Announcement

Collapse
No announcement yet.

Attempting to change 401K plans

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Attempting to change 401K plans

    I'm working with my partner at a small dental practice (~12 employees not including the 2 dentists) to change over our 401k plan. He has been with an advisor (Mercer) for about 13 years and pays ~1.2% AUM fees for the 401k plan. Last year, I brought to him a fee-only advisor but ultimately he did not feel comfortable making the switch, life got busy and another year rolled around. He is nearing retirement ~5 years out and I am ~5 years into practice so we are at drastically different points in our careers. He actually was the one this summer who brought up how much we are paying in fees and that we should maybe look around. As he was unsatisfied with my last fee-only advisor from the WCI recommended tab, I brought the AzDA 401k providers UBS to the table as a compromise. A 401k plan that is a little more mainstream by having the affiliation with the AzDA but still their fees would be 0.6% AUM instead (still not ideal but half of what our current one is). After discussing the change with both parties, my partner was again swayed by arguments his current advisor at Mercer stated (he's nearing retirement, they've been planning for this moment, they've built up trust over the years and they are doing right by him). Is there an easy way to explain how much he is and has been losing each year in AUM fees to this advisor that would help to convince him to change? I believe he has been burned in the past (like many doctors and dentists) and this is why he is having a tough time switching at the end of his career when he believes he has found one that has treated him fairly and that he trusts.

    His advisor mentioned having my partner roll his funds over into an IRA and then be able to keep them with him at Mercer while we took the 401K plan elsewhere and while this would work for me (though larger 401k plans do get preferential treatment/fees), I imagine this would still not be great for my partner because he would still be getting hit with a 1% AUM fee to have his account with them.

    Any advice you have would be great! If there are any good charts and/or articles that address the AUM fees and how generally financial advisors don't make up for their large AUM fee in the long-run, that would be ideal to show him. He admits he does not have the financial knowledge but that is partly why he wishes to stay with someone who will make all the decisions for him rather than moving and putting his accounts into a Target Date Fund. Thank you for any words of wisdom!

  • #2
    You have already spent a lot of time trying to convince your partner his FA charges a high AUM fee. Ask for a ballpark figure of the assets the FA manages, multiply by 0.01, and provide him the annual dollar figure. If he still wants to pay the fee it's his money.

    Who pays the 1.2% AUM fee for the group 401k? Is it the owners (you two) or is the AUM charged to all the participants? If the fee is charged to all the participants that's a potential liability. As the owners you have a fiduciary responsibility to provide a 401k plan with reasonable fees:

    https://www.dol.gov/sites/dolgov/fil...-plan-fees.pdf

    "You should know that your employer also must consider the fees and expenses paid by your plan.
    ERISA requires employers to follow certain rules in managing 401(k) plans. Employers are held to
    a high standard of care and diligence and must discharge their duties solely in the interest of the plan
    participants and their beneficiaries."

    Just because he trusts his FA doesn't mean he is allowed to saddle all his employees with that FA's high AUM fees.

    I would not use UBS. A lot of professional organizations don't know squat about a good 401k plan. Check Fidelity and Schwab and see if they can give you a quote for a 401k plan. If they give you an AUM-based fee ask for a flat fee structure. Your partner has heard of both companies and that may sway him.

    Comment


    • #3
      Thanks for the reply.

      Interesting perspective on the possible liability of having our team paying Large AUM fees. Our current FA and 401k advisor was giving the scare tactic that we’d be taking on more liability going from a 3(38) erisa to a 3(21). It may be simplest for him to roll his money into his own IRA and for me to take the 401k a different direction.

      It seems exhausting to search out another provider as we have already spent so much time going back and forth on this one but obviously well worth it in the long-run. I didn’t realize Schwab or fidelity did smaller 401k plans but that would be great to go through them. I’ll give them a call. We have also talked with Konstantin Litovsky in the past (as he is fee-only) but we couldn’t come to an agreement to move his direction.

      Comment


      • #4
        https://www.whitecoatinvestor.com/ho...ent-plan-cost/

        But you can use Kon’s roadmap to lowering the costs.
        spiritrider might have some suggestions.

        As far as cost comparisons, this might be useful.
        https://retirementplanhub.com/retire...st-calculator/

        Comment


        • #5
          Originally posted by James21 View Post
          Thanks for the reply.

          Interesting perspective on the possible liability of having our team paying Large AUM fees. Our current FA and 401k advisor was giving the scare tactic that we’d be taking on more liability going from a 3(38) erisa to a 3(21). It may be simplest for him to roll his money into his own IRA and for me to take the 401k a different direction.

          It seems exhausting to search out another provider as we have already spent so much time going back and forth on this one but obviously well worth it in the long-run. I didn’t realize Schwab or fidelity did smaller 401k plans but that would be great to go through them. I’ll give them a call. We have also talked with Konstantin Litovsky in the past (as he is fee-only) but we couldn’t come to an agreement to move his direction.
          I've been through the fiduciary sales pitch before. My thoughts as a doc with zero financial credentials:

          1. As the practice owner you are ultimately responsible for any fiduciary missteps with the 401k. "Co-fiduciary" is half-pregnant.
          2. Fiduciary liability is only a problem for plans with >$10 million in assets. Less than that a lawyer isn't going to have enough money to chase after.
          3. If the owners decide to pay all the plan admin fees and the employees are only charged the mutual fund fees you have eliminated one of the biggest potential liabilities of a 401k (unreasonable participant fees).
          4. The other major 401k liability is bad fund choices (too expensive and/or inappropriate). Ask for a 401k setup where the participants are defaulted into at target fund and they have a selection of index funds (10-15 is plenty IMO). The FAs love to "backtest" and "monitor" the investment choices. I'm waiting for the day a FA backtests VTI and declares it a "bad" choice.

          I suggested CS and Fidelity because both are well-known and the brand might be enough to convince your partner. I left out Vanguard as they don't directly do business with small business and let 3rd party companies like Ascensus offer VG-based plans. My group uses Ascensus however there is very little handholding and their customer service is lacking. We have used Fidelity and the assigned customer representative did a good job IMO.

          Comment


          • #6
            Originally posted by James21 View Post
            I'm working with my partner at a small dental practice (~12 employees not including the 2 dentists) to change over our 401k plan. He has been with an advisor (Mercer) for about 13 years and pays ~1.2% AUM fees for the 401k plan. Last year, I brought to him a fee-only advisor but ultimately he did not feel comfortable making the switch, life got busy and another year rolled around. He is nearing retirement ~5 years out and I am ~5 years into practice so we are at drastically different points in our careers. He actually was the one this summer who brought up how much we are paying in fees and that we should maybe look around. As he was unsatisfied with my last fee-only advisor from the WCI recommended tab, I brought the AzDA 401k providers UBS to the table as a compromise. A 401k plan that is a little more mainstream by having the affiliation with the AzDA but still their fees would be 0.6% AUM instead (still not ideal but half of what our current one is). After discussing the change with both parties, my partner was again swayed by arguments his current advisor at Mercer stated (he's nearing retirement, they've been planning for this moment, they've built up trust over the years and they are doing right by him). Is there an easy way to explain how much he is and has been losing each year in AUM fees to this advisor that would help to convince him to change? I believe he has been burned in the past (like many doctors and dentists) and this is why he is having a tough time switching at the end of his career when he believes he has found one that has treated him fairly and that he trusts.

            His advisor mentioned having my partner roll his funds over into an IRA and then be able to keep them with him at Mercer while we took the 401K plan elsewhere and while this would work for me (though larger 401k plans do get preferential treatment/fees), I imagine this would still not be great for my partner because he would still be getting hit with a 1% AUM fee to have his account with them.

            Any advice you have would be great! If there are any good charts and/or articles that address the AUM fees and how generally financial advisors don't make up for their large AUM fee in the long-run, that would be ideal to show him. He admits he does not have the financial knowledge but that is partly why he wishes to stay with someone who will make all the decisions for him rather than moving and putting his accounts into a Target Date Fund. Thank you for any words of wisdom!
            Yes, it is very easy to compare fixed fees with AUM fees using the calculator Tim mentioned (that we've developed specifically for this purpose):

            https://retirementplanhub.com/retire...st-calculator/

            In addition to high AUM fees you might also have relatively high investment expenses for your funds, and also record-keeping fees that are also AUM, so it all adds up very quickly, so having no AUM fees vs. having AUM fees is nearly always going to win over time (and win big too).

            This article will give you some idea as to how various types of fees compare over time (and the calculator above can be used for that purpose):

            https://www.whitecoatinvestor.com/ev...all-practices/

            There is a lot more to a 401k plan than the fees (which are important nevertheless). There is the plan design aspect, and making sure that your plan is designed properly by maximizing partner contributions. Having no AUM fees in your plan is always a good idea though, so that's a good target to have, and the best thing is that it is not difficult to achieve. You can get everything for a fixed fee, and will still have some money left over vs. most AUM fee arrangements.

            Another key component is getting unbiased/fiduciary advice for the plan sponsor/partners. If you want an adviser for your plan, they should ideally be an ERISA 3(38) fiduciary who takes full responsibility for investment selection and portfolio construction for your plan. As a small plan sponsor you don't have an HR department, so the role of an ERISA 3(38) fiduciary should be the following (in addition to the role of selecting and managing plan investments):

            1) Enrollment for the staff. Your adviser should be conducting the initial enrollment/education meeting for the staff to go over the enrollment brochure and plan investment options.

            2) Plan sponsor meeting for the partners to go over investment selection and portfolio construction, optimal accumulation and distribution strategies, as well as how to use your plan effectively to achieve your goals.

            3) Ongoing advice to the plan sponsor/partners. Advise partners if they have any questions regarding investments/taxes/planning and their retirement plan.

            4) Coordinate the efforts of the record-keeper and TPA and oversee their work to make sure everything is done in a timely fashion.

            For larger plans, ERISA 3(38) will shield plan sponsor from some of their fiduciary liability, but that's not the primary reason to hire one. Getting good advice and having someone who works exclusively for the plan sponsor to save them money and improve their plan can be worth it for some plans when the plan sponsor needs the help. Many retirement plan advisers are not really doing all that much, are not ERISA 3(38) fiduciaries, but collecting high fees nonetheless. So when selecting one, definitely make sure that they will help you all around, and not just select investments.
            Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

            Comment

            Working...
            X