The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (31 page)

Soon the nurse said she wanted to inspect the Manning home, which workers’ compensation laws allow. The Mannings thought her approach was anything but that of a caregiver because when she visited, her primary interest seemed to be in questioning why Manning would want to go on living. When she got to Manning’s bedroom, her purpose became clear.

“Why don’t you have a DNR order on the wall?” she asked. A do-not-resuscitate order is an instruction people who know they are dying may
give to indicate that no resuscitative care should be provided. But Bob Manning had no interest in dying; after almost forty years of living with almost complete paralysis, he was a remarkably vital man.

As Dr. Chew noted when he told me about this incident, end-of-life decisions are a fit subject for a physician to discuss with a patient. But this nurse was not a caregiver; she was an agent of a company that would lose money if Manning went on living and would profit from his death.

“She was asking me to die,” Manning told me.

Dr. Chew agreed: “She wanted Bob to have a DNR order and was quite insistent.”

The nurse turned out to be an employee of a medical advice company called Concentra. When I asked Tom Fogarty, the doctor who is a cofounder of Concentra about this, he did something unusual. Unlike the top executives who will not come to the phone or who speak only through written statements, Fogarty set out to find out what happened. When he got back to me he was guarded about what he shared, but he made it clear he was aghast that any medical professional representing a financial interest in someone’s life would even inquire about a DNR order. He also volunteered that after a brief spell, his company had gotten out of the line of business that the nurse had been part of. How much better American business would be if we had more chief executives who dealt forthrightly with issues instead of hiding behind publicists and lawyers, not to mention squads of burly security guards.

Now, to be clear, I do not think for a moment that Warren Buffett knew that the nurse working for his Cologne Re insurance company was going to ask Bob Manning, in effect, to die the next time he had a medical emergency. But that does not mean Buffett is free of responsibility for what happened. Buffett often says that his style is to let his managers run their shops, as long as they make their numbers, meaning their expected level of profit. His management style is widely praised in news reports and in profiles of the “Oracle of Omaha.” By giving managers the freedom to run their business units as they see fit, Buffett takes on a duty to demand the highest ethical standards. That would not, in my opinion, include gouging customers on coal shipping rates as his BNSF railroad does. Nor would an ethical chief executive allow anyone in his employ ever to suggest that anyone should die to bolster a company’s profits. But that is what happens under the Buffett style, in which by his own account he focuses on whether managers, some of whom resort to immoral conduct to give their billionaire boss what he demands, “make their numbers.”

The reality is that what Manning had been saying all along, even
before we met in 1997, was true. The insurance company wanted him to die. They had made it difficult for him to get care, they had for years refused to replace the crane Helen used to hoist him out of bed after the gears were stripped, they made it hard for him to get supplies to avoid infections. And finally a nurse hired by a Warren Buffett company came right out and asked him, in effect, why he was not going to die the next time he had a medical emergency.

Bob Manning lived until 2009. To this day, his family says they are still owed money to which he was entitled. They are owed more than that.

17.
Jim Mehling’s career
was humming. As president of Monitor Capital Advisors, his team was minting money for its owner, the immensely successful insurer New York Life. In effect, Mehling was an internal financial adviser for New York Life, the largest life insurance company in America owned by its customers and known therefore as a mutual insurance company.

One March day in 1997 Mehling’s boss gave him a glowing review, a raise and a $147,000 bonus. Six days later Mehling was fired.

To anyone who has a 401(k) to save money for their old age, the story of Jim Mehling and New York Life matters because it opens a small window on some of the many subtle ways your retirement funds get nicked with dubious fees.

Mehling’s offense was refusing to look the other way when he found out that New York Life gouged the 401(k) and pension plans of its own workers. He told his bosses the gouging had to stop. In a lawsuit filed three months later, Mehling and lawyer Eli Gottesdiener sought the return of special bonuses paid to the executives and the return of hundreds of millions of dollars in profit that New York Life made by charging the pension plans as much as twenty-five times the market rate for investment management services.

New York Life offered up a revealing public defense to Mehling’s accusations. Executive Vice President George J. Trapp invited me to the
company headquarters, an ornate forty-story temple of wealth that occupies an entire block on Park Avenue in Manhattan. Should its size, location and polished marble interior fail to make the point, atop the 1926 skyscraper rests a golden crown, a gilded melding of church spire and Egyptian pyramid.

Trapp and Stephen M. Saxon, a pension lawyer, insisted that all fees New York Life charged to its own retirement plans were within the law. Trapp added that Mehling was fired for good reasons that had nothing to do with the accusations that New York Life charged too much for services to its own retirement plans. The five plans had $4.1 billion of assets at the time.

Even if excess fees had been charged, Trapp and Saxon said, they could not imagine a cause of action against the company or its executives. They noted the solid returns and that the company’s defined-benefit pension plans had $2.7 billion, including a surplus of $900 million, a robust 50 percent more than the $1.8 billion in benefits owed to New York Life employees and agents at the time.

Of course this was also 1999, when the stock market was soaring beyond any values justified by profits, as investors would learn the following April when the Internet bubble collapsed and $7 trillion of paper wealth was lost to those who had not yet cashed out. More important, however, the law makes no distinction between charging excess fees to rich plans or poor ones. Norman Stein, a law professor who specializes in pension issues, explained, “the statute says you can’t violate your duty and charge excessive fees, not that you can charge excessive fees if a pension plan is overfunded.”

Alan Lebowitz, a senior Labor Department pension official, observed that cases like that at New York Life “were inevitable because the statute creates this situation where you can be” an official of both an investment company and its pension plan. “The individual who is both a plan fiduciary and a company official is in a very difficult situation because you clearly owe an obligation to both the plan participants and to the shareholders.”

More than eight years later, New York Life paid $14.7 million to settle the overcharging case. The company did not admit to wrongdoing (firms almost never do). But the Mehling case illustrates one reason that many millions of Americans are heading toward old age without enough resources to live out their last years well or even decently.

Mehling’s essential revelation was simple: there is no way for any of the 61 million Americans with money in 401(k) plans to know whether
those permitted to shave slices of money from their accounts are taking more than the market rate. Indeed, there is no way to know the name of every company taking some of your money or just what they are doing for their fees.

Senators and representatives have known about this for years. Congress has been told repeatedly about numerous weaknesses in the 401(k) system by its own investigative agency, the Government Accountability Office. Academic researchers, journalists, whistle-blowers and even some industry leaders like Mehling have exposed clear and present financial dangers. The poachers include bosses who steal from their workers by never passing on 401(k) money from paychecks to be invested. Some workers are forced to invest in their own employers but given no voice in how their shares are voted. Most of all, far too little money flows into 401(k) accounts, especially for workers not in the top tiers of pay.

Yet little or nothing has been done to correct abuses and protect workers, whose voices are heard far less often than those of big campaign donors and the lobbyists they employ. The result is practices that enrich some corporations not from market capitalism but market manipulation, ensuring the haves have more at the expense of those with less.

AN ACCIDENTAL SYSTEM

The problem began at the very birth of the 401(k). Starting as a favor to one industry, it grew into a system, one that carries a burden, as a cornerstone of American retirement, it was never designed to carry.

The 401(k) is really one huge tax loophole. Tax loopholes are not intended policy, but often are the unintended result of laws that do not match up, leaving some income untaxed. Loopholes can be pure accidents; sometimes clever tax lawyers spot an opening and leap through it. Other loopholes are the product of lobbyists shaping legislation and of gullible politicians, too eager to please donors and prospective employers.

The 401(k) was created at the behest of bank holding companies so that their better-paid workers could stash away some extra pay without paying taxes until they retired. Back then the top tax rate was 70 percent, so in retirement all but the most senior executives could anticipate paying much lower rates. But when a Pennsylvania compensation consultant named Ted Benna read the law more than three decades ago, he recognized something much larger. In classic entrepreneurial fashion, Benna set out with no capital to build a business for himself; by his reading of
the law—and it is a correct one—not just banks but most any business could create 401(k) plans. Benna promoted the widespread use of such plans, which quickly caught the attention of people with capital, like the Ned Johnson family of Boston, who own Fidelity; the Stowers family of Kansas City, who own Century Investments; and other mutual funds. They got in on the deal and made billions, although Benna never made it beyond being a tiny player, barely compensated for his rich insight.

The annual taxes avoided because of 401(k) plans come to about $110 billion, according to Teresa Ghilarducci, a pension economist who teaches at The New School in New York. To put that number in perspective, had the IRS collected another $110 billion in 2009, total income tax revenue would have gone up by close to 13 percent.

For those who can afford to save, the plans are a happy accident. Named after a section of federal tax code numbered (you guessed it) 401(k), workers can set aside money from their pretax pay. Employers with such plans have the option to add money, matching some or all of what the workers save.

As enhancements on top of Social Security and traditional pensions, 401(k) plans are a good idea because they encourage additional savings. Viewed as a kind of financial dessert, like meringue, the 401(k) makes sense.

But instead of being dessert, this financial meringue has come to be served most often as the main course, one that is no more healthy financially than pie topping is dietetically.

Mutual funds and other promoters of 401(k) plans sold them in the eighties and nineties as a way to riches, with charts showing young people how they could retire as millionaires. But it hasn’t worked out that way. Jack VanDerhei, research director for the Employee Benefits Research Institute, a straight-shooting nonprofit that gathers data, observed that “far too many people had false confidence in the past” that modest savings would make them flush in old age. “People’s expectations need to come closer to reality so they will save more and delay retirement until it is financially feasible,” VanDerhei said.

The rise of 401(k) plans illustrates how America is not prospering because its economic policies violate well-established principles. The typical 401(k) involves excess costs, added risks and inefficiencies that have become embedded in the law. Because of the concentrated interest of a narrow segment of the economy, people are certainly getting rich off the plans, but most of them aren’t the supposed beneficiaries. What we’ve seen is the financial equivalent of mechanics throwing sand in the gears
of machinery they do not own. It gets them work, but not work that adds value.

Corporate executives know full well that these plans are seriously flawed.
CFO
, a magazine for chief financial officers, told its readers in 2009, “True, 401(k)s have not proved to be the perfect substitute for pension plans. Workers tend not to use them to full advantage, and employers don’t always follow best practices in designing them.”

That’s an understatement.

SLICING AND DICING

In all, 401(k) plans held about $2.2 trillion in 2010. After adding in the holdings of similar plans called 457s for government workers and 403(b) plans for nonprofit workers, the total comes to an estimated $4.5 trillion, according to the Investment Company Institute, a trade association.

Money in the trillions—that is, millions of millions—is almost incomprehensible. But divide the 401(k) pool by the 61 million people involved and you get an average of $33,375 in each account. Looking at just the 52 million workers who can add money to their plans (the others have moved on or retired), we find they did not put all that much into their accounts. Counting both worker savings and any match money from their employers, the average participant saved $4,061 in 2009, the latest year for which Labor Department data is available.

Some dollars have disappeared, as Jim Mehling warned us, due to excessive charges for record keeping, trusteeship, compliance, promotion and investment management. According to its own data, industry fees are at least a half of a percentage point per year higher than a competitive market would charge.