A mass-marketing genius and an industry elder statesman come together to reinforce the need to put plan participants first.
It’s just how he rolls. If Tony Robbins shows up in your particular business space, you’re doing it incredibly well and he senses opportunity, or you’re doing something horribly wrong and he senses… opportunity.
The jury is still out on which way the 401(k) industry winds blow, but whatever one’s feelings about the entrepreneurial giant (and we mean that literally), it’s clear he’s on to something.
It’s easy to see why. Like scavengers at a crash site, demographic and regulatory issues have collided in a screech of sparks and steel that have the attention of tort lawyers, and retirement plan advisors are understandably concerned.
Just a quick recap for anyone living under a rock: Trial lawyers have exhausted big tobacco and asbestos and are hunting for new tort targets. 401(k) fiduciary-fails are squarely in their sights. The recent drama over Tibble v. Edison is a natural outgrowth; a case that made its way to the Supreme Court due to power-utility Edison International’s use of more expensive retail shares, rather than the lower-cost institutional shares for which its 401(k) plan qualified.
While the ruling centered on a technicality, the justices nevertheless made it clear that plan sponsors (and by extension plan advisors) have an ongoing legal “duty to monitor” for appropriate investments.
It’s a litigious bombshell, and has further encouraged a low-fee investment message that’s resonating with the general public, driven by better investor education, a 24-hour cable news cycle and bestsellers like Robbins’ recent “Money: Master the Game.”
Robbins made a controversial splash in the financial space last December when, coinciding with the book’s release, he delivered a keynote presentation at compliance consultant MarketCounsel’s annual conference in Las Vegas. While viewed enthusiastically by some, and skeptically by others, his arrival heralded greater interest, and scrutiny, from the public at large into long-held industry practices.
For the book, Robbins interviewed dozens of the investment industry’s best-and-brightest, including Charles Schwab, Carl Icahn, Warren Buffett, Steve Forbes and John Bogle.
Bogle, of course, is widely considered the conscience of the industry. The Vanguard founder and investing legend has staked his career and reputation going back decades on the very message now discussed. It’s especially timely, a strike-while-the-iron-is-hot moment that rarely comes along in an industry that moves at such a slow (some would say glacial) pace.
If they seem like an industry odd couple, it’s because they are. Regardless, a mass-marketing genius and an industry elder statesman have come together to reinforce the need to put plan participants first. It’s a message that now has precedent behind it, something the court made clear in its decision.
“I’m really enthusiastic and totally approve,” Bogle says. “It was unanimous and said in no uncertain terms a trustee has ‘a continuing duty—separate and apart from the duty to exercise prudence in selecting investments at the outset—to monitor, and remove imprudent, trust investments.’”
Of course, it could always be better, and the fact that he’s rarely satisfied probably explains how Bogle found such astronomical success in the first place.
“We have the judicial standard, but now we need legislative language that goes over and above the Department of Labor’s proposal (which I totally support),” he adds. “The fiduciary standard as currently written and interpreted only applies to retirement advisors and investors, but it should apply to all advisors and investors, so I want a big expansion of the definition of fiduciary duty.”
Unsurprisingly, Robbins agrees, and puts it in less formal, every-man terms for which he’s known. He notes he’s “a free-market guy and normally against government regulation,” but feels 401(k) participants are too often “chess pieces and not chess players.”
They’re at the mercy of an industry that “has forgotten its role,” one that should be about supporting individuals as they save for retirement and not concentrating on how they can charge more fees.
“Every time something like [the DOL proposal] has happened, it’s gotten watered down, so I hope it won’t be watered down,” Robbins explains. “John Bogle got me quite passionate about the impact of fees. I mean, 96 percent of mutual funds don’t match the market over a 10-year time, and the few that do, the 4 percent that do, good luck in finding them. But on top of it, when you put in all the expenses and then look at it, you go ‘this is insane.’”
Bogle argues that in Tibble-type litigation, plaintiffs typically lose because of what he calls an “absurd standard not to interfere with mutual fund directors if it doesn’t offend the conscience of the court.” It’s one reason the decision was so earth shattering, and why so many plan sponsors and advisors are anxious.
He adds that, too often, fees are confused with fee rates. As long as courts were looking at fee rates, say an increase from 1 percent to 2 percent, it’s unlikely to offend the court’s conscience. But it would be far different, Bogle notes, if they looked into the actual amount of the fees.
“Back in the day, a fund pulled in $1 billion a year in fees,” he says by way of example. “So $25 million went the manager; that left $975 million still unaccounted for. That will offend the conscience of the court; it certainly does mine.”
All well and good, but plans do have hard costs and investment companies are in business to make money.
Robbins isn’t buying our (admitted) straw man argument. When speaking with business owners and plan participants in preparation for his book, he found many were angry when informed of the high fees they were paying, but not for the reasons one would think.
“TrueCar’s Scott Painter is a friend of mine,” he begins rhetorically. “He came up with this idea of radical transparency a lot of industries have talked about and he really created. He found that consumers are thinking car dealers are trying to get 100 percent or 150 percent, but they don’t know how small the ratio of real return is. He’s made it possible for consumers to see what they are really paying so they can make decisions based on truth. He found that consumers were willing to pay a reasonable fee, more than a lot of car dealers were getting before all of the discounts, if they knew the price they were getting was true.”
So it’s not so much the price as the procedure; a lack of transparency as well as uniformity in how 401(k) and mutual funds are offered. Calling it unconscionable (one of multiple times he uses the expression during the interview) Robbins continues the car example with a hypothetical comparison.
“We are in the only world that I know of—this investment world, this financial world—where someone can have the same product and the same services,” he explains, his voice rising. “One person over here is buying a Honda for $20,000 and another person is buying the same vehicle for $350,000 and it’s the same damn car. It’s ridiculous. You’d go crazy if you were the guy paying $350,000. People are angry.”
In a nod to Network’s Max Schumacher, both men agree people are so angry they’re not going to take it anymore.
“There is a new perspective, one that finds that low-cost investing can compete, and the tide running in that direction is growing,” Bogle says, using (what else) indexing as an example. “In 1975 and 1976, indexing didn’t really account for much, and some people actually called it un-American. In 1995, it was 6 percent of invested assets and today it’s 72 percent of invested assets. Higher-cost funds have reached economies of scale that are still not shared with the average investor. They’re not getting their fair share of the return. If you don’t believe me, ask Bill Sharpe.”
He returns to his well-known theme: the tyranny of fees, where the “miracle of compounding returns is overwhelmed by the tyranny of long-term costs.”
“Shareholders take 100 percent of the risk by making 100 percent of the investment and receive 30 percent of the return. How is that fair? I think it’s a very good question.”
From the anger, Robbins has found the aforementioned opportunity. He’s a partner and board member with America’s Best 401k, a full-service option focused on reducing investment-related fees.
“We’re here to disrupt and give people an alternative that’s truthful. We’re sure there will be other disruptors coming up, but now it seems we’re the first,” he says. “People are living longer than at any time in history. The No. 1 fear of baby boomers is not death; it’s that they are going to run out of money while they’re alive. It’s a good fear because, unfortunately, it’s going to be accurate.”
The one thing to change it, he concludes, is a reduction in fees, which he says could add 10 to 20 years of retirement longevity to the portfolio for many investors.
Bogle agrees, and adds a bit of parting advice for plan participants with flourish that’s typical Bogle.
“Just stay the darn course. Figure out what you can afford [to save] and don’t peek. That’s p-e-e-k. Don’t open your 401(k) statement at all until you’re ready to retire, but when you do have a cardiologist handy because you’re gonna be shocked by how much is in there.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
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