DARK SECRETS –What the Financial Service Industry does not want you to know!!!

By Mark Folgmann

The profitability of the 401k industry depends on the magnitude of fees it can extract from plan assets, not on how well it protects and enhances the retirement income security of plan participants. Conflicts of interest run rampant in the Financial Service Industry and it begins with the advisors or brokers pay. Rarely is it disclosed that different investments pay different commissions or fees to the broker and even different mutual fund share classes provide different income to the selling agent. This is what creates the conflict when we have the broker picking or advising what funds or investments to include within our 401ks and receiving different compensation as a result. People tend to do what they get paid to do and the greater the pay the more they make the recommendation.. I see this in the insurance industry quite often when the agent suggest whole life insurance which cost and pays much more over term insurance which is less expensive and probably better for most people. Advisors will want you to believe they have a special skill for identifying and choosing outstanding mutual funds to be included in your 401k when in reality these mutual funds have bought their spot with “pay to play” money and may even throw in a free trip for the salesman (advisor) if he sells enough of their product.

Many people think their 401ks are free because most of the fees are never disclosed and sharing the fees generated by a common practice called Revenue Sharing. The 401k may only offer the most expensive mutual fund share classes which generate enormous fees which in turn are used to pay for record keeping and advisor servicing fees. Since the employees participating in the 401k never see the fees deducted, it appears the services are free when in reality they are being charged so much they would be better off not participating in the 401k and instead funding a private IRA with a low cost Vanguard Fund. This is not the case if you are receiving matching by your employer. I have recently reviewed 401ks that are charging employees 35 times more in fees than they would pay at Vanguard for equal if not superior investments.