Reasonable fee for 401k/PSP fiduciary?

[TheGipper]

Question for Kon Litovsky and other board experts.

Our group has our 401k/PSP with Vanguard.  We pay a ?small fee for fiduciary services to a 3rd party, which basically entails them meeting with us (physician PSP committee) quarterly to ensure plan compliance and track any active funds that may at some point be candidates for replacement.  They also provide advise on fund selection to any interested for this plan only, and some docs have also chosen them as their personal advisors, which is a major benefit to them as well.  They presumably do a few other minor services like making sure no one is doing anything crazy in the brokerage link, etc..

I don't know if we are overpaying for this service.  We are a group of about 40. What would be a ballpark flat annual fee for basic fiduciary/compliance oversight with or without advise on fund selection?  Would prefer to avoid AUM fee even if very small, but if this is the customary arrangement, what is reasonable?

Thanks in advance for any advice.

[childay]

I have no idea but am curious what you are paying now

[litovskyassetmanagement]

TheGipper wrote:

Question for Kon Litovsky and other board experts.

Our group has our 401k/PSP with Vanguard.  We pay a ?small fee for fiduciary services to a 3rd party, which basically entails them meeting with us (physician PSP committee) quarterly to ensure plan compliance and track any active funds that may at some point be candidates for replacement.  They also provide advise on fund selection to any interested for this plan only, and some docs have also chosen them as their personal advisors, which is a major benefit to them as well.  They presumably do a few other minor services like making sure no one is doing anything crazy in the brokerage link, etc..

I don’t know if we are overpaying for this service.  We are a group of about 40. What would be a ballpark flat annual fee for basic fiduciary/compliance oversight with or without advise on fund selection?  Would prefer to avoid AUM fee even if very small, but if this is the customary arrangement, what is reasonable?

Thanks in advance for any advice.

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This, by the way, is potentially a big conflict of interest.  Your retirement plan fiduciary should not be soliciting personal planning business.  Do they specialize in managing retirement plans or are they 'incidental' advisers who just happen to manage your plan?  Meetings are a waste of time when there is nothing to discuss.  It really is not necessary to meet much if everything is taken care of properly.

The first question, are they an ERISA 3(38) fiduciary,or are they an ERISA 3(21) fiduciary, or are they not even a fiduciary?  Someone who is a registered investment adviser can claim to be a fiduciary, but they are not so for a retirement plan, only for personal planning engagements.

http://litovskymanagement.com/2014/01/hiring-fiduciary-adviser/

Brokerage windows can be a big issue if they are not taken care of properly.  It takes a good TPA to make sure that your brokerage windows are in compliance.  I typically do not recommend brokerage windows, but if there is a necessity, I typically recommend that a single window is used (for example, with Vanguard/Ascensus you have Ameritrade, so I would make everyone try to open only a single type of brokerage window if possible).  With a good plan menu it makes no sense to have brokerage windows at all, in my opinion, but some docs do have other advisers.

If your plan adviser uses brokerage windows to charge asset based fees for plan participants to whom they provide advice, that's a clear conflict of interest, especially if they also work as the plan adviser.

Also, there are several rules that should be followed (if you want the best bang for the buck):

1) No asset based fees of any type for advisers, record-keepers and TPAs.  Only fixed/flat fees that are not taken out of your personal accounts.

2) Low cost index funds with an average expense ratio of ~0.15%

3) Full ERISA 3(38) fiduciary oversight.  Your ERISA fiduciary should create and maintain an Investment Policy Statement that spells out how investments are selected and managed, and maintain a number of model portfolios for plan participants.

4) Keep plan fiduciary separate from participant advice.  The whole point is that your ERISA 3(38) fiduciary should be independent and unconflicted.  If participants want to hire advisers to manage their brokerage accounts, that's fine, but the same firm should not be managing the plan as a fiduciary.

There are many examples of this type (with multiple conflicts and lack of proper fiduciary oversight) among smaller retirement plans.  I always recommend to keep things as simple (and as low cost) as possible, while hiring the best fixed fee providers to do the job.  Your plan adviser should also make sure that your TPA is doing their job, because the TPA is not a fiduciary and are not bound by the same rules.

 

 

 

 

[TheGipper]

Thanks for all the info, as always.

The fund lineup we chose in conjunction with them is excellent. Almost all Vanguard with a half dozen DFA funds mixed in, and only a few stinker active funds that were requested by plan participants. The automatic default is VG target date, and we have limited the brokerage link, but felt it was fine to keep available for a few more "sophisticated" participants that prefer to use a slice and dice ETF portfolio. To each their own.

To their credit, this advisor group is careful to never solicit individual business but after helping with plan set up and initial fund choice, several docs sought out their services. Perhaps still a conflict.

They handle a mix of retirement plans and personal portfolios. I will admit, I dont know their ERISA 3(38) or 3(21) designations.

They were excellent at facilitating our transition from a prior poor high cost actively managed plan to this Vanguard/Acensus platform and dealing with some intricacies of a few older grandfathered participants allowed to remain outside the plan.

I agree the quarterly meetings are useless. Nothing to monitor with index funds. With only a handful of active funds, doubt we'll make many lineup changes.

We currently pay a 10 bp AUM fee, which will soon become very costly. I was thinking an annual flat fee of $10000 would be fair, perhaps more if they continue to offer fund selection advise to participants. Am I off base here? I would prefer however to have those interested in further advice to pay an individual small flat fee as the majority of the group doesn't need it.

[litovskyassetmanagement]

TheGipper wrote:

Thanks for all the info, as always.

The fund lineup we chose in conjunction with them is excellent. Almost all Vanguard with a half dozen DFA funds mixed in, and only a few stinker active funds that were requested by plan participants. The automatic default is VG target date, and we have limited the brokerage link, but felt it was fine to keep available for a few more “sophisticated” participants that prefer to use a slice and dice ETF portfolio. To each their own.

To their credit, this advisor group is careful to never solicit individual business but after helping with plan set up and initial fund choice, several docs sought out their services. Perhaps still a conflict.

They handle a mix of retirement plans and personal portfolios. I will admit, I dont know their ERISA 3(38) or 3(21) designations.

They were excellent at facilitating our transition from a prior poor high cost actively managed plan to this Vanguard/Acensus platform and dealing with some intricacies of a few older grandfathered participants allowed to remain outside the plan.

I agree the quarterly meetings are useless. Nothing to monitor with index funds. With only a handful of active funds, doubt we’ll make many lineup changes.

We currently pay a 10 bp AUM fee, which will soon become very costly. I was thinking an annual flat fee of $10000 would be fair, perhaps more if they continue to offer fund selection advise to participants. Am I off base here? I would prefer however to have those interested in further advice to pay an individual small flat fee as the majority of the group doesn’t need it.

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It does not sound like they are a 3(38), possibly a 3(21) because a 3(38) takes full discretion.  You can't 'bow to the crowd' and must have a solid investment philosophy and understanding of portfolio management, so you can't add funds because SOMEONE asked for it.  This is a major fiduciary breach.  How are you going to explain this to DOL when they ask you about how the expensive managed funds are selected?  There has to be an investment policy statement that explains this, and funds can't be randomly picked by participants.  This is not a good idea for the plan because plan sponsor is on the hook for this.  That's why plans hire ERISA 3(38) who align with their investment philosophy so that they don't have to worry about stuff like that.  With this 'anything goes' attitude, what else is not confronted?  There are plenty of group practices who are creating multiple breaches over time, and if these behaviors are not confronted (nicely, with solid facts and solutions) and changed they can end up costing the practice significant compliance penalties.  For example, if the adviser charges AUM fees for personal asset management, do brokerage windows aggregate with personal assets to provide a lower % AUM fee for plan participants on their personal money as well?  This is one example of how a conflict of interest leads to fiduciary breaches.

Yes, we work with older plans, and some participants can remain outside of the plan, but we try to make sure that they are providing timely account information via an electronic data feed to Vanguard/Ascensus.  I'm also a proponent of risk-managed portfolios vs. target date funds, which are not appropriate for some docs for multiple reasons and the plan should provide education on the exact approach that is used within the plan (especially if you have NHCEs).

Yes, that's what I typically charge for a group plan, depending on complexity.  The idea is that you should not waste your time worrying about compliance, because it is being taken care of by someone you are paying to do just that (not to create compliance problems down the road).  Also, this is tax-deductible vs. having the fee yanked out of your account.  They can definitely provide participant advice (though it sounds like they are soliciting personal clients in the process, which is a big no-no).  I sometimes hire a 3(21) adviser (virtual) to provide individualized advice to plan participants, and they are NOT allowed to solicit personal clients.  All conflict of interest should be removed, for your benefit. I also typically provide basic one on one advice as needed, because sometimes there are more sophisticated questions that have to be addressed.  But managing personal assets, that's a separate issue altogether that any plan advisers should avoid, and I would advise not to use any adviser in a 3(21) and especially in a 3(38) capacity that also provide personal planning advice as that creates a conflict of interest.

 

 

[litovskyassetmanagement]

In general, retirement plan advisers who charge AUM fees create a huge conflict of interest by virtue of charging asset based fees.  For example, if your practice ever wants to add a Cash Balance plan, will this adviser jump at the opportunity even though they might not have much experience doing this?  Will this result in a high risk portfolio (for the purpose of growing the AUM) and to justify a stiff AUM fee for portfolio management?  When it comes to CB plans, an AUM fee is a huge problem, and I've seen some group plans with highly risky portfolios as a result of having to pay a 1% AUM fee, and this excessive risk taking can potentially saddle the remaining partners with a huge burden after some partners retire at the top of the market.  So in general, AUM is to be avoided when you hire an adviser for your 401k and/or CB plans.

Not to mention that AUM fees cost a lot of money.  I think I posted this calculator before, but here it is again:

http://retirementplanhub.com/retirement-plan-cost-calculator/

Really easy to compare flat vs. mixed fees side by side.

[Craigy]

Our firm is also with Vanguard, but pays a third party advisor to cover employer's ******************.  I want to say it's about half a percent a year, for essentially no real added value IMO.  We're just paying extra money so that our employer can point the finger at someone else.

[litovskyassetmanagement]

Craigy wrote:

Our firm is also with Vanguard, but pays a third party advisor to cover employer’s ******************.  I want to say it’s about half a percent a year, for essentially no real added value IMO.  We’re just paying extra money so that our employer can point the finger at someone else.

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That's excessive, but rather common with small practice plans.  This will change over time as more younger docs read WCI and start thinking about the cost to THEIR own portfolio from paying AUM fees that keep increasing every year while no real work is being done.  And by the way, unless they are an ERISA 3(38) and they act like it, employer can't point fingers because even an ERISA 3(21) is not responsible for employer's investment choices.