Image Credit: Charlie Chaplin in Modern Times, Wikimedia Commons
By Jason Zweig | Sept. 6, 2013 6:11 p.m. ET
Your 401(k) retirement plan is supposed to be the ultimate long-term holding, with a horizon that for many investors extends for decades. Even so, advisory services are springing up to help you manage your 401(k) over the short term, urging trades every few weeks.
These services confront investors with knotty new challenges. If you don’t follow every trading recommendation, your results can vary widely from what they report. If you do mirror their suggestions exactly, you could incur fees or other penalties for trading too much in your 401(k).
And these services operate in a regulatory no man’s land; unlike investment advisers and brokers, they aren’t generally subject to the securities laws. So their disclosures can be confusing and unfamiliar to investors accustomed to mutual funds and brokerage accounts.
This July, T. Rowe Price Group permanently banned 1,300 American Airlines employees from exchanging into its funds in their 401(k) plan. According to a person familiar with the matter, the firm acted after several warnings to the airline employees, many of whom subscribe to a monthly newsletter called EZTracker.
Like many fund companies, T. Rowe Price reserves the right to impose a redemption fee on sales of fund shares held for less than 90 days—typically 1% to 2%—and can reject orders from frequent traders.
Various editions of the EZTracker newsletter cost roughly $60 to $85 annually and recommend several trades a year, says co-owner and co-publisher Michael diBerardino, a former American Airlines captain. “We think buy and rotate is better than buy and hold,” Mr. diBerardino says. “We don’t think it’s prudent for T. Rowe Price to suspend people from trading their funds.”
T. Rowe Price “took this step to protect all fund shareholders against the disruptive impact of excessive trading,” says spokesman Edward Giltenan.
An online service called Active401K charges $19.95 a month to provide emails with trading recommendations based on the “momentum,” or price trend, of funds in a 401(k) account. The service has about 200 subscribers and makes eight to 10 recommendations a year, says its owner, Craig Wear, president of Game Plan Advisors in Conroe, Texas, an asset-management firm with $50 million in assets.
“Our active models have allowed us to sidestep a lot of the negative events in the markets,” Mr. Wear says, although he says that without direct access to their account information, he can’t be sure how well his subscribers have done.
There seems to be little doubt about how well subscribers to the 401(k) trading service from Compass Investors in Kenilworth, Ill., have fared: According to a chart on its website, if you had invested $100,000 on Jan. 1, 1997, and followed Compass’s trading advice ever since, you would have had $755,000 by this Aug. 26, a 12.9% average annual return.
The same amount invested in the S&P 500, according to the chart, would have risen to just $221,000, or 4.9% annually.
On June 23, 2008, according to records provided to The Wall Street Journal by Kevin Coppola, president of Compass, the service told subscribers to shift from 100% stocks to just 21.3% stocks, with the rest in fixed-income funds. Compass didn’t go back into stocks until June 2009, enabling subscribers to escape severe losses during the financial crisis.
Until Friday, the website said “the application and reported performance results…have been verified by Ashland Partners,” an accounting firm in Jacksonville, Ore., that examines investment performance for money managers.
Based partly on those spectacular numbers, Centier Bank, a community bank with some $2 billion in assets and more than 40 branches in northern Indiana, is introducing a “collective fund” this fall that will package Compass’s service for the bank’s retirement-plan clients.
Centier hopes to raise at least $10 million initially, says James Boyd,a vice president at the bank, who says that he is a Compass subscriber and his own results show “it works.”
Peggy Beavers, a 62-year-old retiree in Geneva, Ill., says she has used Compass since 2003 and “it has made a dramatic difference” to her wealth.
A closer look at Compass’s reported performance, however, raises some questions.
Other marketing materials from Compass state that it didn’t have any clients until 2003.
According to investment-research firm Morningstar, the S&P 500 returned 6.9% annually, including reinvested dividends, between Jan. 1, 1997, and this Aug. 26. That turned $100,000 into $302,920—much more than the Compass website claims.
Ashland Partners hasn’t provided an audit opinion to Compass since Jan. 30, 2006, says Jason Millard, a partner at Ashland. The firm found only that Compass’s mathematical model had been consistently applied, he says, and didn’t verify Compass’s performance results.
“The disclosures on the [Compass] website do not match the scope of the services we performed,” Mr. Millard says, “nor do they accurately represent the time frame for which we performed it.”
Mr. Coppola told me this past week that Compass has roughly 1,000 subscribers, who pay $300 to $600 annually. He says the results between Jan. 1, 1997, and Sept. 16, 2002, are “back-tested,” or simulated, and that he is adding a disclaimer to that effect. Mr. Coppola doesn’t dispute Mr. Millard’s statements and says he is revising the description of Ashland’s audit to make Compass’s website “crystal clear.”
Compass’s calculation of the S&P 500’s returns, based on data from Yahoo Finance, didn’t include reinvested dividends, while those of Compass’s own results did, says Mr. Coppola—accounting for the difference. He says he is changing the chart to explain how dividends are treated.
“I don’t want there to be any question whatsoever as to the quality of the information we’re providing,” he says. “My goal is to be the man who helps as many people as possible reach retirement-income security while I’m walking this earth.”
These 401(k) trading services are a new reminder of an old rule: No matter how well-intentioned advisers might be, investors should always ask hard questions whenever a way to get rich sounds easy.
Source: The Wall Street Journal