With outrage over hidden fees in 401(k) plans as fuel, a Glastonbury startup has launched an online retirement plan allowing do-it-yourself investors to allocate their own savings at a flat monthly rate.
Run by Wayne Connors, 401k Investor LLC allows people to use a self-directed brokerage account within their existing retirement plans to choose among a range of exchange-traded funds offering varying levels of risk.
Connors previously was an asset allocation expert with 3D Asset Management, an East Hartford investment management firm that advises clients on how to balance their portfolio risks, including through the use of exchange-traded funds (ETF).
Like mutual funds, exchange-traded funds track a portfolio of publicly traded securities in an effort to smooth out volatility; unlike mutual funds, shares of ETFs can be bought and sold publicly.
As an example, 3D Asset Management holds shares in a WisdomTree ETF that includes some 600 securities, including those of several Connecticut-based companies like People’s United Financial and SS&C Technologies.
ETFs also offer lower fees than those levied by many traditional 401(k) asset managers, whose fees are typically assessed as a percentage of assets or administrative services offered.
As Connors tells it, the idea for 401k Investor came to him in 2012 on the heels of Congress and the U.S. Department of Labor scrutinizing hidden fees in 401(k) plans.
DOL illustrates the impact of fees on retirees’ nest eggs in the case of an individual who has 35 years until retirement and a 401(k) account balance of $25,000. Assuming the return on investment in that account averages 7 percent over the succeeding 35 years and fees cut into that asset base by a half-percentage point, the balance would increase to $227,000 at retirement.
Up those fees by a full percentage point, however, and the account balance at retirement would shrink to $163,000 — a 28 percent difference.
The National Association of Plan Advisors and others have defended fees in many cases, saying they adequately reflect the level of services furnished by advisors and their market acumen.
Instead of levying a fee based on a percentage of assets under management, 401k Investor charges members $15 monthly for access to five model portfolios using 10 ETFs (most from Vanguard), differentiated by the risk tolerance of each portfolio. The company also posts videos with investment tips. Connors is aiming for a customer base of 10,000 members.
Connors’ company did not invent the concept of do-it-yourself, exchange-traded funds. Fidelity Investments, the Boston-based financial services giant with the dominant market share for 401(k) plans, offers a similar option coupled with ongoing commentary on ETF options.
While 35 percent of 401(k) plans today give people the option to build their own portfolios using low-cost index funds — nearly twice as many as five years ago — Connors said many do not provide adequate instruction on how to do it. That is where he hopes to differentiate his online platform.
But coupling self-directed brokerage accounts and 401(k) plans brings compliance burdens that extend to the plan sponsors themselves, according to Chris Martin, a senior vice president for USI Consulting Group in Glastonbury, who leads the company’s defined contribution practice.
“The IRS and the Department of Labor are out reviewing these plans all the time,” Martin said. “Those self-directed brokerage accounts are just a real challenge from the compliance perspective for a plan sponsor.”
Connors grew up in Wethersfield; after serving in the U.S. Air Force, his own education on the industry passed through a succession of financial services giants before his path led him to 3D Asset Management eight years ago.
“I have a lot of experience in building portfolios and using low-cost index funds,” Connors said. “I just saw that there was a great opportunity, because it is the 401(k) investor who is the most neglected out there.”
He is not alone in that sentiment. In mid-April, the Center for American Progress called for a retirement fund “label” to be affixed to any client literature, akin to nutrition labels on food packaging that discloses whether fees are exponentially higher than low-fee fund alternatives.
Meanwhile, Yale Law School professor Ian Ayres attracted wide attention last year after firing off letters to some 6,000 plan sponsors, saying he would publicly expose hidden, high-cost fees in their plans if they did not end the practice.
Analyzing data from more than 3,000 401(k) plans for a paper published this past February, Ayres said 16 percent of those plans charged sufficient fees to consume the tax benefits a young worker could expect to receive from those 401(k) plans.
