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  • Changing Group Retirement Plan, looking for advice

    I am in the process of "updating" my group's 401k/profit sharing plan. We have received a proposal from our local pension plan advisor, who currently handles our cash balance plan, on the costs for the "new" plan:

    Setup and Implementation $850

    *Advisory services 0.19%*
    Average investment expense 0.12%

    Annual Administration (third party administration, recordkeeping, custodial, mutual fund offsets): $5,029

    Overall, I am looking mostly for advice on what the advisory services cost should be, as I personally believe a flat fee would be much more desired, but I am unaware of what others pay or what is a fair price. Many thanks for any guidance .

  • #2
    This was a couple years ago, but our practice moved our retirement plan to Schwab.

    At the time, there was about $15M in assets, spread between 18 participants, and the annual charge was $15,000. In addition to the above services, they also acted as trustees. We were specifically looking for the trustee function, to remove ourselves from that role and potential liability.

    We were able to design a plan that provided a menu of mutual fund choices (we chose an index fund menu of mostly Vanguard funds), but it also allowed participants to invest in any publicly traded stock, bond, mutual fund, or ETF. There were no "advisory services" included, but participants could engage with Schwab for advice at 0.45% AUM (decreasing with increasing assets). It was a great plan because it provided a "company 401k-like" structure, for those who wanted to come in and pick index funds from a list, but it also allowed people to keep their DFA funds, MLPs, or whatever else they accumulated in their retirement accounts.

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    • #3
      Originally posted by Redwings13 View Post
      I am in the process of "updating" my group's 401k/profit sharing plan. We have received a proposal from our local pension plan advisor, who currently handles our cash balance plan, on the costs for the "new" plan:

      Setup and Implementation $850

      *Advisory services 0.19%*
      Average investment expense 0.12%

      Annual Administration (third party administration, recordkeeping, custodial, mutual fund offsets): $5,029

      Overall, I am looking mostly for advice on what the advisory services cost should be, as I personally believe a flat fee would be much more desired, but I am unaware of what others pay or what is a fair price. Many thanks for any guidance .
      It really depends on how big your group is and how much assets you have. If you have zero assets, 0.19% might be fine, if you have $50M in assets, this would be too much. In general AUM fees get a lot worse for the group as the assets grow. So for example, if you have $1M, its probably fine, but if you have $5M or more, you should consider hiring a fixed/flat fee one. It can make a difference whether the adviser is an ERISA 3(38) fiduciary or not. They have to act in your best interest at all times and avoid any revenue-sharing funds (ideally they should use only index/passively managed funds). I'm not sure about 'mutual fund offsets' if your expense ratio is 0.12% on average unless your adviser is going to sneak in actively managed revenue sharing funds into the lineup (for example, Vanguard funds don't pay revenue sharing, so offset would be zero). There is also a question of what type of services the adviser will provide. Will they:
      1) Run the initial enrollment meeting for the staff?
      2) Select the best TPA/record-keeper?
      3) Work with the TPA to make sure your plan design is optimal?
      4) Advise on viability of Cash Balance plan?
      5) Provide advice to the plan sponsor/partners on optimal use of your plan, including in-plan Roth conversions, asset allocation, portfolio construction, etc?
      6) Act in an ERISA 3(38) capacity?

      A lot of times local and in-person costs more and generates little actual value for the plan. You will need to identify what really matters for the plan sponsor and make sure that your adviser can deliver it. Will this adviser try to solicit personal planning business and thereby create a conflict of interest? Does the firm provide personal planning to any of the partners (which already creates a conflict of interest)? Always a good idea to ask.

      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


      • #4
        Thank you both for the input. Kon, during the short discussion for our proposal, the mutual fund offset was very unlikely but used to show that even if they select a fund with those fees, that they would credit them toward the cost of their services. I may have read that this is actually a law, but I may be mistaken. For your questions, the answer is yes for most of them although they are proposing to act in a ERISA 3 (21) capacity.

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        • #5
          Originally posted by Redwings13 View Post
          Thank you both for the input. Kon, during the short discussion for our proposal, the mutual fund offset was very unlikely but used to show that even if they select a fund with those fees, that they would credit them toward the cost of their services. I may have read that this is actually a law, but I may be mistaken. For your questions, the answer is yes for most of them although they are proposing to act in a ERISA 3 (21) capacity.
          It is not surprising that 3(21) is talking about revenue sharing and offsets. There is never a need to have a fund that does this so this conversation should never happen (other than in the context of 'we don't ever use revenue sharing funds', which is a best practice adopted by many 3(38) fiduciaries). Another question to ask them is whether they believe in passive indexing or active management. There is a chance they'll hedge and say both are fine as an excuse to use revenue sharing funds. Yet another one is how they select asset classes - there is rarely a big need to change funds in the lineup, but some firms try to show 'action' by constantly rotating funds (each year, quote often), which is not necessary if you have good index funds.

          They don't have to credit revenue to offset admin costs, there is no law against this, but there is case law when plan sponsors got sued in the past, so most advisers are adopting this position. Here's a big issue. Suppose the revenue sharing covers all admin costs. Then what? Do they get to keep the rest? Usually they would. The very idea of using funds that pay any revenue sharing is something that good ERISA fiduciaries stay away from because these types of funds have higher than necessary expense ratios, so by committing to using low cost index funds you basically ensure that the plan participants will be paying the lowest expense ratios possible.
          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


          • #6
            I have also just been tasked with updating the plans for our group as well. I haven't reached out to anyone yet, mostly because I am trying to weed through the opaque nature of our current plans - currently housed at Morgan Stanley.

            Currently we have multiple partners, employees participate. Our corp pays the fees for the entire plan even for employees. On the books it appears that we are paying an ER around 0.8%, based on the fees that are paid by the corp quarterly. The money goes into a 'pooled' plan at MS. The asset allocation looks ok, but lots of buying / selling going on without the accounts.

            How can I drill down on if we are paying any additional fees into the plan outside the obvious 'fee' that we are paying quarterly. I find it hard to believe that this would be the end of the fee schedule, but cannot get a clear enough answer from our advisor. Maybe I'm not asking the right questions? I just hate dropping around 40k a year in fees toward a retirement plan.

            TL;DR help me figure out the right questions / forms to ask for to make sure we aren't getting screwed

            Comment


            • #7
              Originally posted by centrebaseball View Post
              I have also just been tasked with updating the plans for our group as well. I haven't reached out to anyone yet, mostly because I am trying to weed through the opaque nature of our current plans - currently housed at Morgan Stanley.

              Currently we have multiple partners, employees participate. Our corp pays the fees for the entire plan even for employees. On the books it appears that we are paying an ER around 0.8%, based on the fees that are paid by the corp quarterly. The money goes into a 'pooled' plan at MS. The asset allocation looks ok, but lots of buying / selling going on without the accounts.

              How can I drill down on if we are paying any additional fees into the plan outside the obvious 'fee' that we are paying quarterly. I find it hard to believe that this would be the end of the fee schedule, but cannot get a clear enough answer from our advisor. Maybe I'm not asking the right questions? I just hate dropping around 40k a year in fees toward a retirement plan.

              TL;DR help me figure out the right questions / forms to ask for to make sure we aren't getting screwed
              First thing you need to do is get copies of all advisory contracts the plan signed with service providers. Much is disclosed there. Next you should get plan level 408b2 fee disclosure. However, if your 401k plan is pooled, then they don't have to provide you with this. What you can do is get an annual statement, this should have all of the information about fees, and someone has to read through it with a fine tooth comb. Do you truly have a pooled plan for everyone? Or is profit sharing done as a pooled plan while salary deferrals are put into a participant directed one? Buying and selling means you are paying commission to MS for all of these transactions, and if they are not an ERISA 3(38) fiduciary they could be buying and selling to benefit themselves, not for just for the plan (so they might buy funds with high expense ratios and revenue sharing, which can be looked up). Multiple transactions are already a sign that they might be churning. If this is a pooled plan then they might treat it as an individual brokerage account rather than as an ERISA 401k plan, so 'active management' strategy can be employed there (this is usually disclosed in the paperwork they would have provided initially).
              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


              • #8
                Thanks Kon!

                It is a pooled 401k and a separate pooled DBP for owners. I was told that since it was pooled there is no 408b2 to give me. I will have to look up original paperwork but these plans have been in place for years. Possibly even 15 -20 years with the 401k. Less so for the DBP.
                Last edited by centrebaseball; 03-17-2022, 04:40 AM.

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                • #9
                  Originally posted by centrebaseball View Post
                  Thanks Kon!

                  It is a pooled 401k and a separate pooled DBP for owners. I was told that since it was pooled there is no 408b2 to give me. I will have to look up original paperwork but these plans have been in place for years. Possibly even 15 -20 years with the 401k. Less so for the DBP.
                  Ok, so I would definitely convert a pooled 401k to a participant-directed one if you have more than one owner/partner as your goals might be different. And if you have a DB plan in addition, it would have to be managed conservatively (the 401k will allow the partners to adjust their allocation as needed to account for DB allocation). I would imagine DB plan is managed similarly to the 401k (lots of transactions), which is again a sign of active management approach. Usually though you might be provided some paperwork as to the target asset allocation or something like that. So definitely get an annual statement, this should show all transactions, and if you know that all other direct fees are billed to the practice (which by the way is a good way to pay for these, rather than have the fees taken out of the assets), everything else in the account would account for the rest of the fees/expenses.
                  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


                  • #10
                    Finally got some information back.

                    It appears that there are 'pooled internal costs' as well as the quarterly payments made by the corp for management that equates to 0.87 ER.

                    Our 401k pooled plan is certainly less risky than I would like as a younger doc (65/35 stock bond) and the DBP is (55/45) but basically I have been using my other funds outside the 401k as 100% equity anyway.

                    So, my question is, should I be looking elsewhere for mutual fund accounts and fees, because 0.87 ER seems quite high to me.

                    Comment


                    • #11
                      Originally posted by centrebaseball View Post
                      Finally got some information back.

                      It appears that there are 'pooled internal costs' as well as the quarterly payments made by the corp for management that equates to 0.87 ER.

                      Our 401k pooled plan is certainly less risky than I would like as a younger doc (65/35 stock bond) and the DBP is (55/45) but basically I have been using my other funds outside the 401k as 100% equity anyway.

                      So, my question is, should I be looking elsewhere for mutual fund accounts and fees, because 0.87 ER seems quite high to me.
                      CB plan allocation looks like it is really aggressive. CB can potentially be expensive as well. So 0.87% includes expense ratios for all funds? This is of course quite expensive. Ideally you want the ability to set your own allocation and have zero AUM fee and very low (~0.12%) average expense ratio. Anything else is just subtracting from your total return over time.

                      How many partners/staff does the practice have?
                      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


                      • #12
                        Originally posted by litovskyassetmanagement View Post

                        CB plan allocation looks like it is really aggressive. CB can potentially be expensive as well. So 0.87% includes expense ratios for all funds? This is of course quite expensive. Ideally you want the ability to set your own allocation and have zero AUM fee and very low (~0.12%) average expense ratio. Anything else is just subtracting from your total return over time.

                        How many partners/staff does the practice have?
                        2 partners. One 60's, One 30's - adding new associate in fall (very likely future partner) - part of the impetus to look into fee structure in the corp
                        8-10 staff at any given time. Likely will expand to 15 at some point in the next 2 years

                        attached is the basic breakdown of the funds listed (of which there are many)

                        Click image for larger version

Name:	Screenshot 2022-03-23 170017.png
Views:	90
Size:	9.2 KB
ID:	326030

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                        • #13
                          Originally posted by centrebaseball View Post

                          2 partners. One 60's, One 30's - adding new associate in fall (very likely future partner) - part of the impetus to look into fee structure in the corp
                          8-10 staff at any given time. Likely will expand to 15 at some point in the next 2 years

                          attached is the basic breakdown of the funds listed (of which there are many)

                          Click image for larger version

Name:	Screenshot 2022-03-23 170017.png
Views:	90
Size:	9.2 KB
ID:	326030
                          This is actually bad information, and here's why. They are taking AUM fees, converting everything to a fixed fee, and then calculating an average fee (AUM). What you should see instead is the following:
                          1) AUM fees for all investments, weighted expense ratio (as %)
                          2) AUM fees for advisory (as %, this should be spelled out in your advisory agreement)
                          3) All other AUM fees (custodial, etc)
                          4) All other fixed fees, separately from AUM fees (those are usually billed directly to the practice)

                          Then you can use these to see how much your AUM fees will grow over time:
                          https://retirementplanhub.com/retire...st-calculator/

                          Doing it like this is not a very good way to see the total AUM fee you are paying, which is the whole point of this exercise. A fixed fee as an AUM fee will still be fixed over time, but as assets grow, it will decrease as % of assets. An AUM fee will grow over time, so even if they show you AUM fees converted to a fixed fee, this fee is not fixed, and will grow over time. What you want to see is separate AUM fees and separate fixed fees so that you can compare apples to apples and examine how your fees will increase as more assets come into both plans.

                          That said, $50k in advisory fees is an overkill for tiny practice like yours, that's for sure, so you are overpaying by at least a factor of 2 (and of course, if you are paying AUM fees, these increase as your investments grow, so even if we assume a 0.87% average AUM fee, this is still extremely high). I would also assume that whoever provides advice to both of your plans is not an ERISA 3(38) fiduciary, and for pooled plans 100% of the fiduciary liability is on the plan sponsor, and you are responsible for all of their investment decisions and portfolio management as if you are managing both accounts yourself (there is no such thing as an ERISA 3(21) for pooled accounts, it is either all or nothing since these are discretionary accounts, and unless they are ERISA 3(38) with full discretion, they have zero liability).
                          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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