Hidden 401k fees for group practice owners with Paul Sippil

Dan King: [0:00] Hello, everyone. I am excited today to be joined by Paul Sippil, who's a forensic retirement consultant. Dan King: [0:06] Sometimes he's called a crime fighter and 401k vigilante. When I hear about 401ks, usually isn't the most exciting subject in the world, but Paul is an exciting human and is a lot of fun to talk to. So, Paul, welcome to the show. It's good to have you. Paul Sippil: [0:21] Well, thank you for noticing, and it's great to be here. Dan King: [0:24] So Paul, we'd love you to start out by explaining to the audience what you do and why it excites you. Paul Sippil: [0:31] Yeah, and great description. I do call myself a 401k vigilante and crime fighter. And I think the word vigilante is particularly interesting because sometimes you can't just rely on government regulations to solve problems. Sometimes you have to take things into your own hands and come up with more creative, innovative, free market solutions to a problem that not only can't be solved by central planning, but was actually either created and or exacerbated by an opaque centrally planned system that distorts the market. And basically how I got into this is I learned how you can look up anyone's 401k profit sharing or 403b tax form online. I just could not believe that that information was a matter of public record and when I would call these business owners, they would tell me Upon me explaining to them that I'm looking at these insane service charges that they're bearing, not just in one year, but going back the last several years, that A, they're taken care of, B, they're not paying anything, and C, it's their friend that handles it that they trust, so there's no problems. Paul Sippil: [1:41] There's a lot to unpack there, but what I'll basically say is it's usually the friend that is the problem in the first place that's taking all this money. The other main problem is nobody ever gets an invoice. So when I tell them, business owners, when I called them that there were these crazy service charges, they just really didn't believe me, even though they showed up on their tax form, because they never saw an invoice, and I was a stranger. It just didn't seem legitimate, even though it was. Dan King: [2:08] So you're doing some digging for people, and you're looking into, Dan King: [2:13] hey, are there irregularities here? Are there insanely high commissions? How often, when you pull up these 5500s, do you find an irregularity or an insanely high commission? Paul Sippil: [2:26] Pretty often, actually. Sometimes there's no fees that show up at all, which can indicate that the employer is actually paying every fee, but that is almost unheard of in the industry because it's so much easier to make money when you're not showing how much you're making. And therefore, your services and your fees are not subject to any scrutiny whatsoever, which is unlike every other profession. I mean, imagine getting a $50,000 bill from your attorney and not knowing exactly what your attorney did. Naturally, you're going to start questioning and asking for a breakdown of the services. But there are often what you might call irregularities or excessive and unnecessary service charges. And I know this because I have an Excel spreadsheet, actually several spreadsheets, with tens of thousands of companies. And I've gone through probably over 100,000 small business retirement plan tax forms in the last 16 years where there are... Unusually high commission payments, as well as record keeping and administration charges that show up on various line items of what's known as Form 5500, which again is the form that is filed with the Department of Labor for any group retirement plan. It's the tax form for any group retirement plan. Dan King: [3:45] And before we hit record, you were telling me about how professional services companies in particular, a lot of healthcare practices tend to be hit hard here. Why is that? Paul Sippil: [3:55] It's especially, and any professional services practice, but yes, especially healthcare for a few reasons. The first is that they tend to have a lot of cash flow. And when I say cash flow, I mean cash flow with employer contributions. That can be a matching and or what's called a profit sharing contribution, which is a contribution that the employer makes regardless of whether or not the participants put any money in or make any contributions, which are known as 401k contributions. And then, of course, if the practice is making money, and it often is, there are contributions that are made by the participants, namely the more highly compensated employees, which are the mental health professionals, the doctors. And the more money that's put into these plans, the more the assets start to grow. And because these fees are primarily and wrongly assessed as a percentage of the overall account value, rather than a fixed dollar fee that's a function of the number of participants and really the amount of time that these service providers are spending, which is really driven by the number of participants, the fees are disproportionately high. And I mean really disproportionately high. Paul Sippil: [5:07] In proportion to the actual services that are being provided. Paul Sippil: [5:11] And the difference between a $1 million and a $5 million plan, everything else being equal, if let's say they both have 20 participants, is nothing in terms of the services. So the more money you have, the more you get charged, but you don't receive any additional services in return. Now, another reason this is so problematic is that the fees are passed down in proportion to the account balances. So who has the most money it's almost always the owners of a professional service firm whether that be a medical practice or a law firm architecture or engineering firm and these fees are being passed on to the participants where they are not tax deductible they're paid with non-tax deductible dollars and even if you saw the fees you can't pay even if you you can't deduct them but usually you don't even know to look. So you wouldn't even know to deduct them, even if they could be deducted because you don't see them because you don't get an invoice. So if you paid at the employer level, however, it would be tax deductible just like any other business expense would be to the employer. And since the owners are paying the majority of those fees anyway, it just makes so much more sense to pay at the employer level, not to mention that you'd be saving everybody else a ton of money and therefore making your plan more attractive and helping retain, motivate and attract not only key employees, but all employees and making that plan so much more valuable for everybody. Dan King: [6:40] That is quite a picture you paint. So... Help me understand exactly what this plan administrator is doing. So what does their day-to-day look like? What services are they actually providing? Paul Sippil: [6:53] Yes, excellent question. And I actually, on my website, paulSippil.com, S-I-P-P-I-L, there's also a paulSippil.com, so I want to make that clear. I have a page that breaks down what all the costs are. And the primary services and costs are what's known as advisory, and there's different types of advisors out there, record keeping, administration, and custodial fees. The administrator is preparing that 5500 form and doing work related to compliance for the plan, whereas the record keeper, a record keeper example is like Fidelity or John Hancock or Voya. And sometimes the record keeper can be the same party as the administrator or it could be a different party. And that record keeper is providing a website, it's providing an 800 number for both the plan sponsor and the participants. Paul Sippil: [7:43] It's keeping track of all the balances like loans. It's a place where you can upload the contributions. The record-keeping platform makes certain funds available. Some are more restricted than others. So that's essentially the record-keeping function. And the advisory function could be what's known as investment education or recommendations, which is not advice, which is provided by a broker who can only receive asset-based kickbacks built into certain investments and not others, I always say to stay away from that arrangement. The other arrangement is through a fiduciary or registered investment advisor that does not receive compensation from these third parties and gets a direct fee either from the employer, which they often don't do, which is better, as I said, or a fee that comes out of the accounts of the participants. However, most of these registered investment advisors are still charging a fee as a percentage of the account value. And I think it's much better to charge a fixed fee because it's more commensurate with the work you're doing and the advisor isn't biased. For example, if you have 20% interest credit card debt and there's no match, Paul Sippil: [8:48] you're often better off paying off that credit card debt first before you contribute to the plan. And advisors are always saying max out, put money in a tax-advantaged account. But that is not always such a good idea. And if you're getting paid based on a percentage of the assets, you're losing money by telling the participants, in some cases, to do the right thing. Dan King: [9:10] Wow. This is not something business owners are educated about at all. Paul Sippil: [9:15] Not really. They just don't think about it. It's out of sight, out of mind. It doesn't relate to a revenue generating activity. They don't see the fees, kind of like putting your hand on a hot stove. It's good to feel pain. Yeah, it hurts. But if there's people, I know I've heard about this before, that have some kind of a dysfunction where they can't actually feel pain, and that's very dangerous. And this industry is set up in such a way as Milton Friedman had once explained through the four ways to spend money chart that you don't feel pain. And that chart, just to explain real quick, is where you can spend your own money on yourself, your own money on someone else, someone else's money on yourself, or someone else's money on someone else. And the latter is where you don't economize and you don't seek the highest value. And that's why there's such a moral hazard in how the service providers are selected in terms of cost services and technology. They just don't care because nobody is really accountable to whether or not it's a good service provider in terms of the value and what they're charging. Dan King: [10:17] There's always that interesting asymmetry where when we hire most types of professionals, they know so much more about what they're doing than we do. So our ability to judge whether we're getting real value for money is so limited in most types of professionals that we hire, right? Oh, yeah. Paul Sippil: [10:32] But, you know, I'm not a professional car mechanic. I don't know anything about cars, but when I buy a car and all I like to drive are used Toyota Camrys, I know that I can look at the Carfax report. I know I can look at the past history of accidents. I can see how many miles the car has. I can see what condition it's in, what year it is. And even though I don't know much about cars or, let's say, computers or phones, there's all this information that a novice like me can uncover to make an informed decision. But this is a much more opaque industry. And while it's not completely not a free market, it's not nearly as much of a free market where buyers and sellers have equal access to information as those other industries that I mentioned. Dan King: [11:15] Yeah, yeah. The amount of red tape, the amount of small print in this industry versus some others. I'm guessing it's quite high. Paul Sippil: [11:24] Yes, and it's inherently complex because there's this term called revenue sharing, which is partially these commissions that are often paid to brokers. Sometimes there are revenue sharing payments that are kicked back to both the record keeper and the administrator. And sometimes the administrator will show on the bill what's called an offset, where they'll bill you X amount of dollars per quarter. So there is somewhat of a bill from some of these providers. And then they'll show what's called a credit based on these revenue sharing payments that they're getting. But the average person sees credit and they think they're getting a discount. And all they're really saying is that, no, we're just not billing you as much because we're getting some money out of the accounts. And oh, by the way, we're only getting that money based on certain investments being selected because not all the investments have these revenue sharing payments that are built in to pay these service providers. And all the client understand is, oh, I got a discount, I got a credit. But when you start to dig deeper, they don't really understand the context or the meaning of that credit and all the conflicts of interest that arise as a result of that arrangement being available in the first place, which has no benefit to the consumer, and therefore would likely not exist at all in a truly free market. And that's what I'm trying to promote. Dan King: [12:41] Very, very interesting. I can hear your enthusiasm and your voice as you speak about this, which is always exciting to see someone has a business that really means a lot to them. How did you get into this in the first place? Paul Sippil: [12:54] I touched on this a little bit, and I'll elaborate on this colleague I had, and this was a conversation I had 20 years ago, and I still remember the conversation pretty well. And he was always doing research. He was always reading about different tax rules. He really got into the weeds in the financial planning area and the estate planning area, which is how I started my career. And one day he said, hey, Paul, did you know you can look up tax forums on this website, freeerisa.com? And I thought, wow, this is really interesting. And then, you know, I didn't know what to do with it. And as I mentioned, I started calling the business owners and they didn't understand any of this. I thought I'd be a hero. But when I got all this pushback, I thought this industry is so messed up that I could spend my whole career just consulting in this one area and still never explain this fully to everyone. So that's kind of the fuller story. Dan King: [13:47] You're fueled. So it sounds like you're very much fueled by mission here, right? This is a business. this is how you earn a living, but it feels like there's a broader mission for you. Is that a fair way of looking at it? Paul Sippil: [13:58] Very much. So when I call people, I often tell them, hey, did you know I see these fees on your tax form? You should pay them at the employer level and you should negotiate. Nobody knows. Just like your internet bill where you can find a better deal or you can just ask for a reduction. If you literally just ask for a reduction for the administration, record-keeping and advisory fees, nine times out of 10, you're going to get a reduction. Now, there are certain service providers that are already really low cost, that are already a fixed fee, there's no reduction available, but you wouldn't really need one in the first place. I said this on a previous podcast I was just on. This just happened. And I'm not even working with this client yet. I explained to them that there were all these advisor broker commission charges showing up on their 5500 form. They didn't even know they had an advisor, which sounds crazy, right? This does happen, but this gets even worse. They were paying an advisor who the administrator or the HR person of the plan had to Google just to find out who it was. And it turned out this advisor had actually been dead since 2014. Dan King: [15:02] Oh my God. Paul Sippil: [15:03] They were paying a dead advisor for 11 years. And they still haven't even agreed to work with me yet. Because now they're trying to think if they even need an advisor, which is fine. I'm not offended if they don't want to work with me. But oftentimes, I'll get hung up on saying, oh no, Paul, we're fine. We don't need your services. And when I call people, and this gets back to your question about mission, and I'm just trying to tell them that they're getting screwed on these service charges. I'm not necessarily calling them to convince them that they need an advisor. And I haven't even explained what an advisor should be doing, which is providing ongoing education services, actually advice, because when you're a fiduciary, you can provide advice and not just education, which is what a broker can do and only provide recommendations and actually help them select a record keeper, administrator, and a custodian, evaluate those providers in terms of cost services and technology and provide ongoing objective advice to the plan participants in terms of how much to contribute, which investments to select, Paul Sippil: [16:06] Which investments should be available in the plan, whether or not they should have a six months or so savings cushion, whether or not they should pay off certain amounts of debt, and how to construct Paul Sippil: [16:18] their portfolio and take into account the other assets that they have. But the problem is that the plan sponsors have no incentive to monitor whether or not that service is even being used because they don't even understand that they're paying anything in the first place. So this is why the industry is so convoluted. There's a lot of different layers that I don't know anyone that wants to dig into. And then the other reason is most advisors don't handle any 401k plans. And if they do, they only handle one or two. And to your point about enthusiasm, because they only handle one or two plans, they not only don't have much knowledge, which it takes many years to develop, but they have very little enthusiasm for the plans. They see that as a loss leader. And all they want to do is sell individual products and services to the highly compensated, high net worth participants in the plan. And they just phone it in. There's an advisor from another large service provider that once told me how they're handling a few 401k plans, but they don't even understand how they work. Paul Sippil: [17:16] But in their mind, they think they're doing the client a favor by having it all under one roof, even though they're taking tens of thousands of dollars in payments and literally not doing anything. But yet to them, they see it themselves as doing the client a favor, which is as backwards of a way to think as I could ever imagine. Dan King: [17:36] Wow. Wow. Well, Paul, thank you. This has been a very good education for me, and I'm quite confident will be a very good education for our audience of group practice owners. Dan King: [17:48] What would be a sensible next step? Let's say they have 401ks. What would be a sensible next step for group practice owners who want to investigate their situation, whether they're getting screwed? Paul Sippil: [17:59] They absolutely need to look up their tax form online. That's number one. If they don't even want to look or understand it, I'm always willing to talk to people. This is not an advertisement or self-promotion for my practice because if people set the plans up where the employer pays the fees and it's a fixed dollar fee for the advisory service and they use a record keeper like a census, A-S-C-E-N-S-U-S.com, who also charges a fixed dollar fee per participant, where no matter how much money you have, you're never gonna pay any additional fee. You could pretty much use any advisor just to help select and monitor funds and you just pay them a reasonable fee based on the work that they're doing. But if you just go to my website, paulSippil.com, you can learn a lot. My contact information is on there. Or just email me or call me and I'll happily walk you through what you should do. And in many cases, you may not need somebody like me or you may wanna work with someone else. And that's fine. I'm really just trying to help. Dan King: [18:58] I think I may very well take you up on that for us. I think that's a great, very, very generous offer. And I hope people take the time to educate themselves just a little bit on this, especially in, you know, universes where margins are getting a little thinner. Insurance companies are aggressively trying to cut back on reimbursement rates. There could be an opportunity to get some real savings here. So if it doesn't cost you anything, at least worth looking into. Paul Sippil: [19:22] Yes, absolutely. Just the idea of negotiating fees that nobody knows that they Paul Sippil: [19:27] can do will take no time and can save hundreds of thousands of dollars over decades. Dan King: [19:34] Paul, as we come towards the end of our time together, we always like to end on a personal note. When you're not vigilanteing, what do you do for fun? Paul Sippil: [19:43] I love planning events. I have a group in Chicago I created about 10 years ago called Community Dining, communitydining.com. Amazingly was available. That's the website. And I love bringing people together over shared meals sourced from regenerative farms. And the idea is to stimulate meaningful dialogue and strengthen social bonds because people don't get together in person enough. And there's a lack of transparency in our food system, much like there's a lack of transparency in our retirement system. So a lot of what I do always involves investigating, even if it's for fun. Dan King: [20:19] Love it. Love it. Paul, such a pleasure to get to know you. Great having you on. Really, really enjoyed it. And it was informative. Paul Sippil: [20:26] Well, thank you. It was a lot of fun.