401k Profit Sharing Plan question

[Hogfan24]

My wife will become eligible for the 401k profit sharing plan at her practice next year so I've begun researching what our options are for the account. She has joined a larger physician group and is nearing half-way through a 2-year partner track. It was explained to me that they allow their docs to set up their investment account for their 401k with a company of their choosing and the business opens the account for the benefit of the doc. I called Vanguard to see if we could do this with them and the rep said this would be a "pooled account" for the benefit of my wife and that Vanguard no longer services such accounts because there is too much liability involved. Her group offers John Hancock as an option to their non-physician employees and we could use that. But my question is, what is the best approach to take on this knowing that we don't want to go in with an expensive financial advisor? I'd prefer to open an account with good index fund investment options at the lowest fee cost possible. Has anyone else encountered this sort of set up?

Thanks in advance.

[childay]

At Fidelity it is called a "investment only" account or "non-prototype" plan.  That is who we use for my wife's 401k.  No advisor needed and no fee aside from the funds.

https://www.fidelity.com/retirement-ira/small-business/investment-only-plans

PM me if needed.

 

[Hogfan24]

Good deal. Thanks. I'm researching now and it looks like ETrade would be an option too.

[litovskyassetmanagement]

Hogfan24 wrote:

My wife will become eligible for the 401k profit sharing plan at her practice next year so I’ve begun researching what our options are for the account. She has joined a larger physician group and is nearing half-way through a 2-year partner track. It was explained to me that they allow their docs to set up their investment account for their 401k with a company of their choosing and the business opens the account for the benefit of the doc. I called Vanguard to see if we could do this with them and the rep said this would be a “pooled account” for the benefit of my wife and that Vanguard no longer services such accounts because there is too much liability involved. Her group offers John Hancock as an option to their non-physician employees and we could use that. But my question is, what is the best approach to take on this knowing that we don’t want to go in with an expensive financial advisor? I’d prefer to open an account with good index fund investment options at the lowest fee cost possible. Has anyone else encountered this sort of set up?

Thanks in advance.

Click to expand...

Already a red flag.  First, if there are non-physician employees who are offered a different brokerage account (a high cost Hancock) while doctors are using Vanguard or Schwab, that's a big breach of fiduciary duties and the practice can be successfully sued on that basis alone. While a lawsuit might be a long shot, it is a violation that can definitely result in IRS penalties if found during an audit (which are a lot more common these days).  A big fiduciary liability issue is that non HCE employees are not very sophisticated, so if they don't have enough information to pick a brokerage window for themselves and if practice owners provide them advice, the practice becomes 100% liable for any screw ups the employees would have (which is unnecessary liability).

The Vanguard rep has no idea.  Vanguard does offer pooled accounts that can be opened - it is called a VRIP account. It is the job of the TPA who administers the plan to make sure that the data gets to them in a timely fashion. A group plan with non-doctor employees would require annual testing, so you'll need to provide the TPA with annual data for the account (especially if each partner can contribute different amounts into the profit sharing).

Also, it looks from your description that the plan might be profit sharing only and possibly only allows to contribute $53k (or maximum) or nothing (otherwise they would need to get data from every brokerage account, which can be a nightmare).  So a plan like this should be redesigned to include a single investment menu with low cost index funds and a single brokerage account option (with the possibility of having existing brokerage accounts where they are), and this would take care of most of the fiduciary liability issues.  A 401k option should be added (if it is not already there) to allow salary deferrals, and catch-up contributions for the older docs, and this is really easy to do once the plan is redesigned.  If the plan does not allow variable profit sharing contribution, that too should be changed to allow everyone the ability to contribute different amounts (I see this  often in brokerage only plans).

A note for all group plans out there: brokerage windows are really not a good idea and it is very easy to screw this up.  ERSIA attorneys always recommend against having a brokerage-only plan with non-HCE employees because of numerous fiduciary concerns that can only be eliminated when a plan has a single investment menu and possibly a single brokerage window (though for new plans that's absolutely not necessary because you can have all of the best funds in the menu itself). And it only takes a single adviser (ERISA 3(38) fiduciary) to manage the plan for a fixed/flat fee (rather than having to hire advisers for each account, with most such advisers charging high asset based fees).

 

[childay]

Interesting Kon, thanks

[Hogfan24]

Thanks but I would say a couple of things in response. I don't know what all employees are offered exactly. I do know that there is a 401k option. And both the practice and vanguard indicated that vanguard no longer supports accounts. I clealry need to ask more questions.

[litovskyassetmanagement]

Hogfan24 wrote:

Thanks but I would say a couple of things in response. I don’t know what all employees are offered exactly. I do know that there is a 401k option. And both the practice and vanguard indicated that vanguard no longer supports accounts. I clealry need to ask more questions.

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Vanguard does offer these accounts (I know because some of the group practices I work with have them, and because I also use them for pooled plans), but your practice TPA might not want to work with them for some reason.  That's understandable, Vanguard accounts are difficult to work with because they are bare-bones (but worth it if the TPA works with them).  You might consider using any other brokerage that has low cost index funds/ETFs (Schwab, Fidelity and Ameritrade are all adequate, especially if you want to use ETFs).

It is good that there is a 401k option, in that case this explains several things.  The information from the brokerage account has to be transmitted to the TPA annually, so maybe the TPA wants to only work with a select number of windows that make this process easy, that's my guess.

The problem is that with most group practices there are no standards or processes, and with brokerage-only plan it is nearly impossible to come up with such a process because there are too many variables (and no ERISA fiduciary would ever consider working with brokerage only plans for that reason), so if non-HCE employees end up in Hancock accounts while most doctors are in Vanguard/Schwab ones, that's a de-facto breach, regardless of whether that was intentional or not. Also, by providing any and all advice to employees regarding brokerage windows, the practice becomes fully liable for the outcomes, thus it is always best to have a menu of funds with a QDIA option as well, as that would take care of most fiduciary issues as far as the plan sponsors are concerned.

 

[RadMoneyMD]

My 401k profit sharing plan sounds similar to yours.  I use a Fidelity "non-prototype" plan.  The TPA third party administrator should be able to guide you when setting this up.

[childay]

What information is it the TPA needs annually exactly?

[litovskyassetmanagement]

childay wrote:

What information is it the TPA needs annually exactly?

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All of the transactions in the account.  If the plan allows things like Roth contributions and Roth conversions, the TPA should know about it.  They have to review all of the account activity and also reconcile everything.  There is no automatic reporting to the TPA - Vanguard's account (and others) simply have a list of transactions, and the participant has to send that information to the TPA.  But the TPA should tell you exactly what and when.  I also imagine some TPAs might limit the number of accounts they are working with - I think that Vanguard's account is nearly identical to Fidelity's, but some TPAs may have automated the data processing (which can get very complex, especially if you are doing day trading in your account, as an example, with hundreds or thousands of transactions), so maybe that's why some are limiting the number of brokerages they work with.  I have never seen this though - usually if a TPA can work with one brokerage type, they can work with them all, but if you have a plan with hundreds of participants, this can get very time consuming for a TPA if everyone has a brokerage window.

[spiritrider]

Hogfan24 wrote:

It was explained to me that they allow their docs to set up their investment account for their 401k with a company of their choosing and the business opens the account for the benefit of the doc. I called Vanguard to see if we could do this with them and the rep said this would be a “pooled account” for the benefit of my wife and that Vanguard no longer services such accounts because there is too much liability involved. Her group offers John Hancock as an option to their non-physician employees and we could use that. But my question is, what is the best approach to take on this knowing that we don’t want to go in with an expensive financial advisor? I’d prefer to open an account with good index fund investment options at the lowest fee cost possible. Has anyone else encountered this sort of set up?

Thanks in advance.

Click to expand...

Actually, the Vanguard CSR stated this exactly backwards. Vanguard used to have individual "investment only accounts", but now only provides "pooled accounts." A pooled account is where the administrator manages one "pooled" account for all participants and does the accounting themselves. This is in fact what most TPA provided 401k plans look like under the covers.

The use of investment only accounts can be advantageous to smaller employer plans. By definition, the accounts are already segregated making record keeping easier. This assumes that they have you open separate accounts for pre-tax, Roth, after-tax (if supported). It also provides flexibility to the participants. So it can reduce the record keeping requirements

Fidelity has such investment only accounts. There is a link on their small business retirement plans page. Fidelity has index funds that have equal or lower expense ratios than comparable Vanguard funds. While they now have more assets classes covered, they are not as extensive as Vanguard. For example, they do not have investment grade commercial index bond funds and municipal index bond funds.

 

[Hogfan24]

Thanks. I think you've hit the nail on the head re: Vanguard. I'm going to discuss with the TPA after the holiday but my inclination would be to use Fidelity for the reasons you've stated. Between my wife's plan, and the one I have through my work, I think that we'll be able to cover the asset classes that we need with low cost index funds.

[litovskyassetmanagement]

spiritrider wrote:

Hogfan24 wrote:

It was explained to me that they allow their docs to set up their investment account for their 401k with a company of their choosing and the business opens the account for the benefit of the doc. I called Vanguard to see if we could do this with them and the rep said this would be a “pooled account” for the benefit of my wife and that Vanguard no longer services such accounts because there is too much liability involved. Her group offers John Hancock as an option to their non-physician employees and we could use that. But my question is, what is the best approach to take on this knowing that we don’t want to go in with an expensive financial advisor? I’d prefer to open an account with good index fund investment options at the lowest fee cost possible. Has anyone else encountered this sort of set up?

Thanks in advance.

Click to expand…

Actually, the Vanguard CSR stated this exactly backwards. Vanguard used to have individual “investment only accounts”, but now only provides “pooled accounts.” A pooled account is where the administrator manages one “pooled” account for all participants and does the accounting themselves. This is in fact what most TPA provided 401k plans look like under the covers.

The use of investment only accounts can be advantageous to smaller employer plans. By definition, the accounts are already segregated making record keeping easier. This assumes that they have you open separate accounts for pre-tax, Roth, after-tax (if supported). It also provides flexibility to the participants. So it can reduce the record keeping requirements

Fidelity has such investment only accounts. There is a link on their small business retirement plans page. Fidelity has index funds that have equal or lower expense ratios than comparable Vanguard funds. While they now have more assets classes covered, they are not as extensive as Vanguard. For example, they do not have investment grade commercial index bond funds and municipal index bond funds.

 

Click to expand...

A single pooled account is the same as 'investment only' account, it's just that a pooled account allows more than one participant.  Not sure why a TPA would differentiate between these two - with one participant there should be no difference whatsoever.

[spiritrider]

Kon Litovsky wrote:

A single pooled account is the same as ‘investment only’ account, it’s just that a pooled account allows more than one participant.  Not sure why a TPA would differentiate between these two – with one participant there should be no difference whatsoever.

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It is not the TPA that is differentiating. There are multiple participants in the plan, with each participant obtaining their own investment only account.

It is Vanguard that will no longer open participant-directed individual investment only accounts. Fidelity, TD Ameritrade and others will. Vanguard will now only open trustee-directed pooled investment only accounts.

[litovskyassetmanagement]

spiritrider wrote:

Kon Litovsky wrote:

A single pooled account is the same as ‘investment only’ account, it’s just that a pooled account allows more than one participant.  Not sure why a TPA would differentiate between these two – with one participant there should be no difference whatsoever.

Click to expand…

It is not the TPA that is differentiating. There are multiple participants in the plan, with each participant obtaining their own investment only account.

It is Vanguard that will no longer open participant-directed individual investment only accounts. Fidelity, TD Ameritrade and others will. Vanguard will now only open trustee-directed pooled investment only accounts.

Click to expand...

I don't think this is correct.  Here it is from Vanguard:

https://personal.vanguard.com/us/whatweoffer/smallbusiness/investmentonly

"The Vanguard investment-only program is designed for employers who have a retirement plan with another firm and want to offer their employees a wide range of competitive, no-load Vanguard investments. Your employees can invest in Vanguard funds while your plan administrator continues to serve as trustee and provides recordkeeping."

I also believe the TPA is in error here, because I know that participants in some of our plans have opened VRIP accounts and they use them just like any other investment-only account.  Whether you are a trustee or your plan is a trustee, it does not matter - you can still open these investment only accounts at Vanguard directly.