When a Vig Equals Ownership: The Forever-Cost of a 401k Plan

Wall Street — by which I mean the overall business behemoth that makes its money by holding investments of other people’s money and by trafficking in investments and money generally — is vigging all of us to death.

I mean this pretty much literally, i.e., I mean that, from the moment we are born until the day we die, the price each of us pays for storing our saved-up money, for our own use later on, consists of Wall Street taking its little slice — its vig — off the top, every moment of every day of every week of every month of every year, forever and ever, the scale of which is totally disassociated from any value Wall Street delivers unto us. Wall Street owns the market, and, in many ways, it also owns our investments in that market.

Wall Street thus owns the Asset of All Assets — the King and the Queen and all the Princes and Princesses of Assets, and t’is a very nice thing to own, indeed.

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First year property class in law school is all about what it is to own something. For instance, it talks about what sorts of rights an owner of land has relative to the rights of those who live next to the land. And it talks about who owns a fox that is fair game but happens to be on another person’s land. More broadly, it also talks about how ownership is, in essence, a bundle of rights that can be enforced in a courthouse. Seen in this light, ownership is the very bedrock of the law we know and kinda-mostly love.

Probably no realm of the law has a more nuanced, more complex approach to ownership than estate planning. It’s necessary to have a sophisticated idea of ownership in the realm of estate planning because the main game in high-end estate planning (e.g., estate planning for couples with, say, $11 million or more in net worth) is to relinquish ownership of an asset while also keeping an ever-so-perfectly-slight modicum of control over that asset — keeping some strings attached, if you will, but not so many as to provide the IRS the opportunity to argue that the person giving away the asset for gift and estate tax purposes still owns the asset.

The label I use for this part of estate planning is cake-eating, because almost every high-end estate planning technique involves a wealthy person or family trying to have his or her or their cake and eating it too, giving it away but also kinda keeping it at the same time. Ooh, and it tastes so good . . . .

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When an investment advisor helps a company set up a 401k plan, the investment advisor can get paid a vig “through the plan.” Getting paid through the plan means that the investment advisor gets paid his or her vig out of money inside the 401k plan, which can range from, say, a quarter of a percent of the money inside the plan per year to, say, three times that amount, or 0.75% (also known as 75 basis points or 75 bps, and also known as 75 bips or even 75 beeps).

Typically that vigging goes on forever, and, also typically, that vigging applies to an ever-larger number, as the money inside the plan grows due to (a) the march of time, as employees continue to contribute to the plan over their careers, and their total contributions therefore increase, and/or (b) the increase in the value of employee contributions once the contributions are invested, as the long-term trend of prices of the investments bought via those contributions is up, baby, up, and/or (c) the business (hopefully) increasing its headcount over the years, so that more and more people contribute to the plan.

Mind you, none of these factors has anything to do whatsoever with the quality of the advisor’s services, and only tangentially with the quantity of the advisor’s services, but a viggin’ the advisor does go because it is a great business model and because the vig flies low enough on the radar that an advisor just might price the plan at 75 basis points and just might have the person buying the plan for the company (often someone not knowledgeable about any of this, and someone who is perhaps even intimidated by the whole thing) just say okeedoke without giving it a second thought.

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So my question is this: if the advisor takes half a percent of plan assets each year as his or her vig . . . er . . . uh . . . compensation, and if that vig goes up due to reasons having next to no connection with the advisor’s services, then does the advisor have something tantamount to an ownership interest in every dollar in each employee’s 401k account? If so, is it right for the advisor to own a chunk of the plan in that way?

Sure, a one-time payment for setting up a plan is a one-time thing, but a forever-vig — a forever-vig that’s mostly going up, baby, up at that — for doing not-much or nearly-nothing is something else entirely. Clearly, the advisor in that situation has what amounts to a perpetual income interest in the plan — an interest of considerable value — which the advisor can sell at a later date (in which case it would be part of something called the advisor’s “book of business” or just simply the advisor’s “book”) and which the advisor can probably also leave to his or her heirs.

Viewed this way, the income stream flowing from that 401k plan sounds very much like a piece of property, does it not? And it also sounds like the advisor owns that piece of property, yes?

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There are ways for advisors to provide services to 401k plans, and to be compensated thoroughly for doing so, while also not vigging the employees ’til the day they die. Compensation should align with value delivered. Wall Street would not have it so, and, thus far at least, Wall Street wins. The vig lives on. And on and on and on.



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