Advice on Defined Benefit Plan

[litovskyassetmanagement]

EM_INDY wrote:

I am hoping to get some advice about my group’s Defined Benefit Plan and whether I should increase my contribution to it.  I just became a partner in my group last year (I’m 32 now) and in addition to maxing out my 401K PSP/HSA/wife’s 403b/backdoor Roths I chose to contribute $10,000 to my group’s DFB for 2015.  Based on my age, I can contribute up to $35,000/year.  Due to the group taking on a couple new contracts, my income for 2016 and 2017 will be significantly higher than 2015 and I will definitely have income in the highest marginal tax bracket.  My question for the group is, given my relatively young age, would I be best served maxing out the DFB up to $35,000 or should I just invest in a taxable account instead?  For further details, our plan has a target 4%/yr return, with investments split between Vanguard and Lazard funds (I have the breakdown of all the funds if that is helpful information). Any returns >4% just decreases the individual’s contribution for the following year. Our group pays ~5K/yr + roughly 2% of assets for our fees.  While this seems high to me, I realize that fees are much higher for DFBs than for other retirement vehicles but am still not sure if we should explore getting a different plan. Our plan also does not allow for in-service distributions until participants are >62 years old.  This was set up prior to me joining the group but we have had changes in our group leadership since and among the younger partners in our group we have several Boglehead/WCI devotees who could likely be successful in pushing for a change in plans if that was felt to be the right thing to do. At this point, only a third of the partners in the group participate in the plan at all. Thanks in advance for any help you can give me!!

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1) The 4% 'return' is the crediting rate, not the actual return.

2) Lazard fund expense ratios are ridiculous.

3) You can have your plan redesigned to allow you to contribute more than $35k, that's always possible.

4) Your plan fees are ridiculous.  We typically charge a fixed $10k for investment management for group Cash Balance plans without any asset based fees and using all low cost Vanguard Admiral Shares.  So if you are paying 2% in fees AND you are paying underlying expense ratios, your return might be a lot closer to zero than it is to 4%.

5) We can change the rules to allow for in-service distributions, that's for sure.

We would also need to look at your 401k plan - I bet there may be some opportunities to decrease your fees significantly there as well.

[EM_INDY]

Thanks for the replies!! To answer some questions: Student loans paid off as of June, 2016. No CC debt. Cars paid off. Mortgage 15 yr at 2.875%, owe ~150,000 current home value 300,000. $3 million term life policy. >20K/month OO disability coverage. Happily married and just welcomed twins to the world last week (who already have 529s with >5K in each of them). Neither my wife nor I have a spending problem and we live well below our means. Currently have taxable account that we are using for savings/the next mortgage, invested 80/20 in TSM/TISM with Fidelity Index funds (exp ratios 0.045/0.11). Future taxable account contributions would be similar asset allocation at either Fidelity or Vanguard.

Plan does allow to rollover to IRA upon leaving group or when plan dissolves.  Not sure if can roll over to 401K (although I think not). AUM fee is likely non-negotiable at this point as plan was set up >5 years ago but they'd be willing to if we threatened to leave.  If you don't mind me asking, who do you use that you are able to have 0.2% AUM?

[TheGipper]

I would say absolutely yes if not for the 2% AUM fee! Yikes! I hate the 0.2% AUM fee on ours. Try to negotiate this down to 0.5% or less. This should be more than reasonable as funds are pool invested and managers are not dealing with individual calls with partners.

4% long term return goal is OK. I would prefer if the plan is invested at 50-60% stocks, but I wouldn't let this scare me away.

The major factor is withdrawal and plan dissolution rules. Make sure you can lump sum roll over to IRA upon leaving the group or when the plan dissolves. These plans have a way of being dissolved and restarting up and you may change jobs several times in your career. At this time you can rollover to a low cost IRA or better 401k and control your own AA and fees.

Bottom line yes, but try to negotiate down those management fees to a flat fee or very low AUM fee.

[jfoxcpacfp]

Too many unknown variables. School loans? Ginormous, high-rate mortgage? Spending problems? CC debt? Plenty of term life and OO disability? Happily married? How would you diversify the taxable account?

Is the tax deduction worth getting only a 4% long-term return in a plan that costs at least double the management fees of other investment portfolios? That sounds kind of abysmal to me. At the same time, you are in a high bracket, maybe paying state and local taxes, so it could make sense. Just hate to see the tax tail wag the growth-of-wealth hound.

[EM_INDY]

I am hoping to get some advice about my group's Defined Benefit Plan and whether I should increase my contribution to it.  I just became a partner in my group last year (I'm 32 now) and in addition to maxing out my 401K PSP/HSA/wife's 403b/backdoor Roths I chose to contribute $10,000 to my group's DFB for 2015.  Based on my age, I can contribute up to $35,000/year.  Due to the group taking on a couple new contracts, my income for 2016 and 2017 will be significantly higher than 2015 and I will definitely have income in the highest marginal tax bracket.  My question for the group is, given my relatively young age, would I be best served maxing out the DFB up to $35,000 or should I just invest in a taxable account instead?  For further details, our plan has a target 4%/yr return, with investments split between Vanguard and Lazard funds (I have the breakdown of all the funds if that is helpful information). Any returns >4% just decreases the individual's contribution for the following year. Our group pays ~5K/yr + roughly 2% of assets for our fees.  While this seems high to me, I realize that fees are much higher for DFBs than for other retirement vehicles but am still not sure if we should explore getting a different plan. Our plan also does not allow for in-service distributions until participants are >62 years old.  This was set up prior to me joining the group but we have had changes in our group leadership since and among the younger partners in our group we have several Boglehead/WCI devotees who could likely be successful in pushing for a change in plans if that was felt to be the right thing to do. At this point, only a third of the partners in the group participate in the plan at all. Thanks in advance for any help you can give me!!