Group Stinks, an article written by Scott Woolley in Forbes July 13, 2009 issue has proclaimed all group annuity contracts are dogs.  In this time of specialization, it is great to see a writer take on the roll of an ERISA attorney, contract lawyer, investment manager, plan advisor, and consumer rights advocate.

Are there abuses in the small 401(k) market?  Small being defined as plans with less than 100 employees and $5 million in assets.  Absolutely.  Do they take place in plans with assets of $10 million to $250 million?  Rarely.  Based on Larkspur Data Resources, Mr. Woolley would suggest we have 18,000 dumb companies investing $185 billion of plan assets in dog annuities.  His claim is that all of these products are sold by unscrupulous brokers who are motivated only by lavish commissions.

And Scott, please send me the name of the supervising Texas CPA firm so I can avoid their sophisticated analytical capabilities to not understand or ask the right questions before signing a group contract, or any other business contract.  No matter how much oversight provided by the SEC and the State Department of Insurance, you cannot protect companies from making potentially poor business decisions.

I am not defending the high cost and abusive group contracts sold by some companies.  It is the tone and unconstructive generalization about the GACs that prompts me to post this blog. 

In the future I would suggest you interview brokers and advisors who will provide unbiased advice and explain the value of a GAC.  You have received very biased advice from competitors selling against the products.  Not sure if they have any more honorable intentions than brokers selling GACs that provide poor value.

Finally, the advice to employees is sound.  Identify what the true costs are to participate by asking your employer to do a thorough review of the expenses and fund performance.  As a fiduciary, this should be done every year.  Use the DOL Fee Disclosure form and have the broker and insurance company complete the form.  Also, have the broker put in writing they are not receiving any other form of compensation other than what is disclosed on the form.  This should be signed by an officer of the brokerage firm.

The 401(k) plans with outrageous fees do negatively impact future account balances.  Having a naive writer author financial articles with limited business acumen and not seeking independent sound opinions/advice could be equally damaging.

One final comment, “Do not complain to your Benefits Department.”  A company with fewer than 100 employees typically does not have a Benefits Department.  There are plenty of complaining employees.  How about offering to form a committee to thoroughly review all aspects of the company 401(k) plan, if there is not one already in place?  This will lead to better results for the employer and for plan participants.

In her July 13th article, “Sick and Getting Sicker,” Simona Covel of The Wall Street Journal treats health care not as a key component of a total rewards program, but rather as a burdensome expense for employers. She identifies health care costs as a cause of business failure, especially small business failure, and says:

At some businesses…health care is the highest expense after salaries —with devastating consequences. Owners must skimp on vital investments like marketing and research. Some can’t hire the people they want because top candidates demand premium coverage. Or they end up under-staffed because of the high cost of insurance — and lose potential clients as a result.

This small paragraph sets the tone for what she will spend the rest of the article doing: that is, positing a non sequitur argument which cites the high cost of health care as the principal cause of decline for four small businesses. The article appeals to emotion, perhaps in the hope that the reader will sympathize with the featured business owners rather than recognize the obvious: while health care proved unaffordable in these examples, their competitors have somehow figured out how to offer it to their employees. Furthermore, these particular business owners appear to have other issues contributing to their business failures.

The article points out that for an Oregon-based Web design company called Media Mechanic LLC, a health plan costing just $400 per employee per month was too expensive. The owner, who was looking for a health plan for new hires, chose to offer two-thirds coverage as a compromise. However, if he had been thinking of health benefits as a part of a total rewards program rather than as his “highest expense after salaries,” he could build an employee cost-sharing plan that is competitive in the market. Does an employee value $60,000 per year in taxable salary more than $55,000 per year with great health benefits?

In another example, the president of M2 Health Care Consulting in Washington D.C., claims that health care costs are keeping her not only from providing coverage, but also from making her staff members full-time employees! “Since the business was created in 2005…[the owner] has relied on local contract workers — currently, five of them.” Normally, a business must pay a higher hourly rate to an independent contractor than to a full-time employee to compensate for not providing a health care plan. Moreover, she says that her inability to afford health benefits has discouraged potential workers from working for M2. Is this a fair example of health benefits costing too much money or is it the failure of an owner to build a culture and manage a rewards program to motivate candidates to join and remain with M2?

Contrary to what Ms. Covel’s article suggests, it seems that the cost of health care is not the key driver to these entrepreneurs’ inability to provide competitive rewards. That these businesses are struggling to hire and retain good employees seems the result not only of high perceived health care costs, but financial difficulties in general, a lack of vision, and a reluctance to invest in human capital.

The article states, “It appears that we are at a stage in business where the US will fail due to health care costs.” I would argue that any entrepreneur who cannot overcome the challenge of building a comprehensive total reward program will not be successful. An entrepreneur will have far greater challenges with sharing a vision, building and maintaining an “employer of choice” culture, establishing authority, making employees part of the solution, and developing great products or services. Simona, health care cost is but one of a hundred challenges that employers deal with every year. Interview one of the many who has overcome them and built a great company.