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Loose Cannon or Retirement Plan Messiah?

The Japanese eclipsed the American automobile manufacturers twenty years ago with cars that were more dependable and less expensive than our native-born models. Awakened from a state of lethargy and sloth, domestic companies fought for survival until, finally, we now enjoy home-grown automobile quality that competes successfully around the globe. Today’s mutual fund industry resembles the auto industry of thirty years ago. It has been lulled into complacency as "the world’s most profitable industry." FORBES magazine claimed that fund companies made a 30% pre-tax profit because buyers were not price sensitive. On retirement plan money, like large 401(k) accounts, the industry makes as much as a 500% to 1000% profit. John Bogle of Vanguard points out that any account over $50,000 costs the mutual fund about 6/100′s of one percent to administer while they charge an average of one full percentage point.

What might be the fund industry equivalent of a 1967 Toyota is a service offered by the Glading Group of Montclair, New Jersey. Brent Glading worked for fifteen years in the trenches of the retirement plan industry for such major firms as Merrill Lynch and other financial institutions. He has since determined a methodology for negotiating and extracting concessions from financial institutions that have overcharged for retirement plan record keeping and consulting services. What is unique about the Glading Group is that they have engineered a mechanism for depositing these overcharges directly into the accounts of plan participants.

How large were these refunds? Try $300,000 on a plan with just $120 Million in assets, or $6 million on a plan with $2 billion. These rebates amount to about $400 per person, but the effect of renegotiated fees becomes an annual benefit. It’s the gift that keeps on giving ‐ and rising as assets increase. An extra $400 a year that doesn’t cost the employer or employee any money is nothing to sneeze at. Compounded, it adds up to an additional average of as much as $30,000 for each employee over twenty years. For higher income participants, this can mean an additional $100,000 or more over the same period. Multiply these figures times all the employees in a company, and the huge resulting number is what the mutual fund industry was planning to keep for itself.

Where has this "big-box store" concept been hiding? Conventional wisdom holds that mutual fund pricing is set contractually by whatever the prospectus states. To the extent that some mutual fund companies have offered some revenue sharing, it was usually in the form of providing free administrative services to the plan sponsor. On larger plans, the cost of those services to the funds has been dwarfed by excess profits. Offering free administration amounts to little more than a bone thrown to corporate decision-makers. The real money available to participants comes only after some aggressive, knowledgeable negotiations with retirement plan vendors.

Over the past four years, most company decision-makers have been preoccupied with maintaining solvent organizations. When it came to retirement plan costs, creating a better deal for employees was not high on a list of priorities. Key corporate managers usually receive greater benefits (bonuses, etc.) as a result of improved corporate performance than anything they achieve in behalf of retirement plan participants. There was also no mechanism available to begin negotiating for a share of mutual fund profits. The only alternative was a tedious and disruptive shopping process that required a major education and information effort as poart of a change in retirement plan vendors.

Thanks to the Glading Group, there is now a precedent for opening the black box and determining how much the fund families can reasonably be expected to contribute to your retirement plan. Brent Glading brings two value-added components to the table. First, there is his search mechanism that enables him to ask the right questions. Next has been his successful meander through the Byzantine minefield of government regulations that otherwise limits the ways money can be contributed in behalf of employees.

The fund industry has held the position that they will not divulge cost information for competitive reasons. The securities industry is concerned about anything that looks like a refund because it effectively puts customers in the securities business. The IRS is concerned about any contributions that are based upon employee account balances rather than on employee incomes. Against all odds, Mr. Glading and his associates have overcome these hurdles and are, as far as I can determine, the only organization in the country to have done so.

Before we all get excited, it is important to know that this arithmetic only holds true for larger plans in the $20 to $50 million range and up. Smaller companies do not achieve the massive economies of scale that lead to excessive profits. However, for those who work for large organizations in a decision-making capacity, it is important to be aware of this opportunity. Anyone instrumental in choosing vendors for 401(k), 403(b), or 457 plans needs to satisfy the dictates of their conscience by at least attempting to get a better deal from their existing vendors.

Brent Glading points out that few people today would negotiate a new car purchase without first doing the research to find out the manufacturer’s invoice cost. He brings the same mentality and research to the retirement plan arena. He may not have written the equivalent of Ralph Nader’s 1962 book “Unsafe at Any Speed,” but Glading’s impact on the fund industry may be just as profound. He can be reached at