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Am I over paying for my cash balance plan?

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  • #31
    Originally posted by Mouthdoc View Post
    Thanks to WCI I've started reading my statements and realized that I pay several thousand dollars per year for the administration of my cash balance plan, but also 1.37% on the assets under management associated with the cbp to my FA. Does this seem excessive to anyone else with a cbp? Can I move my assets to vanguard and just keep the current administrator of the plan?

    Several things to point out about this thread.

    1) While custodial account can be opened at Vanguard and it can be a designated CB plan account, this assumes that you will be managing these investments yourself. For a solo CB plan that's probably fine, though the same issues as discussed below will apply. I prefer using low cost record-keepers, since it would be a lot more work dealing with such things as distributions from Vanguard custodial accounts. Record-keeper is much more efficient at this, and they do the work for you. Usually your adviser would get you on one of these platforms and ideally they charge no AUM fees and the platform gives you access to low cost index funds, just like in your 401k plan.

    2) While it is definitely important to have an ERISA 3(38) managing the CB plan and taking full discretion, the issue with small plans is that they have to be managed prudently, and very few advisers understand how to do so correctly, one reason is many think of CB plans as DB plans, but they are nothing of the sort when it comes to investment management (DB is a long term plan, CB is a very short term plan)

    3) Your ERISA 3(38) should also assist in evaluating plan design - I often see that the adviser is just deferring to the actuary who is not a fiduciary, but not all 401k/CB plan designs are appropriate for the plan sponsor, and quite often they should forego doing a CB plan in the first place. If the adviser was a real fiduciary, they would point this out before the plan sponsor plunges into a sub-optimal arrangement. Also, presumably they should also be assisting you with the 401k plan investment management as well and providing you with personal and business level advice to make sure you are doing the right things with your retirement plans.

    4) The biggest risk to the plan sponsor as far as CB plan is portfolio mismanagement by the adviser, as well as low quality administrative support. This is what you get when your adviser is nowhere to be found (paper adviser, or paper 3(38)) and your service providers are just a big retirement plan mill where you don't get the right level of advice and support.

    5) As far as managing portfolio correctly, the issue is that almost everyone thinks that if the crediting rate is 5% that the portfolio should have lots of stocks to try to 'hit' 5%. That's why I often see 75% stock portfolios that have a potential of doing exactly the opposite of what's expected, namely big under-performance or out-performance, which is also not very good considering maximum 10 year horizon. If after 10 years your rate of return exceeds 5%, guess what, you end up paying 100% of that difference to the government in taxes. And if you have big under-performance, you might have to kick in double or triple the contribution you expected during that year, possibly even more depending on how much money you got in the plan and what the return/loss was. Not something that you want to do at all. So it is not enough to have an ERISA 3(38) manage your CB plan, they have to know what they are doing.

    6) It goes without saying that anyone still paying AUM fees for any plan services is most likely overpaying over time, so that part is easy. In addition, unless your adviser is an ERISA 3(38), your investments might also be sub-optimal - paying revenue sharing, actively managed, high cost and potentially a lot riskier than they should be. And some 3(38) advisers don't mind rubber-stamping an investment lineup if they are working for someone else, not for you. Often these would be 'paper' fiduciaries working for the record-keeper rather than hired directly by you to advise you on your plans. These entities are not worth the money they charge.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees