Longboat Retirement Solutions LLC

The Big Loophole in the DOL Fee Disclosure Regulations October 28, 2012

BY: Chris Tobe, CFA October 26, 2012


401k fee disclosure has a big loophole in one of the largest asset classes. Stable value, or

guaranteed funds, typically constitute 10-40% of assets in most 401(k) plans and have varied

and complex structures which complicate fee disclosure. Billions of dollars in what I call spread

based fees remain undisclosed under the new DOL fee disclosure rules.


Last month I saw my wife’s statement from Lincoln. It showed the stable value or fixed

product with 0% in fees, when I know they may make as much as 2% or 200 basis points (bps)

in spread profits based on my nearly 7 years experience as an officer of insurance companies. I

was recently quoted in the Wall Street Journal’s Marketwatch “These excessive profits, even if

called spread, act like fees and are used like fees,”


Insurance companies are manipulating loopholes for excessive profits. While they may

disclose some fees, it may only tell 25% of the story as they make the majority of their profit on

the spread. Even if the DOL continues to ignore this loophole I believe their hidden spread

fees will probably put them in danger of class action lawsuits. In addition they continue to pay

commissions out of the hidden spread which drive even more sales.


Currently if the insurance lobby gets their way these higher risk and higher fee bundled

products will appear to have lower fees (and higher returns) compared to a diversified

low risk low fee product, like the Vanguard Stable Value collective trust. In this scenario

an advisor with an insurance license can get a kickback in commissions for a product he can

show is DOL approved with higher yields and no fees.



We need to look more closely at the loophole that the insurance companies are using. “ The

preamble to the participant-level disclosure regulation provides that designated investment

alternatives with fixed returns are those that provide a fixed or stated rate of return to the

participant, for a stated duration, and with respect to which investment risks are borne by an

entity other than the participant (e.g., insurance company). 75 FR 64910”.


I believe insurance companies are twisting and manipulating this rule.

I believe that the intent is to exempt a traditional GIC which functions like a bank CD, 3% rate

for 3 years that is sold in a competitive bidding environment. For example Vanguard in their

stable value plan has had a 20% allocation to a diversified basket of traditional GIC’s. When

they purchase a GIC which is never over 5% of their total holding they go to 5 or more insurance companies and get bids to get the highest rate for a GIC of say 3 years. This process

eliminates the excessive fees and the diversification eliminates excessive risk. Vanguard

discloses a management fee, but does not add any additional fees for the internal spread of insurance company.


Insurance company General Account products are usually part of a bundled arrangement.

There is no competitive bidding so they essentially set their own rates and their own profits

without any disclosure. Historically they have been allowed to vary their rates at the will of

the insurance company depending on their thirst for profit. However, I think in their attempt to

manipulate this loophole they will try to keep rates more constant to appear to fit the exemption

which states fixed or stated rate of return. The other qualification for the exemption is a

stated maturity or duration, and none of the insurance products I have seen do this and should

be eliminated from exemption based on that alone.


The insurance industry and its lobbyists have this spin on the loophole. “For general account

products or fixed income products, the Department of Labor (DOL) acknowledges that for a

product with a stated rate of return and term, it is not pertinent to have some type of expense

ratio related because the real driver of income is the rate being offered” I have never heard

this directly from the DOL, but neither have I heard them deny it. Again I think this applies to

diversified product in a competitive bidding situation, not in a captive bundled product.



One of the reasons this loophole exists is because the vast majority of the largest plans

abandoned insurance products for their liability, risks and excessive hidden fees 10 to 20 years

ago. To understand this I think it is helpful to split the $4.5 trillion 401(k) market.

The top $3 trillion (68% of assets) is large fortune 500 type plans account for only 1% of the

plans and for the most part do not use single entity general account products iv However the

bottom $1.5 trillion is spread over 650,000 plans (99%) ranging from small Dr’s offices to midsize

manufacturers. The battleground for fee disclosure will be in bundled insurance company

products in small to midsized plans.


The financial crisis allowed some room for growth of these products to some larger firms as

reported in the Wall Street Journal in May 2010. Amid the shortage of wrap insurance, though,

some firms are seizing an opportunity to reintroduce older types of stable-value products that

are backed by a single insurer and carry considerable risks. OneAmerica Financial Partners

Inc.’s American United Life Insurance Co., for example, last month launched a stable-value

product backed by its own general-account assets. In such products, investors are taking on the

risk that this single issuer could go belly up.


In 2008 Federal Reserve Chairman Ben Bernanke said that “workers whose 401(k) plans had

purchased $40 billion of insurance from AIG against the risk that their stable-value funds

would decline in value would have seen that insurance disappear.” 


Many investment professionals believe that a plan sponsor is taking a severe fiduciary risk by having a single contract with any one entity such as AIG. The only counter to this relies on assuming that the

single insurance company backing the stable value option is too big to fail and has an implied government guarantee which is problematic on its face.


The National Association of Government Defined Contribution Administrators,

Inc. (NAGDCA) in September 2010 created a brochure with this characterization of general

account stable value that got beyond the high risks and right to fee disclosure. “Due to the fact

that the plan sponsor does not own the underlying investments, the portfolio holdings,

performance, risk, and management fees are generally not disclosed. This limits the ability of

plan sponsors to compare returns with other SVFs [stable-value funds]. It also makes it nearly

impossible for plan sponsors to know the fees (which can be increased without disclosure) paid

by participants in these funds—a critical component of a fiduciary’s responsibility. It is hard

to comprehend why the DOL lets these products escape disclosure.



1. High hidden stable-value spread fees are subsidizing administrative costs.

Revenue from general and separate account stable value options have typically

subsidized administration costs, making some participants pay higher

administration costs than those in mutual funds, and making products appear

competitive in requests for proposal that look at per head administrative costs.


2. Fees and commissions are not being fully disclosed. Insurance companies are

still fighting not to disclose any spread profits. These excessive profits, even if called spread,

act like fees and are used like fees. Commission kickbacks to consultants with insurance

licenses are common in plans with general and separate account stable value.


3. The structure creates a higher level of fiduciary duty for vendors and risks for plans. Since

general and separate account stable-value assets are on the balance sheet of the insurance

company, this creates an inherent conflict between the fiduciary care of pension investors and

company shareholders. If the firm needed more income they could get it by lowering rates paid

to plans since they are in captive non-bid bundled arrangements.


Most stable value products (IPG) provided in bundled insurance company products do not fit

this exemption in my opinion since its fixed rate is variable and the duration is variable. If the

DOL continues to listen to the insurance lobby higher risk and higher fee bundled products will

appear to have lower fees (and higher returns) compared to a diversified low risk low fee product like the Vanguard Stable Value collective trust.


Former McKinsey & Co. CEO hit with fine, 2-year prison term for insider trading October 26, 2012

Filed under: Corporate Malfeasance,Uncategorized — larsfforsberg @ 2:05 am
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Rajat Gupta, formerly one of the most respected CEOs in the US and a board member of financial giants like Goldman Sachs and Russia’s Sberbank, received a prison term and a $5 million fine for insider trading during the height of the 2008 crisis.

Prosecutors accused Gupta, the former head of the global consulting firm McKinsey & Co. and a onetime director of the huge consumer products company Procter & Gamble, of being “above-the-law” in feeding his close friend and partner Raj Rajaratnam insider knowledge between March 2007 and January 2009. Billionaire Rajaratnam is also a founder of the Galleon hedge fund.

During the trial which has been going on since May, the prosecution highlighted a September 23, 2008, phone call made by Gupta to Rajaratnam just minutes after Gupta had learned about Warren Buffett’s planned investment of $5 billion by Berkshire Hathaway in Goldman Sachs.

Shortly after the called ended, Rajaratnam purchased $40mln in Goldman stock, which made him nearly $1 million at the height of the financial crisis that had engulfed the country.

In sentencing the judge called the phone call “the functional equivalent of stabbing Goldman in the back.”

Judge Jed Rakoff said the punishment was sufficient for the 63-year-old Gupta.“… no one really knows how much jail time is necessary to materially deter insider trading; but common sense suggests that most business executives fear even a modest prison term to a degree that more hardened types might not. Thus, a relatively modest prison term should be `sufficient, but not more than necessary,’ for this purpose,” Rakoff said.

However, the sentence was well below the 10 years requested by government prosecutors, and well below sentencing guidelines, which made some experts question whether it’s a fair punishment.

Chicago attorney Andrew Stoltmann says Gupta “intentionally betrayed his duties to Goldman Sachs” and refused to take responsibility for his actions. Gupta’s sentence should have been closer to the 10 years prosecutors had recommended, as his actions were more serious a crime than those of his friend Rajaratnam, who was sentenced for 11 years in prison.

“At the same time Mr. Gupta did not trade and did not make money. Rather his motive was friendship. Here the fall from grace for him will be much harder than for most given his stature in the community. That may well be the worst punishment,” said Thomas Gorman, a former senior counsel in the division of enforcement at the Securities and Exchange Commission.

Prosecutors say Rajaratnam earned up to $75mln illegally through his trades while Gupta’s attorneys point out that their client earned nothing.


Reduce Fees, Create Cash Flow October 23, 2012

Filed under: Real Estate Investing,Uncategorized — larsfforsberg @ 3:14 am
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Self directed IRAs and Solo 401k’s can own real estate.

The fact that real estate prices throughout the U.S. have declined has self directed retirement account holders looking for undervalued properties that have the potential to generate cash flow. Cash flow real estate can be a valuable addition to your retirement account. You can’t get cash flow out of your stock portfolio, gold investments, CDs or tax liens.

Why do self directed IRA custodians and self directed IRA administrators charge such high transaction fees and annual valuation fees?  Why is a Solo 401k, if you qualify, a superior retirement account than a self directed IRA?

Large institutional IRA custodians like Merrill Lynch or Fidelity have minimal fees and offer correspondingly minimal choices.  The use of a TRULY self directed IRA or a Solo 401k will broaden your choices greatly.

Firms like Equity Trust Company and Entrust Administration specialize in the administration of self directed retirement accounts, but have fees that can add up quickly and demoralize your enthusiasm for self directed investing. These companies’ hit you with transaction fees, wire fees, cashier’s check fees, and same day service fees and annual valuation fees.

  • Would you like to avoid all of these transaction fees?
  • Would you like total control of your retirement account checkbook?
  • Would you like to avoid the cost of the IRA LLC structure, and its annual fees?
  • Would you like to avoid UDFI (unrelated debt financed income) when using leverage in your  retirement account?
  • Would you like to be able to personally borrow up to $50,000 from your retirement account with low interest and without a penalty?
  • Would you like to contribute up to $49,000 individually or $98,000 if married into your retirement account?

A Solo 401k may be the best choice for you….again, assuming you qualify, or can become qualified (self employed, with no employees). Can you produce self employment income?  Have you ever considered going on your own?  Ever dreamed of being your own boss?

You can retain your current employment, while moonlighting with your new business that allows you to create income and contribute to your Solo 401k.


U.S. Sues Wells Fargo: Yet Another Bailed-Out Bank Accused of Fraud October 11, 2012

Filed under: Corporate Malfeasance,Uncategorized — larsfforsberg @ 1:07 am
Tags: , , , , , , ,


BY: Matt Taibbi

Earlier this year, Charlie Munger, who is billionaire Warren Buffet’s right hand at Berkshire Hathaway and a sort of self-proclaimed mad oracle of Wall Street, made some interesting comments. He bashed people who buy gold, delivering an all-time amazing quote:

Gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939 but civilized people don’t buy gold – they invest in productive businesses.

Munger, if you might remember, is the same gazillionaire dickhead who two years ago ripped people experiencing post-crash economic hard times, saying they should “suck it in and cope” and that anyone who wants to complain about the Wall Street bailouts should realize they were “absolutely required to save your civilization” (Munger thinks a lot about “civilization”). He added that even if you didn’t like them, “you shouldn’t be bitching about a little bailout. You should have been thinking it should have been bigger.”

Some of those bailouts we shouldn’t have complained about, of course, were directed at one of Munger’s favorite companies – banking giant Wells Fargo, in which Munger and Buffett are heavily invested. Wells Fargo got as much as $36 billion in federal aid after the crash and got a massive push from the government to help it buy up the dying crash-era megabank Wachovia for $12.7 billion, a shotgun wedding that created the second-biggest bank in America. Wells Fargo not only got $25 billion in TARP funds just before it bought Wachovia, it got a special tax break from then-Treasury Secretary Hank Paulson, which some reports say was worth as much as $25 billion to WF at that time.

This is all just background for the latest news: Wells Fargo is being sued by the State for vast fraud in the mortgage markets. The U.S. Attorney in the Southern District of New York, Preet Bharara, yesterday brought a case against WF seeking “hundreds of millions of dollars” in damages for what it says is a decade of fraudulent behavior, in which WF wrongfully certified more than 100,000 mortgages as being eligible for federal mortgage insurance. Basically, Wells Fargo screwed the FHA and HUD by mass-approving loans without regard for whether they were defective or not. From the L.A. Times:

When Wells Fargo discovered problems with the loans, it failed to notify HUD, which administers the FHA program, as required, the suit said. The action alleges more than 10 years of misconduct.

“The extremely poor quality of Wells Fargo’s loans was a function of management’s nearly singular focus on increasing the volume of FHA originations – and the bank’s profits – rather than on the quality of the loans being originated,” Bharara’s office said in a statement.

The action by the U.S. Attorney here in New York comes on the heels of another suit against Chase brought last week by Eric Schneiderman in Obama’s Mortgage Fraud Task Force. That action alleges similar mortgage-related scumbaggery by Bear Stearns, which Chase acquired in another government-brokered, market-concentrating shotgun wedding in early 2008.

So in just a week, we’ve seen two pretty big actions brought against the Coke and the Pepsi of the American commercial banking world. We’ll see how they pan out, but it’s interesting, if nothing else.

So just to recap Munger’s comments: gold is not an investment for civilized people, it’s for panicked Jews fleeing the Holocaust. Civilized people, according to Munger, instead invest in productive businesses like Wells Fargo, which according to this new suit spent a decade committing mass fraud and dumping tens of thousands of dicey loans onto the lap of the taxpayer. If we think about it in retrospect, Wells Fargo then got rewarded for years of bad behavior by receiving tens of billions more in bailout money, which it used to buy a dominating market share – artificially inflating its share price for the next generation, to the benefit of wrinkly old greedheads like Charlie Munger. And if you don’t like it, you should suck it in and cope.

I wonder what Munger thinks about his investment now. Is it still civilized?


Why you should seriously consider establishing a Solo 401k: October 3, 2012

Some questions to ask yourself.

Do you trust your “financial advisor?”

Are you satisfied with your investment choices?

Do you feel safe with all of your eggs in one basket?

Do you feel comfortable leaving your future in the hands of the Wall Street gang?

Do you think that things “have to improve soon?”

Do you think that “it can’t get any worse?”

Does your “money guy” call himself a “money guy?”

Does this guy wear colorful suspenders and a gold watch?

If you answered yes to a few of these questions, you owe it to yourself to look into self directed retirement investing with a Solo 401k.  You may not be a financial or investment expert (the guy with the suspenders isn’t either), but at least you have your own best interests in mind when making investments.  It is not necessary to be brainwashed by the financial education community to make investment decisions; you can do this.

Take responsibility for your future.  Take action.