Here’s your newest threat. Tom Zgainer has identified and deftly exploited certain areas of 401k advisory failure, yet too many industry professionals are quick to dismiss his observations as either obvious or overblown. If so, why are tort terrors like Jerry Schlichter still busy suing the pants off every plan sponsor, and why is there the ongoing DC-plan deluge from active to passive management?
Thankfully, greater awareness and education about what ails the industry is finally getting through to the investing public, a game-changer that has practitioners that identify as “traditional” sizing their tombstones (metaphorically speaking).
That’s one reason the firm Zgainer leads, America’s Best 401k, is taking—haters would say stealing—clients and generally causing concern. Far from denying it, it’s something he proudly proclaims, calling it a natural outgrowth of a “broken” retirement model.
Yet before anyone gets their britches in a bunch, he’s quick to note that he doesn’t have an issue with every 401k advisor, or any that truly act in the best interest of plan sponsors and participants, as he explains.
“There are two sides of the aisle,” he professorially yet passionately begins. “We have to separate each to get at the meaning and nomenclature of the word ‘advisor.’”
Evoking Merrill Rule madness of a decade ago, in which the venerable wirehouse lobbied to have brokers identified as advisors even if they performed decidedly non-advisory functions, he points to RIAs on one side, “who all along, in theory, should be putting the interests of clients first.”
On the other side are brokers trying to “fall under the wing of advisors. They’re what we as an industry refer to as ‘two-plan Tonys.’”
He’s all for the former, having worked early in his career with a host of RIAs to help build successful practices, many of whom he still considers friends. As for the latter? Not so much.
Brokers “are not 401k or retirement plan experts, and they’ve sort of fallen into a plan here or there.”
Yet multiply a plan “here or there” by the number of brokers (even peripherally) in the industry, and the problem quickly compounds itself.
“They’re looking to get a little too wealthy on a couple of plans for our taste,” Zgainer understatedly says, adding that 401k participants, over time, could give as much as 30 percent of a nest egg away in fees. “You have needless and unnecessary asset-based expenses that are charged in order to pay the provider, the broker-dealer and the registered rep, all with their hands in the jar.”
What they’re forgetting, he notes, his voice rising, is that there are “real people involved, saving for the future and their family’s future that are completely unknowledgeable about the effects of fees over time.
“We would love to see everybody simply put the interests of the participants ahead of their own needs and become 401k experts. And if they don’t want to do it, that’s okay, but then let someone else do it!”
All well and good, but arguing that advisors should put client interests first is like arguing cops should arrest criminals; it’s pretty much a core job function that few (other than the criminals themselves) would oppose. So, moving on from the less experienced “Tonys,” what about the more experienced 401k specialists?
“It’s not what they’re doing wrong, necessarily, it’s just that we’ve created a national brand,” he diplomatically hedges. “Your typical registered investment advisor, as a rule, is going to be working in a more geographical location central to where they themselves live. They have manufactured opportunities in their own communities, cross-working with CPAs and others in circles of influence and charitable pursuits and have made a great name for themselves and have built a really great, nice, tidy business.”
They’re using low-cost funds, open architecture platforms and providers. They’re crafting a core fund lineup and listing themselves as a named fiduciary, and they are providing advice to participants.
“I love those guys—that is not our competition at all,” he argues. “In fact, we have close to 30 or 40 RIAs that contact us every month to ask us how we can work together. We have to gently and politely tell them we can’t, because we serve as a 3(38) fiduciary on the plan, and therefore don’t partner with external advisors.”
The fact that they are interested in such a model, where all the components are tightly integrated, indicates it’s one they’re still having trouble replicating.
“If you’re more of a wealth manager and you’ve taken on a few 401k plans maybe because you have business owners as private clients, participant calls from those plans could begin to significantly tax your business. We just had an advisor from Indiana call with just such an issue. So, find a solution like ours to point those clients to and focus then on the personal wealth management instead, which is their bread and butter anyway.”
Not that we’re necessarily trying to overhype his business, but a closer look provides important insight into why it’s so successful, and why now. We can’t help but remark that a “solution like theirs” is tagged America’s Best 401k; a braggadocios, Martin Shkrelilike thumb of the nose not likely to endear Zgainer and his team to industry competitors and colleagues.
“In large measure, at the outset, [the name] was aspirational,” he counters. “We wanted people to know exactly what business we were in, who it was for—plan participants in America—and that it was going to be the best.”
Part of it was also to steer clear of confusion, Zgainer claims, as “there are so many companies in our business that if you asked a random person if they know what the company does, they haven’t a clue. If you ask what America’s Best 401k does, the person would say ‘we think we’re America’s best 401k.’”
However, he likes the brand positioning the name affords.
“When our competitors present against us, the business owner will ask how they compare with America’s Best 401k,” he says with a laugh. “The competitor has to answer, ‘but you can’t be better than the best,’ so it’s kind of worked in our favor that way.”
Speaking a bit more altruistically, he adds that it also reminds the team of the “important work they’re doing” to fix the aforementioned broken retirement savings model.
“We are talking about the retirement savings of 88 million-plus Americans, which is often their largest investment outside of their home. The only reason we’re doing this is to rescue those retirement savings.”
Rescuing retirement savings and fixing a broken model may sound hyperbolic, but a significant portion of financial pundits, politicians and the investing public agree, not to mention many 401k advisors themselves.
So what else besides high fees is driving industry angst?
“Granted, you could have a poorly-designed 401k plan, bad customer service and no one-on-one participant help, which could offset any advantages of a low-fee plan.”
However, if you can have those things, “then you have to ask yourself, as a plan sponsor, if my plan has total investment-related fees of 1.80 percent as opposed to a plan with investment fees of 0.60 percent, then the mathematical consequence of that difference could be hundreds of thousands if not millions of dollars over time.” It’s that kind of fee mismanagement, long known but until recently rarely discussed, that led Zgainer to start America’s Best 401k.
In 2011, new fee disclosure rules— 404(a)5 and 408(b)2—gained traction, and for “the first time in the over 30 years of the defined contribution retirement plan business, providers had to tell you what they were actually charging.”
Calling it his one and only futuristic idea that came to fruition, he concluded (rightfully so) that the fee disclosures would cause widespread confusion.
“The business owner wouldn’t know how to articulate them to employees [although they were required to do so], the plan participants rarely looked at their statements, and even if they did, too often [the statements are] hieroglyphics. So, I launched the company the exact same month that the disclosure rules were put into effect.”
The low-fee focus was, of course, serendipitous, as it’s now dominating industry discussion, as well as litigation, especially for those allegedly failing in their fiduciary duties.
“If you look at the large financial services companies, it’s all the companies that have the blimps, stadiums, golf tournaments and big buildings that have to line a lot of pockets. Not all of them, of course, as you have some that through their advisors are really building their client base.”
But there’s something to be said for a nimble company like America’s Best 401k, one that stays streamlined and focuses its firepower on what it claims is cutting-edge technology and superior customer service.
“Too many of those other companies are like an aircraft carrier moving through the Erie Canal, which is extremely narrow at some points and very tough to maneuver. We’re designed more like a speedboat with room to move.”
It’s at this point we hit the hockey buzzer, understandably skeptical of how the company is supposedly doing so much yet keeping with the low-cost ethos that dictates today’s defined contribution environment. The numbers just don’t add up.
After a bit of back and forth over proprietary information and on versus off-the-record, he agrees to give it up.
“We have no attrition and we’re adding between 60 and 80 clients every single month,” he says. “Here we are at the 20th of the month and we’re at 52 new clients already. It’s volume and no attrition, and we’re going to be knocking on $1 billion at the end of the year. We added 20 plans in a 48- hour period just one week ago. And, again, we have zero attrition. We’ve lost 10 clients since we’ve been in business. Losing them had nothing to do with our service, but with the fact that the 401k plans were terminated. We’re like the Hotel California; they never leave.”
Yet even though he’s attempting to disrupt long-held industry practices and upsetting quite a few 401k advisors in the process, he pushes back (hard) at our attempts at framing the interview in an us vs. them construct.
“I respect the model that many RIAs are building. In fact, we see those plans and we tell the plan sponsor, ‘stay where you are, your advisor is and has done a great job. It looks like everything is buttoned up tight, your hard dollar fees are very fair, they’re using low-cost, well-performing, historically-strong fund companies and they have no proprietary interest.’ The sad fact of the matter is we can only say that three out of 100 times, because the other 97 plans are completely the opposite.”