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Am I over paying for my cash balance plan?

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  • Khart23
    replied
    jacoavlu I’m speaking in the larger scope of an administrator pointing employees to the advisor for complaints of fund performance when they are most certainly equally involved in the selection of the investments.

    Paying the tab or not, if it came to litigation on the plan the impression being given to the participants would be a field day for the lawyer representing the employees. To your point, the plan admins always hold some liability: zlandar intending to point that they have an FA managing the account would not be in their best interest. This is dually important because the FA is not managing the account nor did they ever have that sole responsibility even in the investment selection.

    Again, this is just a point of caution for everyone to consider. Unfortunately, there are just as many frivolous lawsuits as legitimate ones against companies for their plans. Don’t give gasoline to feed a fire by making the claim that was mentioned is the real take-home point here. Same point of having insulation with a TPA when other staff is involved was made by Johanna before Zlanders addition to the thread.

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  • jacoavlu
    replied
    Originally posted by Khart23 View Post

    Specific to the performance of accounts (or any other investment holding issues such as fees) when the plan sponsor has involved themselves in the direction and approval of investments they are assuming a section 3(21) co-fiduciary role. In contrast, when a plan provider signs an advisor as a section 3(38) investment manager the advisor acts as a fiduciary in the selection, review, replacement and oversight of the investments in the plan. With a 3(38) advisor in place the plan sponsor still must do due-diligence by benchmarking the plan, its fees and the investments to ensure that they are acceptable.

    To your point, that the plan admin always has some liability. But to “point” at them for funds that the admin had some of the greatest involvement in picking would be a complete litigation nightmare. All those things aside, using low-cost index based funds that follow most of the values in forums such as this one or Bogelheads helps to significantly lower any risks from active-managed mutual funds, their fees, share classes etc.

    I hope that helps provide clarity, you should always have the level of responsibility (by the ERISA section as mentioned earlier) in writing for your plans Investment Advisor agreement.
    are you talking about DBP's, DCP's, or both?

    zlander's post you quoted of course was referencing a DBP and in the case of investment performance shortfall the employer is paying the tab for the shortfall no matter what.

    We're not talking about an employer-sponsor directing the investment of an employee's assets in a 401k or other DCP

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  • Khart23
    replied
    Originally posted by jacoavlu View Post

    I call BS, the employer is the plan sponsor, selects and pays the advisor and other professionals involved with the plan, so I don't see how they could ever not share in the liability in the case of litigation against the plan
    Specific to the performance of accounts (or any other investment holding issues such as fees) when the plan sponsor has involved themselves in the direction and approval of investments they are assuming a section 3(21) co-fiduciary role. In contrast, when a plan provider signs an advisor as a section 3(38) investment manager the advisor acts as a fiduciary in the selection, review, replacement and oversight of the investments in the plan. With a 3(38) advisor in place the plan sponsor still must do due-diligence by benchmarking the plan, its fees and the investments to ensure that they are acceptable.

    To your point, that the plan admin always has some liability. But to “point” at them for funds that the admin had some of the greatest involvement in picking would be a complete litigation nightmare. All those things aside, using low-cost index based funds that follow most of the values in forums such as this one or Bogelheads helps to significantly lower any risks from active-managed mutual funds, their fees, share classes etc.

    I hope that helps provide clarity, you should always have the level of responsibility (by the ERISA section as mentioned earlier) in writing for your plans Investment Advisor agreement.

    Leave a comment:


  • jacoavlu
    replied
    Originally posted by Khart23 View Post

    Careful on this one, because you were involved in the direction/approval of the investment selections (rather than FA having the full discretionary authority) it does mean that you share the liability of any litigation against the plan.
    I call BS, the employer is the plan sponsor, selects and pays the advisor and other professionals involved with the plan, so I don't see how they could ever not share in the liability in the case of litigation against the plan

    on the contrary, giving an advisor "full discretionary authority" sounds like a recipe for even greater liability to me, from the perspective of a small business owner

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  • Khart23
    replied
    Originally posted by zlandar View Post
    I discussed with my FA that I wanted only low cost funds. He understood I invest like a Boglehead and built a simple index-based portfolio for the CBP. After a few years it's running on autopilot but it's worth the money to have him oversee the account IMO. In addition to managing the contributions he handles any withdrawals and sends account statements to the TPA. If the market goes south and docs start complaining I can point that we have a "FA" managing the account.
    Careful on this one, because you were involved in the direction/approval of the investment selections (rather than FA having the full discretionary authority) it does mean that you share the liability of any litigation against the plan.

    Leave a comment:


  • G
    replied
    Originally posted by jacoavlu View Post

    curious, do they actively manage the plan assets? How complex is the portfolio?

    I've seen managers that want to do everything from having just a few cheap bond index funds comprise the whole portfolio, to having an active basket of individual stocks plus bonds and even precious metals funds
    Yeah, there are like two dozen holdings. It is amusing.

    Leave a comment:


  • jacoavlu
    replied
    Originally posted by G View Post

    We could not find anyone not using an AUM model. Being a dedicated boglehead/dahlehead, I balked. But then I did the math. Although possible, it is unlikely that we keep the plan for more than 3-5 years before closing it down to rollover into the 401k. For sure, if we were keeping it for 20 years, the calculations would be different.

    We were able to negotiate the rate down. Sorry, I don't recall the number. I do recall the annual skim being less than what it would cost to reimburse a bunch of partners for admin time, obv not an issue for you.

    Welcome to the forum.
    curious, do they actively manage the plan assets? How complex is the portfolio?

    I've seen managers that want to do everything from having just a few cheap bond index funds comprise the whole portfolio, to having an active basket of individual stocks plus bonds and even precious metals funds

    Leave a comment:


  • G
    replied
    Originally posted by Mouthdoc View Post
    Thank you all for your wonderful replies! Molar Roller, you nailed it. I am a solo doc, single practice orthodontist. I have myself and my wife as the 'highly compensated employees' on our CBP and the rest of my staff as the 'non highly-compesated employees.' My wife cannot participate in the CBP per plan requirements. We just started the CBP about 2 years ago so it's balance is just under 200k. Molar roller, do you mind me asking how much your AUM fee is?

    Zlandar, I think I may need to shop my CBP plan around with different FAs as well. Over the years, the high AUM fee is going to add up.

    We could not find anyone not using an AUM model. Being a dedicated boglehead/dahlehead, I balked. But then I did the math. Although possible, it is unlikely that we keep the plan for more than 3-5 years before closing it down to rollover into the 401k. For sure, if we were keeping it for 20 years, the calculations would be different.

    We were able to negotiate the rate down. Sorry, I don't recall the number. I do recall the annual skim being less than what it would cost to reimburse a bunch of partners for admin time, obv not an issue for you.

    Welcome to the forum.

    Leave a comment:


  • jacoavlu
    replied
    Originally posted by Steven Podnos MD CFP View Post
    Schwab offers a personal defined benefit plan for under 2K a year. You can manage it yourself with the intent to earn 5% a year on average using low cost funds.
    presume the OP has employees including spouse and a 401k in addition to the CBP, has a TPA handling both plans, would not be eligible for a personal DBP even if they are the only participant in the CBP.

    CBP and 401k need to be tested together

    Leave a comment:


  • Steven Podnos MD CFP
    replied
    Schwab offers a personal defined benefit plan for under 2K a year. You can manage it yourself with the intent to earn 5% a year on average using low cost funds.

    Leave a comment:


  • Mouthdoc
    replied
    Thank you all for your wonderful replies! Molar Roller, you nailed it. I am a solo doc, single practice orthodontist. I have myself and my wife as the 'highly compensated employees' on our CBP and the rest of my staff as the 'non highly-compesated employees.' My wife cannot participate in the CBP per plan requirements. We just started the CBP about 2 years ago so it's balance is just under 200k. Molar roller, do you mind me asking how much your AUM fee is?

    Zlandar, I think I may need to shop my CBP plan around with different FAs as well. Over the years, the high AUM fee is going to add up.


    Leave a comment:


  • molar roller
    replied
    Zlandar,
    Nice negotiating skills!
    I'm guessing the OP is a dentist.
    Dental practices, even when group, tend to be a lot smaller. Most likely Mouthdoc is the only plan participant, or one of two if he/she has a partner. I pay AUM but much less than $4K. At smaller balances, AUM might be more cost effective than flat.
    OTOH my plan requires no "managing" as it is 100% fixed. It houses most of the bonds of my total portfolio asset allocation, and I don't care very much about the return. But I have a much larger portfolio and CB plan works well within it.
    If there were other participants in the plan, it would likely not match their investment objective.

    Leave a comment:


  • zlandar
    replied
    I would have told your FA no thank you. I interviewed 3 FAs to manage a group practice CBP. All three initially wanted 1% AUM. When I said I would only pay a flat non-asset based charge two dropped out. The third I negotiated with and agreed upon $4k/year.

    I discussed with my FA that I wanted only low cost funds. He understood I invest like a Boglehead and built a simple index-based portfolio for the CBP. After a few years it's running on autopilot but it's worth the money to have him oversee the account IMO. In addition to managing the contributions he handles any withdrawals and sends account statements to the TPA. If the market goes south and docs start complaining I can point that we have a "FA" managing the account.

    You could interview some more FAs and try to find one with a fee structure you like. If you find a FA he/she could arrange to transfer the CBP assets to an investment account. I don't think VG is able to handle these type of accounts. My CBP account is with LPL Financial which is a large independent broker dealer. I have view-only online access to the account.

    Leave a comment:


  • molar roller
    replied
    Good on you for starting to look deeper into your plan! 401k/CB plans can get very confusing.
    1.4% sounds like a pretty high amount, especially for a CB plan that is only supposed to deliver 5% growth. Hard to achieve that with 30% of the earnings going to the advisor, without taking some massive risks that may bite you when the market turns.

    The firm I use charges 0.25% AUM for CB plan FA.
    https://americasbest401k.com/our-pricing/

    PM me if you want more details about their fees.

    Leave a comment:


  • jfoxcpacfp
    replied
    I don’t see why not. Understand that you would fill the shoes of the administrator of the plan, but if you are well-versed in the investment themes prevalent here in this forum and the blog and stay involved and actively learning, you will probably have as good or better results than most paid advisors. Of course, that depends heavily on your personal temperament and understanding of the place that a plan has in your long-term results, along with your choice of advisor. Poor decisions can cost at least as much as you’re paying now.

    As for TPA (Third Party Administrator), as long as you own a practice with employees other than your spouse and/or non-qualifying p.t. Team members, i d/n recommend DIY. In fact, I would warn strongly against. Not to say that you cannot save $$ by shopping around, just that is is a necessary cost.

    Leave a comment:

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