Part 4 (out of 10)

Total Costs to Participants Finally Revealed

Investment costs are the most protective pieces of information in the financial industry, hermetically sealed from public view for good reason. If people found out how much they were paying over several decades they would realize how all those hidden costs and expenses eat at the heart of growth for their final next egg. They might revolt. Thus, the industry takes extreme precautions in how they reveal costs. The dance before the school board reflected decades of orchestrated marketing.

Investment costs must be revealed somewhere in the fine print of the multipage, complicated prospectus. But it’s up to consumers or committee members to add the scattered pieces together. You already got the first lesson when the AIG-VALIC VP reported the first level of costs and Mercer tacked on a second. There are more to come.

The next task was to distinguish distracting noise from the information you need. Complicated investment costs have one inherent purpose—encourage confusion and discourage transparency–ever so subtlety.

In September our committee administrative foundations were completed. We were an official LAUSD chartered committee. We could see the extent to which the financial profession disguised their fee structures. Revenue sharing was literally hidden.

Mercer handed out a glossy, colorful, spiral-bound 23-page folder entitled “LAUSD Deferred Compensation Plan.” The professional looking handout provided an overview of 1 quarter, 1-year, 3 years and 5-year past performance. In my opinion the investment data provided was mostly noise. Past performance should never be the determining factor for selecting investments. Noise was “interesting” investment statistics but add little value to our committee’s job. What was important was to select low cost funds that are from the core asset classes: large, mid and small-cap, bonds and international.

It doesn’t matter if you are helping your brother-in-law, your sister, your folks with their retirement plan or discovering your broker/adviser’s shenanigans with your portfolio, always, ALWAYS follow the costs. From their initial presentation to the Board several months before, I wanted to know the total cost to LAUSD employees. The mutual fund costs were published on page 9 called “Fund Expense Analysis.” “At last,” I thought. Table 1 illustrates each fund, asset class, fund expense ratio, revenue sharing and the peer group average expense ratio.

TABLE 1

	Asset Class	Fund Exp. Ratio	Revenue Sharing	Average Inst. Exp Ratio
American Growth Fund R4	US Large Cap Equity	0.68%	0.35%	0.88%
Vanguard Growth & Income	US Large Cap Equity	0.40%	0%	.70%
Vanguard Extended Market	US Equity (Index)	0.25%	0%	na
Vanguard Dev Market Index	Int Equity (Index)	0.29%	0%	na
American Europacific R4	International Equity	0.83%	0.35%	0.98%
PIMCO Total Return Admin	US Fixed	0.68%	0.25%	0.62%
Dreyfus Bond Market Index Inv	US Fixed (Index)	0.40%	0.35%	na
Dreyfus Cash Management	Money Market	0.30%	0.10%
Dreyfus S & P 500 Index	US Equity (Index)	0.50%	0.40%	na
VALIC – Fixed Interest	Stable Value			na
TRP Income (ADV)	Lifestyle	0.89%	0.35%	na
TRP 2010 (ADV)	Lifestyle	0.93%	0.35%	na
TRP 2020 (ADV)	Lifestyle	1.01%	0.35%	na
TRP 2030 (ADV)	Lifestyle	1.05%	0.35%	na
TRP 2040 (ADV)	Lifestyle	1.05%	0.35%	na
Davis NY Venture A	US Large Cap Equity	0.89%	0.25%	0.74%
Turner Mid Cap Growth	US Midcap Equity	1.20%	0.40%	0.93%
Janus Mid Cap Value (inv)	US Midcap Equity	0.92%	0.25%	0.74%

 Hide the Costs at all Costs

Do you see the total cost to the buyer? Was this an oversight? Mercer’s data do not include the AIG-VALIC’s 15 bsp, so the total cost was omitted. Thus, Mercer’s Table 1 was incomplete, this time they omitted what the AIG-VALIC VP announced to the board.  Why convince the Board of Education and the human race proclaiming that AIG-VALIC could administer our plan for 15 bsp and exclude it in Table 1? This was funny. Does anyone care about “Average Institutional Expense Ratio?” It was not in the best interests of consultants to show the total cost—it was in our best interests. All employees deserve to know.

Revenue sharing costs were colored gray in Table 2 to show they are hidden. They imbed the cost in the mutual fund expenses.

Table 2 presented a completed Table of the investments with 15 bsp added. The right column showed the total costs. Nothing complicated or omitted. For example, the “American Growth Fund R4” was first.  The Revenue Sharing cost of .35% was embedded in the Expense Ratio column, .68%. Thus, the total cost was calculated by adding the mutual fund expense ratio and the TPA cost (.68% + .15%) for a total of .83%.  The revenue sharing costs are already part of the .68%, so don’t add it. Clever, isn’t it? Now a twelve year-old can understand the scheme.

TABLE 2

	Exp. Ratio	Rev Sharing embedded in Exp. Ratio	TPA Cost	Total Cost
American Growth Fund R4	0.68%	0.35%	0.15%	0.83%
Vanguard Growth & Income	0.40%	0%	0.15%	0.55%
Vanguard Extended Market	0.25%	0%	0.15%	0.40%
Vanguard Dev Market Index	0.29%	0%	0.15%	0.44%
American Europacific R4	0.83%	0.35%	0.15%	0.98%
PIMCO Total Return Admin	0.68%	0.25%	0.15%	0.83%
Dreyfus Bond Market Index Inv	0.40%	0.35%	0.15%	0.55%
Dreyfus Cash Management	0.30%	0.10%	0.15%	0.45%
Dreyfus S & P 500 Index	0.50%	0.40%	0.15%	0.65%
VALIC – Fixed Interest				NA
TRP Income (ADV)	0.89%	0.35%	0.15%	1.04%
TRP 2010 (ADV)	0.93%	0.35%	0.15%	1.08%
TRP 2020 (ADV)	1.01%	0.35%	0.15%	1.16%
TRP 2030 (ADV)	1.05%	0.35%	0.15%	1.20%
TRP 2040 (ADV)	1.05%	0.35%	0.15%	1.20%
Davis NY Venture A	0.89%	0.25%	0.15%	1.04%
Turner Mid Cap Growth	1.20%	0.40%	0.15%	1.35%
Janus Mid Cap Value (inv)	0.92%	0.25%	0.15%	1.07%

Notice that Vanguard does not enter into revenue sharing agreements. The 40 bsp for the Vanguard Extended Market Index was an outstanding cost. I have no problem with the ten funds which have a total cost of 1% or less. Why didn’t AIG-VALIC or Mercer present Table 2 to the board of education? A .83% cost for American Growth R4 was not expensive for an employer-sponsored retirement plan. While I personally prefer to invest in Vanguard, I have no problem with the American Fund’s investment philosophy of low turnover, low-cost expense ratios. Their front-end commissions of 5.75% are waived in most plans, including this plan.

To be continued in 1 day…