] JD: Are they, I hate to say should [8:45] Justin: have an effect on that decision. [8:46] JD: Yeah. What's their salary rate, what's their tenancies, how might they retire? How long are they going to work? I mean, and that's going to help [8:53] Justin: you get through these next few years. [8:55] JD: Was there intelligence and understanding of risk and are they risk averse or not? So all those types of decisions. So now you know who your people are generally. Now there are four things to consider. And they say the number one thing which I said wouldn't come as a shock is glide path. [9:11] Chad: Oh, I'm shocking. [9:12] JD: Mark. Mark doesn't know what a fiduciary is. [9:14] Chad: So you still haven't told me. [9:17] JD: We're holding that back. You'll get that sometime next year. [9:19] Justin: There's a definition that was recently released. [9:21] JD: Glide path. And I guess you could say, what do I mean by glide path? You can say to and through. Fine, that's. [9:28] Chad: That's same kind of thing you think of wee. [9:32] Justin: Yes, actually I do. [9:34] Chad: Unless you're American century and you're flat. Then you're like wee. [9:38] JD: Yeah, yeah, yeah. [9:40] Justin: You're not wee. [9:41] JD: They say flat is fat and I say fat. I mean, p. H a T fat kind of 80s thing. So your glide path, which. [9:50] Justin: Duh. [9:51] JD: Of course, that's the biggest thing to consider because it's going to have the most impact on the outcomes of that type of investment. I should pull up. You guys studied all this. Number two. [10:02] Chad: You're absolutely cheating, by the way, by having a laptop. [10:06] JD: Number two. Number two. You guys gonna. You guys studied it. What's number two? [10:11] Justin: You guys studied, didn't you? [10:14] JD: Asset class exposure. [10:16] Mark: That's what I meant. [10:19] Justin: You have fixed in there that you have some good exposure. Yeah. [10:22] JD: So yeah, you've got a glide path. And does a glide path mean you. You have equity versus bonds and cash? For sure. But now they're saying number two is dive deeper. What's the asset allocation within the equity? What types of classes are they using? And what's the allocation within the bonds? And how does it vary along that glide path? Right. [10:42] Justin: Correct me if I'm wrong, but they first talk about exposure and then they talk about physical allocation. Right? [10:47] JD: Yeah, yeah, true. And they include fixed income. No. So step three has the asset allocation methodology and how the allocations in the glide path change over time. Chad's right. I was wrong. [11:00] Justin: It has to do. And you hear this, and he didn't [11:02] Chad: even read the article. [11:04] Justin: Not all target day funds are created equal. You talk about equity exposure at the beginning and the steepness of their glide path and equity exposure 2 versus through and the allocation within there. There are a few active managed target date funds since I gave the plug to Vanguard earlier. Some active managers out there. [11:21] Chad: That's the fourth point. [11:22] Justin: Don't go ahead. [11:22] JD: Jesus. But that's good that he said that. So what's the fourth point? [11:26] Chad: We didn't do three yet. [11:27] Justin: We just did methodology. Methodology. [11:29] JD: Yeah, the last one. Number four. [11:32] Justin: That was an honest mistake. [11:33] JD: Number four is the big debate, right? Active versus passive or both or there are some out there that are mixing, you know, but the concept is, are you going to choose an active based target date fund or a passive based fund or. Yeah, sure. Some of that has a mix of both. And that's number four, they're saying. [11:53] Chad: I don't like how when you said both, you were kind of dismissive of it. Can you. I'm just, just curious. [11:58] JD: There are targeted funds out there that have said, hey, we've decided that within this type of asset class, say international, for example, we think there's a lot of benefit to being actively managed in this space, but when it comes to something like US Equity, maybe we want to be passive or And I'm just making up some stuff here. But that's the concept is you could mix and match with things like that. Right. [12:22] Chad: But you don't, you don't think that's a good mix? [12:25] JD: Oh, I think it could be great. Makes a lot of logical sense, for sure. [12:28] Chad: It's just not something that a lot of them are doing right now or [12:33] JD: a lot of them doing. I would say about 27.3% of all target date funds. [12:40] Justin: I'm going to go, Chad. [12:41] Chad: I'm going to call Bolt. [12:44] JD: That's probably not far off. [12:45] Justin: Here's a question I've been asked regarding active versus passive in the target date suite. Isn't the fact that they are actively picking the allocation, the glide path, the two verse through make it almost an actively managed fund? I get it that the, the underlying investments are passive in nature, but they're taking an active management role in determining the allocation. The breakdown, the timing, the glide path, all of that is active. [13:10] JD: That's a fair point. [13:11] Chad: But that's, it's like active but passive. [13:14] JD: The funds that you choose within that fund, are they actively managed or are they passively. Yeah, I get what you're saying. And then this goes back to what you said originally. You said point one, point two, point one, what record keeper they're using, do they have a choice? Point two, you said, do they have Vanguard? And so here we are. Apparently plan sponsor disagrees with you. They think that's the fourth choice. [13:37] Justin: But, well, and all I was stating with that is that most advisors in a competitive situation, they want to come in with the most aggressive possible cost of available to them. And so often if you mix in 12 funds that are at 18 basis points like Vanguard, you can roll in with a much lower cost fund lineup. And that's what they're doing. [13:57] JD: Now. [13:57] Justin: What I love, and I know I've told you guys this for a while when you're sitting with advisors is to say, hey, I'm honest, honestly, I'm even fine with you showing Vanguard initially as part of your point of sale to show, hey, here's what a lineup could look like. But let's sit down and talk about what fits you as a business and your demographics like you guys mentioned. And let's determine if Vanguard's right then at that point I've seen an advisor show a low cost. Like he'll pick a provider that fits the client, he'll show a low cost and a recommended lineup and he'll say, hey, you want me to be low cost? You want to use Vanguard DFA passive. Here you go. You want me to come in and help you select the best in class lineup. It's not going to be the lowest cost options. We'll use Vanguard in the blend and then we'll use Active Management and Growth and Value. [14:45] Chad: That's. [14:46] JD: I'm kind of on the fence. [14:47] Chad: That's not every advisor. [14:49] Mark: No not but it. I definitely think it shows a lot of value there. He's put that's a great. [14:53] Justin: That's what we do. That's why we hashtagged it. Right. I mean those are people making it. [14:57] Chad: No one else hashtag it but Chad. [14:59] Justin: So we did. It was a mutual agreement. [15:01] Chad: Two things hashtag is not for all of us. [15:03] JD: Two things I want to do to kind of wrap this segment. One is that I'm kind of uncomfortable with the fact that because of the fiduciary rules because of the fee disclosure rules that came out several years ago that all of a sudden that the answer to that is Vanguard or passive investing. That makes me a little uncomfortable because [15:26] Chad: I believe that you don't get uncomfortable very easily. [15:29] JD: I believe that it really is a debate between active and passive. That's a great debate. Have it and. And I don't care. I'm in the middle on that. Like I see both sides. But when you're in this kind of scrutinizing fees and now you're going to use passive as your way to show lower fees. I feel like there's a little bit of a game being played there. But. But that's. Sure that's just where I'm at. And if you believe in passive funds and that's where your heart's at. I'm behind you. That's great. And I think go for it and. And go out there and share that message. But I just feel like it's a bit of smoke and mirrors to be running around talking about lowering costs by doing that. Although maybe that's the heart of their argument in the first place. [16:05] Mark: Well do you think it's a result of it is the new regs coming out and people wanting to get in the cost and worried about lawsuits and stuff like that. [16:12] Justin: I think that that's a perfect bridge that we're gonna stall for a second but into the last topic that we're gonna chat about today. Is it? Yeah, absolutely. [16:21] JD: So anyways pay attention to that. But one little side thing and maybe we can put it in our. We don't really have show notes but I hear other like podcasts talk about their show Notes. So that's pretty cool, but way too professional. Yeah. Which means like little links and things [16:35] Chad: like this for our check out review. [16:37] JD: Check out the plan sponsor magazine article that we're talking about. And then they give mention to a Morningstar white paper. Right. And the Morningstar white paper is titled the Glide Path Selection Problem. A Quantitative Approach to Assessing Light. Yeah, blah, blah, blah. In it. [16:54] Justin: You wrote that? [16:55] JD: In it, there's an interesting graph. [16:56] Justin: I'm a nerd. [16:57] JD: And it talks about all the target date funds that are out there and their glide paths. And it puts them on a graph and then it says, here's the glide paths of the top five target date funds based on total assets. And I thought it was really interesting because those five have a pretty similar glide path, which tells me that you kind of made mention of this one. These are very well marketed target date funds. Vanguard, Fidelity, T Row. I don't know the top five. Sorry, I should have done my homework. But. [17:28] Chad: But secondly, the top five are right [17:29] Mark: in front of you. [17:30] JD: No. [17:30] Justin: To give you names. Just the graph. [17:32] JD: Just the graph. But I'm just saying they follow very similar. So maybe it's a popular kind of glide path, too. I don't know. Food for thought. [17:37] Justin: The funny thing is, when you look at that, though, [17:42] Chad: you can see it's [17:43] Justin: different methodologies in terms of two or three. [17:45] JD: It's a lot more similar than the others. [17:47] Justin: But the glide paths are all almost identical. [17:51] JD: There's a couple that fall off a little bit. Okay, with that, I would like to move into, as I've always mentioned, my favorite part of the show. But this time it's not my favorite part of the show because it's a wheel of ice. I think that's great. The wheel is going to come out. We're going to spin it. Mark's going to lose. He's going to drink his random fight. So that's great. [18:10] Chad: Let's get this over with, please. [18:11] JD: But I'm also adding to this, as I did a few episodes ago, the Quiz of Death. [18:17] Mark: Dun, dun, dun. [18:18] Chad: So that applies to him. [18:20] Mark: Chad's getting nervous. You know what? [18:21] JD: I like to keep you guys on your toes. And this time, maybe it's not Chad. [18:28] Justin: I see it. I see Quiz of Death as the very last line item that JD sent out in Topics for this week. And I'm going, this sucks. [18:37] JD: And Justin actually tried it. He tried to IM me and be like, hey, can you tell me about the Quiz of Death? [18:42] Mark: And I'm like, nope, because I didn't [18:43] Chad: think it would Be enough. [18:44] JD: Spin it. Mark's gonna lose. Get his Smirnoff eyes. For the quiz of death, I will need some duct tape. Can I get some duct tape? [18:53] Chad: I'm sorry, what? [18:55] JD: Yes. Okay, so we're gonna get some duct tape, and I'm gonna ask a quiz question. [19:00] Mark: Oh, dear Lord. [19:02] JD: Chad can't see this because it's actually not gonna be just Mark. It's gonna be Chad. [19:06] Justin: Oh, I was gonna say, am I part of it? How dare you? [19:09] JD: Yeah, this works. [19:09] Mark: Oh, this is gonna go on your legs. [19:10] JD: Can I see your. Can we get these skinny jeans up so I can see those big fat calves you have? Jeez, [19:18] Chad: look who's wearing dress socks with slip. [19:20] JD: Can we get a close up on that maybe? Sorry, sorry. That's some hair. And this duct tape's gonna take off some of that hair. [19:27] Justin: I hate the quiz a death because it continues to go until I don't get something right. It's like a little get it wrong. [19:33] JD: I'm not gonna put it on until we know that you get this wrong. [19:37] Justin: And, well, I appreciate that. [19:38] Mark: I think you should tear off a nut that goes all the way around the calf. [19:42] JD: Ooh, around the calf. [19:43] Justin: Can we be quiet? [19:44] Chad: Can we do this chest hair? [19:46] JD: The question is, and I'd like to give him 10 seconds to answer this question. So maybe it could be the clock. [19:53] Justin: If I get it right, you two get pulled. [19:55] JD: If you have a plan, deal with $2,355,000. $2,355,000. And your advisor is taking 35 basis points. God, that's. So what would his comp be? His or her? 2. 3. 5. 5 and 35. [20:19] Justin: 7 7, 2, 1 5. [20:26] JD: $8,242.50. [20:29] Justin: I went in tens, and then I multiplied it by three, and then I tried to make up for what the five would be. Oh, that was a terrible question. [20:36] JD: Oh, my God. [20:38] Justin: This is a terrible question for this, by the way. [20:42] Chad: Let it marinate a little bit there. [20:43] Justin: Yeah, this actually doesn't feel that sticky. I'm not too worried. [20:47] Chad: It's not going to do anything. You should have gone against the grain. [20:52] Justin: Just pull against 1, 2. [20:57] Chad: Show the hair. You got plenty. [21:03] JD: Oh, shoot. I'm mic'd up. Sorry. That was pretty good. That was pretty good. All right, Chad, I thought you'd get that one. [21:08] Justin: That's still not. You just got, man, the taser was the worst so far. So that's not that bad. [21:14] JD: We have some other ideas. That's not that bad. [21:16] Mark: I was kind of hoping, like, A Steve Carell shout out like Kelly Clarkson or something. [21:20] Justin: Well, you have to wax me to make it painful for that I wasn't paying attention. [21:24] JD: But the Smirnoff I see is over there. [21:26] Chad: That went down smoothly. [21:27] JD: Is good. [21:28] Chad: That was a 2016 Smirnoff Ice brewed in the mountains of Smirnoff. [21:36] JD: Our last segment here is the 411 cake and we are talking about some lawsuits or kind of one in particular but in general starting to go down market. We are so used to lawsuits on big large plans with hundreds of millions of dollars or billions of dollars. And now hitting the press is [22:05] Chad: someone [22:06] Justin: needs to tell him to be quiet. [22:07] JD: Why? [22:08] Chad: He's working unlike us. [22:10] JD: There's a lawsuit on a plan that is less than $10 million. And so what's the name of the case? [22:19] Chad: So everyone knows. [22:21] JD: Well, you guys tell me that wasn't [22:23] Chad: part of the study materials. [22:26] JD: I'm trying to pull it up. Here we go. So there's an article called who says only big plans get sued by Mr. Nevin Adams at Napa Net. And the case is Damberg versus Le Metri's Collision Inc. So it's a, it's a Minnesota plan with less than $10 million in assets and 114 participants. And the lawsuit centers around what share class not being appropriate, being too expensive. [22:57] Chad: I would say in general terms reasonable fees for. [23:00] Justin: That's exactly what I was going to say. Let's start there because I think that the majority of people are going to say it's about excessive fees. I don't know what it's titled. [23:07] Mark: Yeah. But I'm still very, very confused on where they came to. It should be. So in it they name that it should be $18 per participant on average annually. [23:16] Chad: Let's talk about the case first. [23:18] JD: Yeah, let's talk about the case first. But that it wasn't. I was kind of caught off guard by that. [23:21] Justin: Yeah, that's. [23:22] JD: They also say, and I'm not going to quote the article, but the article here. But they also say that they feel like there was no oversight. They feel like there is no fiduciary process. What's a fiduciary. So basically they're saying, hey, these people were at the, the steering wheel of our plan. Right. The committee. [23:43] Justin: Did the employees file a suit, a civil suit. Yeah. [23:45] JD: With, with an attorney. Right. [23:47] Chad: Okay. [23:48] JD: That's what these attorneys do. They try to go out there and find their people. And this, this, this law firm looks like they want to go after others. And they've clearly this Is why this is newsworthy is because usually these attorneys would go after a far bigger payoff as opposed to this smaller plan. So. [24:07] Justin: And the justification has always been the fines. The compensation for those folks has to do with a percentage of assets. So you pick a smaller pay, and you get paid less. And so that's why they go after the big fish. [24:16] JD: And so kind of my question for you guys is, does this change the current landscape of what you and your advisors talk to plan sponsors about? [24:26] Justin: Yes. [24:26] JD: Can I first start that? We've kind of always gone to them and said, them being plan sponsors, like, hey, man, you need to keep your ducks in a row. You need to dot your I's and your t's. And why did we say that? Because we're like. Because you could get sued. Right. But now maybe you can say, yeah, you really can. Like, it's happening where before it was kind of upmarket. Yeah. [24:47] Mark: Which is why it's even more important to do what we always say. Document, document, document. [24:51] Chad: I think it's very common to hear folks say that they started a plan, it was set up well, they were happy with it. Nothing was really going wrong. So an advisor would proactively reach out to say, we should sit down every year to discuss your plan. And they would just say, I don't have time for it. It's kind of a. I would call it. You can tell me what you would call it. But a set it and forget it approach, where they thought, like, we set it up, everything was fine. I do the contributions. I'm on time. I sign my 5500. Everything's going smoothly. But they don't think about the bigger picture. [25:26] Mark: Right. [25:27] Chad: About all the nuances, the fees and the funds and everything else that you're thinking about. And I think maybe advisors need to be a little bit more stern to say, we have to sit down. I need you to sign off on this. [25:40] Justin: I've seen many advisors slide a service agreement, which we've talked about in the past, slide a service agreement across the table to a client and say, I'm gonna sign this, and you're gonna sign this. And because of that, you have to let me come in every year and do my fiduciary review. [25:54] Chad: We get it that you're busy, but it takes 30 minutes. We've got to get down once a year. [25:59] Justin: You just got to be there. [26:00] JD: I was having that conversation yesterday with a Southern California advisor where I said, hey, I think a great opportunity for you is to walk in and say, I'm going to demand that this happens. So unlike a lot of my peers, I'm not going to take no for an answer. We're going to make sure. I'm going to take responsibility to make sure we check those boxes, get these meetings done, don't document it, put it away, et cetera, et cetera. But let's go deeper. [26:22] Justin: Let me briefly clarify though what the issue was with the fees here, because there are some folks who do fiduciary reviews and let's be honest, we've all sat in them. What do they do? They review plant participation. They review prudence of the plan itself. When they get into cost, they review the costs. They don't review the prudence necessarily, but they often review the cost. If they are doing a benchmarking even, they often do an overall benchmarking and not necessarily what they this is pointing out to be the issue, which is a share class benchmarking. And so I always give the example to folks when we talk about the cost of a mutual fund, the difference between share classes. So we know A share, B share, C share, T share, I share institutional, R1, R2, R3, R4, R5, admiral. There's all these different shares, Y shares, T shares. Forgot about T shares too. You said T shares. My goodness. The end result is an analogy that I always give is if I wanted to go buy a soda and I walked the vending machine downstairs, I could buy a soda for a dollar. Let's just say if I went to Disneyland. [27:22] Chad: Not nowadays. No way. [27:24] Justin: I went to Disneyland and I wanted to buy the exact same bottle of soda. Another 12 ounce bottle of soda, 450. It's gonna cost me 450 or 5$. [27:32] Chad: Dude, Mickey Mouse has to get paid. [27:34] Justin: That's my point though. These shared classes have different costs. It's the same bottle of soda with different costs built around them. And so what this lawsuit and what Tussie versus ABB Inc. And some of these others is that they're looking at there and they're looking at the share class and they're saying based upon your [27:51] JD: assets, you could have a better one. [27:53] Justin: You could have a better one. [27:54] JD: But why aren't you, why aren't you [27:56] Justin: looking at that and going to your vendor and saying we want to lower share class. And that's it's not necessarily about the overall fee, it's about the share class that those funds are in. [28:05] Chad: We just talked about this a second ago. But then why not just give Vanguard to everybody then? [28:10] Justin: Because it's not about passive versus active or Necessarily cost of the type of fund. [28:16] Chad: I'm just playing both sides of the field. [28:18] Justin: No, I think that that's a natural response. [28:21] JD: But share class does not mean active first passive. Okay, so you can have a passive fund that has a higher share class. When people argue for vanguard, what inevitably they're arguing is, I want an institutional share class of an index fund. That's kind of the concept. So this is about share class. And you hit the nail on the head. Hey, if there's something better available to you that you could get your hands [28:48] Justin: on for the exact same fund and [28:49] JD: you're not doing it, then you're doing a disservice to your planned participants. And maybe that's where these lawsuits are coming from. [28:55] Chad: And who do you think? So you say disservice. So who do you think that falls to? [28:58] JD: Oh, I love that you asked that because I asked Chad that earlier. Like, is it the vendor's fault for not coming back and saying, geez, we're saving money on you guys? We could have just offered you this. And our kind of consensus is currently the first. The buck's gonna stop with the plan sponsor. It's gonna stop with the fiduciaries, like the people there that are in charge of this. And so I think, yeah, that's, by the way, when you have a plaintiff and they're suing, you know, this whole lawsuit's going down. It's not naming the vendor. Right, True. Although there are. [29:34] Chad: Although I will say that there is a particular record keeper that's mentioned in that article. [29:39] JD: But I guess I think it's really important to fixate on who we're trying to protect. We're trying to protect the plan sponsor. And so they're the ones. [29:47] Justin: So aside from the responsibility is who should be having that conversation with the plan sponsor because their advisor. Exactly. In all reality, that client is not. They don't know the 401k world well enough to have that conversation. But the advisor can come to them and say, hey, we started you off as a startup plan. You're now $8 million. You're still sitting in our three share class. [30:10] Mark: Well, that conversation we had well before they hit 8 million, though. [30:13] Justin: Well, I'm just stating that this. And we run into this all the time. I'm going to see a case done in some account next week where they're still sitting in a shares and they're seven and a half million dollars. [30:22] Chad: Isn't SoCal your territory? [30:24] JD: Yeah, but there was. [30:24] Mark: There was three specific. [30:26] Chad: Come on, man. [30:27] JD: Justin brought it up. Just, just so our audience knows, you know, if they read this article. I did find it interesting. It's probably going to get us off track here. But it did say that this lawsuit was claiming that a reasonable annual per capita fee paid by the retirement plan participants should not exceed 18 bucks. [30:46] Chad: Can you also specify the percentage over they were paying? [30:51] Mark: Right. [30:51] Chad: 4,900% more than they should. [30:54] JD: So they said that actually each participant was paying $886, which equates to 4,900. 4,900% higher. [31:04] Mark: That's based off of participant counts more. [31:07] Chad: That's a little excessive. [31:08] JD: Do the math for me on that for a second. I said 114 participants. What's $114 times $18? [31:16] Mark: Right. [31:16] JD: I called BS on that. Sorry, I'm all for prudent fees, but [31:21] Chad: we were just talking about this earlier. Is that specifically what they should be paying for record keeping fees? [31:25] Justin: That's exactly what I was thinking. [31:28] JD: Okay, maybe. Who knows? [31:29] Justin: So sorry not to let you finish your point. I think what you're getting at is you have cost of investments, you have cost of record keeping, you have cost of administration, you have cost of advisor comp. [31:39] Chad: It cannot be all in. [31:40] Justin: Some companies aggregate those, some break them apart, you get institutional, and then you break each of those apart. So it depends. [31:47] JD: I recently wrote a blog post. [31:49] Chad: What? [31:50] Mark: No, wait, wait, wait, wait. [31:52] Justin: Yeah, clap. What's the name of your website? [31:55] Chad: I hope Brandon can put it in here. [31:57] JD: F o u r401k01k.com and I did write an article about this concept of shifting fees from the participants to the plan sponsor. So I want to wrap this kind of litigation lawsuit conversation with this. A great way to solve this problem is start to take those costs and instead of having them be $18 per participant or $886 per participant and start to make them a business cost. And if the employer is writing a check for those services, you're lowering your response, your liability in a huge way. So something for our audience to kind of chew on is, you know, start thinking about solutions where maybe Tom, Joe and Mary, the participants aren't flipping the bill for the whole darn thing all the time. I know that's kind of earth shattering concept. [32:55] Chad: I wouldn't say that. [32:56] JD: And the plan sponsors picking up the tab. [32:58] Chad: It's easy to communicate to your participants when you don't have to tell them the different types of fees. You're just like your investment costs. [33:05] Justin: That's the cost. [33:06] Chad: That's what you pay. [33:07] Justin: Which is an argument we haven't even chatted about on the show at all. Next time, nav. You know, there are providers out there that say we won't give you institutional, but we'll give you nav. And therefore the only cost the mutual fund anyway is you're in a higher cost share class, which is back to kind of this. [33:22] JD: Back to the same problem. [33:24] Chad: So I'm just. We do have audience members that aren't in our industry. Can you say what NAV stands for? [33:29] Justin: Net asset value. [33:30] JD: Thank you. [33:32] Chad: I actually didn't know what it was. [33:33] JD: He was doing that because he was trying to figure out what it was. [33:35] Chad: But I just learned something. [33:37] JD: My simple, My point is very simple, is that if you have costs and the majority of those costs are being borne by the participants, and I'm not saying that that's necessarily has to go away, but just, just be aware of that. And you want to change that and you want to make it a safer, less litigious, you know, situation. That's a word, right? [33:59] Chad: I like that. [34:00] Mark: It sounds like it is. [34:01] Chad: It sounds sexy. [34:01] JD: Sexy it is. You move those costs to the plan sponsor. [34:07] Chad: We have this conversation constantly because of the tax implications. Sorry. [34:12] Mark: The cold hard fact though is it's, it's not. I would argue it's not as easy as it sounds because it's an uncomfortable conversation to have. [34:20] JD: I think in my article I said you need to grow a pair of cold hard facts. You need to grow a pair. If you're gonna do it like you gotta have something. I don't think a lot of times [34:29] Chad: the person you're sitting with is paying the majority of the fees anyways because they have the majority of the assets. It's actually an easy conversation to have, at least from my experience. [34:39] JD: A lot of people commented on the blog. [34:40] Chad: Did you say cold hard facts? [34:42] Mark: Possibly. [34:43] Chad: I don't remember. That's nice, man. Have that hashtag or something that was stolen from somewhere. [34:48] JD: So anyways, for advisors, for industry professionals, everyone out there that's watching this show, you know, think about those concepts definitely when you're talking to plan sponsors these days, let them know that these lawsuits are coming down market and therefore it is important. [35:06] Chad: That's one that we've had an example of, but I'm sure there are others similar to that and there's. With the amount of auditors that have been hired, I'm sure lawyers are also out there looking for their share. [35:17] JD: The final paragraph of this article, Mark says, and this may not be the last we hear from the law firm representing the plaintiffs, Madea Law LLC of Minneapolis. That's where my wife's from, by the way. [35:31] Chad: Hi, Tracy. [35:32] JD: The homepage of their website says, goliath, beware. We're trial lawyers. Our core competency above everything else is trying cases to juries, and we specialize in beating giants. So anyways, they're just saying, wow. Yeah, we're gonna. And they're going after this. Thank you for attending. Episode number 14 of Retireholics. [35:57] Chad: You just earned 65 CE credits for your ongoing education. [36:03] Justin: You're qualified to give CE credits. [36:05] JD: Wouldn't that be awesome if Retireology has CEOs gonna. [36:10] Chad: Just email me. I'll sign right off on that puppy. [36:13] JD: You just gave me a great idea. [36:18] Justin: Sorry, you can't give CE credits when you're drinking beer. [36:20] JD: Maybe that's part of it. Thank you for attending. Thank you for all of of your feedback, your comments, your interaction. Keep it up. And we will keep doing this as [36:34] Chad: long as they let us. [36:35] JD: No, we're going to keep doing it forever. [36:36] Chad: Even if they stop watching, that URL gets blocked. [36:41] Justin: But just gonna keep doing it. [36:42] JD: We're gonna keep doing it no matter what. [36:44] Mark: Sit on the couch and have some beers with you guys. [36:45] JD: There you go. [36:46] Chad: Alrighty. [36:47] JD: Changing the 401k, 403b. Profit sharing, defined benefit, cash balance plan industry. [36:56] Chad: ESOPs. No. 1 beer, [37:09] Justin: Mary. [37:10] JD: Bleep or kill. [37:15] Justin: All right. [37:16] Chad: I'm going to marry jd. [37:17] JD: Nice. You're a good husband. [37:21] Chad: I'd bleep Chad for sure.