Monday, July 02, 2007

401K - Moving to a Brand New Plan

This is the first of five posts in my 401K week series. It explains why my company decided to move away from our current 401K plan with ING and into what we consider a much better plan with ADP. Tomorrow's post will describe some of the excellent new features that our new plan will offer.

My company is a subsidiary of a publicly traded international company. It is also the end product of a number of acquisitions that have happened over a period of several years. Long, long ago, somewhere in the mists of time, someone in one of the companies we acquired made the decision to start a 401K program with ING. We inherited this plan. We don't know who that person was, nor do we know exactly why they made that decision, but we do know that this decision did not turn out very well for us.

Here are only some of the problems we have in our current plan:

1. No Ticker Symbols - because ING is an insurance company, they are not permitted to sell us normal mutual funds. Instead they sold us a financial vehicle called a variable annuity, which as our agent explained, is basically an insurance contract under which our 401k funds own shares in actual mutual funds. Convoluted? Hell, yeah! In addition, none of these funds have a ticker symbol, or a MorningStar rating. In essence, there is no way to keep track of these funds, or to truly understand how they invest and what their performance looks like. As far as I am concerned, the funds in our current plan are a black box. I don't like black boxes, especially if my money and my colleagues' money is in them.

2. No Way to Understand Costs - ING provides us with information for the expense ratio associated with each fund. But since we don't own "actual" mutual funds, there may or may not be other costs that we incur in addition to the expense ratio. When I asked our agent a direct question on the topic, I got several different stories, and finally an obfuscating answer. Good enough for me. If I can't even understand what our costs are, we are heading for the door.

3. Nasty Wrap Fees, and a Nastier Elimination of Those Fees - ING had the nerve to charge us a wrap fee, for the pleasure of doing business with them. This wrap fee, which was pointed out to me by a third party, was 0.7% of assets per year, and is paid on top of all the fund expenses and other plan charges. This fee was well hidden in the fine print, and it appeared that no one in my company knew about this.

I called ING and invited them over the re-bid for their business. I told them that costs are our main concern. The ING agent opened the meeting by saying that our account was reviewed two days earlier and that our wrap fee has been eliminated. Just like that. Our plan has about $8M in assets. 0.7% is $56K per year. All we had to do to get them to waive this charge was to mention it. If I hadn't called, ING would have been content to keep charging us 0.7% of assets every year. Even more annoying than the fee itself was the ease with which they waived it. It felt like we were being taken advantage of.

4. Limited Investment Options - ING's plan lacked many basic options, such as lifestyle funds and index funds. They offered us many of these missing options, but to do so we had to move our plan to their new platform. Essentially, this was like switching to a new provider. Thanks for making our decision so easy ING!

5. No Way to Understand Performance - I am a fairly educated person. I hold an MBA from a top 10 school, as well as a law degree. When I got my account statement from ING, I could not figure out how my investments performed, even after spending considerable amounts of time trying to puzzle this out. Last quarter, ING finally changed its statements to a more... readable format. Too little, much too late.

These are some of the problems with our current plan. Tomorrow I will cover some of the ways in which our new plan with ADP will correct them.

1 comment:

Finance Guy said...

You were probably hit with insurance charges related to the Variable Annuity each and every year. Since 401k's are already tax advantaged, there is NO reason to place 401K funds in a 401k.

In all likelihood, you were charged at least 75 basis points for coverage you did not need.