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Am I over paying for my cash balance plan?

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  • litovskyassetmanagement
    replied
    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?

    Thanks!
    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.

    Leave a comment:


  • molar roller
    replied
    Thanks to this thread, I reached out to my CBP admin and inquired whether I need a FA for my plan, since I don't really use them.
    He responded by lowering the AUM fee to something nominal (way less than any fee being discussed here). If anyone is interested, PM for details and info.

    Leave a comment:


  • Khart23
    replied
    Originally posted by Mouthdoc View Post
    This is what my FA said when I asked about switching my funds to vanguard and self managing the cbp assets :

    "Logistically,you are able to transfer the funds to Vanguard, but you are held as a fiduciary on that account. If you do it yourself, you’ll be taking on risk and may not know it until it’s too late.

    I do understand that you want to do your own investing, but you’re removing key parts of your team that helped put your plan together. If/when things don’t go as expected, I don’t believe you’ll have the same level of service or expertise available to help you."

    Definitely makes me nervous.
    Mouthdoc : as it was mentioned, I would be skeptical knowing that you are a solo-practitioner. You would have to decide to sue yourself and that’s incredibly unrealistic/improbable. Now, if there are other participants there is the litigation consideration.

    Don’t let the fiduciary boogeyman be a sales-pitch to you on a CBP: jacoavlu made the point on the CBP that the admin must make-up the difference, currently the Supreme Court ruled that this alone blocks litigation based on Fiduciary Responsibility in the Thole V US Bank decision (see details here: https://us.eversheds-sutherland.com/...pension-claims ). I understand my previous comments on this thread may have read similar to making a boogeyman out of fiduciary responsibility; the intent is to limit the accelerant that a spark could ignite from an active or previously employed plan participant. (E.g. better to cite the companies requirement to deposit funds and the plans protections rather than enter a murky area of pointing to the FA).

    molar roller - I also second the custodian being able to send duplicate statements to your TPA without major pains to you for the CBP.

    There have been counter-claims that lack of fiduciary action significantly increases the potential of injury to participants. The Supreme Court has used the PBGC (Pension Benefit Guarantee Corp) as another backstop to alleviate harm to participants from lack of fiduciary management.

    **Do not mistake the CBP rulings/insulated positioning from fiduciary litigation as applicable to your retirement plan. There are MANY active litigations in regards to Fiduciary standards within this space, so if even one other participant exists it is worth considering some of the protections. **


    Finally, absolutely make 100% sure to benchmark your retirement plan - this is the absolute minimum standard once every 3 years to have any leg to stand on. Quality benchmarking will not only show “apples to apples” fee comparisons (for all associated FA, TPA, Investment, transactional, audit & other fees), but they will also look at plan adoption rates by employees, similar sized plans in all business types (locally or nationally) as well as similar-sized plans in your practices area (also local & national).

    Leave a comment:


  • jacoavlu
    replied
    Originally posted by zlandar View Post

    Yes but that means you have to handle the investment account, any contributions/withdrawals from that account, and send account statements to the TPA on request. If you are a solo practice with a small non-HCE staff and are meticulous keeping records it's potentially doable. Once you start adding partners to the practice I would advise having a FA.
    the investment account should be simple anyway. Complexity and or active management would be a red flag
    contributions should be infrequent possibly only once per year
    withdrawals should be infrequent, probably only when a participant leaves
    recordkeeper / custodian can be directed to send duplicate statements to TPA on an ongoing basis

    presume there is also a 401k which probably has an advisor, in my mind it would be more than reasonable to ask same advisor to oversee both plans for a fixed yearly fee. If they demand an AUM fee then look for someone else

    Kon Litovsky does this stuff for a fixed fee and actually knows the stuff, in addition to managing assets and selecting good funds to offer in the 401k he's another set of eyes on the TPA

    Leave a comment:


  • zlandar
    replied
    Originally posted by molar roller View Post

    So is it possible to have a CBP without a FA at all?
    Yes but that means you have to handle the investment account, any contributions/withdrawals from that account, and send account statements to the TPA on request. If you are a solo practice with a small non-HCE staff and are meticulous keeping records it's potentially doable. Once you start adding partners to the practice I would advise having a FA.

    Leave a comment:


  • jacoavlu
    replied
    Originally posted by molar roller View Post

    So is it possible to have a CBP without a FA at all?
    yes

    Leave a comment:


  • molar roller
    replied
    Originally posted by zlandar View Post

    I've had the fiduciary boogeyman waved at me before. So analyze the risk specific to your situation. I've been regaled with tales of multimillion dollar lawsuits mostly over 401k plans. These stories concern very large companies and universities with hundreds of millions in retirement assets where a difference in 50-100 basis points equals millions in excess fees over the years. There is enough money to interest a law firm. For a solo practitioner or a small group practice? I don't think so.

    As long as you have enough money to ensure that your employees in the CBP plan are covered what are they going to sue over? You are by far the largest participant by assets in the CBP are you going to sue yourself?

    Find a FA that is willing to work with a fee structure that makes sense to you. 1.37%is
    So is it possible to have a CBP without a FA at all?

    Leave a comment:


  • zlandar
    replied
    Originally posted by Mouthdoc View Post
    This is what my FA said when I asked about switching my funds to vanguard and self managing the cbp assets :

    "Logistically,you are able to transfer the funds to Vanguard, but you are held as a fiduciary on that account. If you do it yourself, you’ll be taking on risk and may not know it until it’s too late.

    I do understand that you want to do your own investing, but you’re removing key parts of your team that helped put your plan together. If/when things don’t go as expected, I don’t believe you’ll have the same level of service or expertise available to help you."

    Definitely makes me nervous.
    I've had the fiduciary boogeyman waved at me before. So analyze the risk specific to your situation. I've been regaled with tales of multimillion dollar lawsuits mostly over 401k plans. These stories concern very large companies and universities with hundreds of millions in retirement assets where a difference in 50-100 basis points equals millions in excess fees over the years. There is enough money to interest a law firm. For a solo practitioner or a small group practice? I don't think so.

    As long as you have enough money to ensure that your employees in the CBP plan are covered what are they going to sue over? You are by far the largest participant by assets in the CBP are you going to sue yourself?

    Find a FA that is willing to work with a fee structure that makes sense to you. 1.37%is

    Leave a comment:


  • jacoavlu
    replied
    Originally posted by Mouthdoc View Post
    This is what my FA said when I asked about switching my funds to vanguard and self managing the cbp assets :

    "Logistically,you are able to transfer the funds to Vanguard, but you are held as a fiduciary on that account. If you do it yourself, you’ll be taking on risk and may not know it until it’s too late.

    I do understand that you want to do your own investing, but you’re removing key parts of your team that helped put your plan together. If/when things don’t go as expected, I don’t believe you’ll have the same level of service or expertise available to help you."

    Definitely makes me nervous.
    then tell them to quote you the fixed yearly fee they require to do their work

    Leave a comment:


  • Hank
    replied
    If you still want a 3(38) fiduciary, I’d shop around services and fees and see if you can get better value. I don’t particularly get a warm fuzzy feeling from what you’ve described with your current financial advisor.

    Leave a comment:


  • Mouthdoc
    replied
    This is what my FA said when I asked about switching my funds to vanguard and self managing the cbp assets :

    "Logistically,you are able to transfer the funds to Vanguard, but you are held as a fiduciary on that account. If you do it yourself, you’ll be taking on risk and may not know it until it’s too late.

    I do understand that you want to do your own investing, but you’re removing key parts of your team that helped put your plan together. If/when things don’t go as expected, I don’t believe you’ll have the same level of service or expertise available to help you."

    Definitely makes me nervous.

    Leave a comment:


  • Mouthdoc
    replied
    Originally posted by molar roller View Post
    Does a CB plan actually need a financial advisor?
    Mine is very simple. I am the only doc, I have 99.5% of assets, the plan is 100% index bond funds and holds the fixed income portion of my total portfolio.
    I don't particularly care whether it achieves the 5% crediting rate since I have to hold these bond funds somewhere, and CBP is the best place for them.
    Even though I pay a low 0.3% fee, it's still a couple of grand.
    Can I drop the advisor?
    My question exactly!

    Leave a comment:


  • molar roller
    replied
    Does a CB plan actually need a financial advisor?
    Mine is very simple. I am the only doc, I have 99.5% of assets, the plan is 100% index bond funds and holds the fixed income portion of my total portfolio.
    I don't particularly care whether it achieves the 5% crediting rate since I have to hold these bond funds somewhere, and CBP is the best place for them.
    Even though I pay a low 0.3% fee, it's still a couple of grand.
    Can I drop the advisor?

    Leave a comment:


  • zlandar
    replied
    Originally posted by Khart23 View Post
    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.
    To clarify I told the FA I would scrutinize any funds that had a high expense ratio. My expectation was that the funds included would be low-expense but I did not direct him to buy specific funds or at specific asset holdings. I made no secret I liked VG funds and he presented me a 4 fund portfolio 3 of which are VG funds and one is a relatively low cost actively managed Western Asset bond fund. He emails me quarterly benchmarks on the performance and once a year (except this year because of COVID) we meet for a one hour meeting to discuss how the CBP is doing. I have agreed on all his suggestions on portfolio management (i.e. I am not micromanaging him directing fund trades).

    If my fellow physicians were lawyer-happy the CBP wouldn't exist. Employee assets make up a very small part of our CBP which I would guess is true for many physician CBPs. A practice would have to be near-bankrupt not to be able to fund the employee side.

    Leave a comment:


  • molar roller
    replied
    I realize this has become more of a general discussion rather than answers to OP's specific question, but in the case of dental practice DB, I think the fiduciary risk is greatly overblown.
    Nearly all dental practices who have DB plans are 1-2 doc practices. In my solo practice, I own 99.5% of the plan assets. While I do have an advisor, I am not sure what I am paying for as I do not ask nor receive any advice, and have no litigation risk.

    Leave a comment:

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