Solve the Ambiguous Pension Plan Puzzle

Physician's Money DigestSeptember15 2004
Volume 11
Issue 17

In a specialized economy, most ofus can do several things well andfake our way through a few otherthings we don't really understand.But we can't be good, or even competent,at everything—and that's okay. I'mcomfortable letting someone else interpretmy EKG or fix my car. So, when Itell you that many retirement plan fiduciariesare clueless, I'm not saying thatthey're stupid or irresponsible people.I'm just saying that they have as littlebusiness overseeing pension plans as Ihave overhauling a jet engine.

Play Pension Detective

Success as a business owner, physician,attorney, accountant, or humanresources director doesn't translate intosuccess as a retirement plan administrator.Now, that doesn't mean success inthese fields precludes success in retirementplan administration. What it meansis that except in a few rare cases, theskills that make these professionals successfularen't the skills you find in competentplan administrators. Designingand administering a decent pension plantakes several different high-level skills.

You don't need to meet an administratorto know if they're clueless. Justtake a look at the plans they provide.The clues are easy to spot and includethe following:

  • High total expenses
  • No investment policy statement
  • Low plan participation
  • Inappropriate asset allocation
  • No cost and performance monitoringprocesses
  • Cross testing, reporting, and complianceproblems
  • Inappropriate pension plan designs
  • Duplicate and/or overlapping investmentobjectives

The bottom line:

I see a variety of pension plans inthe course of my business. Reviewinginvestors' plans is part of the financialplanning process. Thevast majority of plans are fatallyflawed. In other words, they're so deficient that participants are unlikely tofind them useful when it comes time tomeet retirement objectives. So, how doresponsible, successful professionalsand business owners end up with suchterrible pension plans?

Distinguish the Pieces

It's not that plan fiduciaries set out toprovide participants with poor plans. Inmost cases, plan fiduciaries are also planparticipants, so it's in their interest tosecure the best possible plan. Few ofthem, however, understand the issuesenough to ask the right questions. Andthere's a huge difference between providinga plan and providing a great plan.


In the real world, it's rare for pensionplans to be an employer's top priority—and that's natural. Most employersare in business to provide goods andservices. Consequently, many believetheir responsibility ends when theymake a timely deposit of the payrolldeductions. In addition, most employerssee a pension plan for employees asa necessary evil, a distraction, and/or aburden. There are no trainingclasses for part-time fiduciaries; therefore,it's no big surprise that few ofthem know what they are responsiblefor under the Employee RetirementIncome Security Act (ERISA), variousstate uniform prudent investor acts, orthe expanded federal prudent man rule.

Of course, there is one step downfrom completely clueless. The administratorswho fall into this category areclueless, but nevertheless think theyknow it all. It's hard to tell if most planadministrators fall into this category. Insome cases, the plan administrator justtrusts the wrong people (eg, commissionedsalespeople from brokeragehouses and insurance companies). Nomatter the reason behind their lack ofknowledge, the results are the same:grossly expensive, cumbersome, andineffective retirement plans.

Knowledge Is Power

Because many plan sponsors arecompletely clueless, they're easy pickingsfor Wall Street's sales machine.Basically, these sponsors are outclassed,outgunned, and outmaneuvered on anuneven playing field. When an earnest,bright young person from a well-knownWall Street firm shows up offering tohandle the company's pension planalong with all the awful details for free,it sounds too good to be true. However,because the firm is a household nameand willing to handle the pension planfree of charge, the sponsor seals thedeal. With a sigh of relief, they sign thenecessary documents.

Most pension plan expenses are bornby the employees, so savings realizedfrom the plan don't contribute to thefirm's bottom line. And since employeesaren't revolting, why bother makingchanges? Pension administration is not aprofit center, and few staff members getpromoted for saving employees money.In addition, municipal and state plansare sometimes awarded as political payoffsto friends or contributors. State andmunicipal plans are not covered byERISA, so there is opportunity for mischiefand graft.

If employees realize how badly they'rebeing gouged by pension costs, they cantake some form of collective action. Ifenough of them express concern, they'relikely to get the attention of managementand prompt reform. Therefore, they needto educate themselves, ask questions, anddemand thoughtful answers. After all, it'stheir money and future.

Frank Armstrong III is the founder

and principal of Investor Solutions,

Inc, a fee-only, SEC-registered

investment advisor. He is also the

author of The Informed Investor: A

Hype-Free Guide to Constructing a

Sound Financial Portfolio (Amacom; 2002), which

is now available in paperback. For more information,


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