Cash balance and defined benefit plan questions

[Eagleeyes]

So this is a pretty sad admission. Although I feel pretty savvy about my 401k, HSA, backdoor roths etc I have pretty limited knowledge when it comes to cash balance plans and DB plans

I will be attending one of our group pension meetings soon and I wanted to learn what are good questions to ask.

I don't know who the major players are in the groups CB and DB plans.

Here are some questions I have to get started. Obviously I can't ask some of these without looking like a doofus so I thought I would ask here first

What is a third party administrator? The group that runs the plans charge a 0.25 AUM fee. Is that normal? What other fees are they charging? Where can I find them out? Is there a central document with all the fees? Are they fiduciaries?

The 401k plan these guys have us set up with is american funds which isn't horrible with ER of 0.7 to 0.8. They FA that set up the 401k also have do our CB and DB plans

Anyway. As always appreciate the insight from all you folks.

[The White Coat Investor]

The third party administrator runs the plan. And no, they don't do it for free. If it is a large plan, you're better off with a flat rate than an AUM fee, but a small plan might be better off with a 25 basis point fee. I wouldn't say that fee is particularly unusual, but it's pretty close to our total cost for our DBP (ignoring fund ERs).

The fees should all be clearly documented in the plan document. You have a right to it so just ask for it.

Is who a fiduciary?

Uh oh, American Funds in the plan is a bad sign that your financial advisor is actually a commissioned salesman. I mean, you can do worse, but real fiduciaries don't typically use actively managed funds these days.

[Eagleeyes]

I am a partner/owner in the group. The group is sizeable 50+ with a mix of employed docs and partners, skewing more to the latter. All are eligible to for the 401k, CB, DB plans

Its an assets under management arrangement instead of a flat fee. My fear is that the account is so big and complicated we will have a hard time unwinding the maze and moving to another flat fee advisor

At this phase I am gathering information. I suspect at some point I will talk to the FA firm and tell them we are going to walk away if they don't come to a flat fee. Also a little worried about ruffling feathers in my group too. Some of the guys invest individually with this FA firm

How hard would it be to have a new flat fee firm come in and takeover?

I wonder if Konstantin L would weigh in and give me some insights. I have found his posts to be pretty thoughtful if not sometimes controversial to others

[Eagleeyes]

Edit: approximately 100 physician members. No non-physician members are eligible at this time

[Eagleeyes]

Next question: while reading the long plan document the advisor note they have a fiduciary duty to act in accordance with investment advisor act of 1940. Is this the definition of fiduciary that most people put in the plan documents. Mr lovitovsky notes advisors have fiduciary statements can have holes in them. So is this the strongest definition of fiduciary that can be given or is it a weak one?

[litovskyassetmanagement]

Eagleeyes wrote:

So this is a pretty sad admission. Although I feel pretty savvy about my 401k, HSA, backdoor roths etc I have pretty limited knowledge when it comes to cash balance plans and DB plans

I will be attending one of our group pension meetings soon and I wanted to learn what are good questions to ask.

I don’t know who the major players are in the groups CB and DB plans.

Here are some questions I have to get started. Obviously I can’t ask some of these without looking like a doofus so I thought I would ask here first

What is a third party administrator? The group that runs the plans charge a 0.25 AUM fee. Is that normal? What other fees are they charging? Where can I find them out? Is there a central document with all the fees? Are they fiduciaries?

The 401k plan these guys have us set up with is american funds which isn’t horrible with ER of 0.7 to 0.8. They FA that set up the 401k also have do our CB and DB plans

Anyway. As always appreciate the insight from all you folks.

Click to expand...

I'm actually writing a comprehensive article to address DB/CB plans for group practices, there are definitely a lot of details that need to be discussed, and it can take many pages to go over everything, so it is best to address each case individually, and educate the partners of each practice regarding their own situation, because there are differences in how group plans can be set up.

There are three providers:

1) TPA/actuary

2) Recordkeeper

3) Adviser.

With American funds TPA is the record-keeper as well.  The issue is that you need high quality TPA/actuary, and I don't know if American funds will be able to provide this.  Adviser has to be an ERISA fiduciary, not a fiduciary under Advisers Act of 1940 (RIA), which basically means nothing when it comes to ERISA.  An ERISA fiduciary should be an RIA, but an RIA is not an ERISA fiduciary automatically.  Something tells me that your current adviser is also getting revenue sharing from American funds (and 12b1 fees).  This is totally unacceptable because you as the plan sponsor is fully responsible for how they act and the fees they are charging. There is no way to justify using only American funds for a fiduciary given that there are better investments out there (such as Vanguard funds).

I beg to differ about a 0.7% ER.  The ER for our plan is 0.15% or so (primarily because we offer some more expensive DFA funds, without those we'd be at 0.1% for just Vanguard), and lowest cost fund is 0.04%.  So you are basically paying 1%+ in total, which is extremely expensive.  Please use this calculator, and you'll see that someone contributing the maximum allowed would be paying hundreds of thousands in extra fees for no added benefit:

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

I would hire an independent TPA, and use an open-architecture record-keeper that allows access to all funds, as well as hire an ERISA 3(38) fiduciary adviser who also knows how to manage investments for group Cash Balance plans. I would avoid paying any AUM fees for retirement plan services (and especially not for CB plans). Asset-based fees will cost you more over time, and you can always find flat/fixed fee providers including advisers and save significant money this way.  It goes without saying that you also need to get good advice regarding the plan design, architecture and everything in the middle, so whoever is providing you with advice better do so in your best interest, and not engage in shady practices such as recommending funds that pay revenue sharing and/or 12b1 fees.

[litovskyassetmanagement]

Eagleeyes wrote:

I am a partner/owner in the group. The group is sizeable 50+ with a mix of employed docs and partners, skewing more to the latter. All are eligible to for the 401k, CB, DB plans

Its an assets under management arrangement instead of a flat fee. My fear is that the account is so big and complicated we will have a hard time unwinding the maze and moving to another flat fee advisor

At this phase I am gathering information. I suspect at some point I will talk to the FA firm and tell them we are going to walk away if they don’t come to a flat fee. Also a little worried about ruffling feathers in my group too. Some of the guys invest individually with this FA firm

How hard would it be to have a new flat fee firm come in and takeover?

I wonder if Konstantin L would weigh in and give me some insights. I have found his posts to be pretty thoughtful if not sometimes controversial to others

Click to expand...

Again, this is a conflict of interest that should not exist.  If a firm is providing retirement plan advice to a plan, they should not be providing investment advice to participants because this can be perceived as a conflict of interest, depending on the facts and circumstances.

Also, unless the firm is an ERISA 3(38), it does not matter what they charge, the liability is fully with the plan sponsor.  Also, it is not entirely clear that they would know how to manage a CB plan.  Many RIA firms are totally clueless about this.

It is not hard at all to transition to a different provider, however, this has to be done after a very thorough review and a careful study of all of the aspects of this transfer.  With a 401k plan you would need to move the plan anyway to a better provider to get low cost index funds.  With a CB plan there are other concerns such as how appropriate the investment strategy is, and the cost of services and investments.

However, before making ANY changes I'd suggest having everything reviewed from A to Z, and make sure that any proposals you get are actually going to please all of the partners, and address all of the concerns (including elimination of asset based fees and conflicts of interest).  Just because the partners invest with the firm does not mean they should keep the plan with that firm.  They can always get self-directed brokerage accounts inside the 401k plan and have the firm manage those, if they want their services so badly, but they should not impose a sub-par plan on everyone else (especially on those who know better).  This is the most important point - there is no need to ruffle any feathers, just to come up with a solution that takes into account the interest of all of the parties involved, and that's what a truly custom-designed plan should be (and it takes a lot of effort, but at the end of the day it is worth it because everyone gets what they want).

 

[Eagleeyes]

Just found out that yes american finds is the record keeper and custodian. My FA firms "sister"company is the TPA.

Found that groups FA who isn't responsible for plan design etc, accepts trailing commissions and 12b1 fees.

Hmmm. Kon, do you have a questions/questionairre or something similar to ask at my meeting to figure out just what is going on? Questions that I can ask to get some knowledge under me so I can evaluate how to or if I should recommend moving to another FA firm

[Eagleeyes]

I agree. It's challenging to do an apple to apple comparison when the costs are hidden with the current firm. Also, I'm sure he can't just do an evaluation of our group for free. It would probably cost something. Probably be cheaper long term. If the group would sanction it I'd dig in and get going

[litovskyassetmanagement]

Eagleeyes wrote:

Just found out that yes american finds is the record keeper and custodian. My FA firms “sister”company is the TPA.

Found that groups FA who isn’t responsible for plan design etc, accepts trailing commissions and 12b1 fees.

Hmmm. Kon, do you have a questions/questionairre or something similar to ask at my meeting to figure out just what is going on? Questions that I can ask to get some knowledge under me so I can evaluate how to or if I should recommend moving to another FA firm

Click to expand...

Actually, I will do it for free because I don't sell products, so before making recommendations as a fiduciary I must understand what your needs are and whether any solutions I may recommend will help you save money and improve your plan services.

There is no questionnaire, just get a 408b2 fee disclosure, plan document/adoption agreement, and copies of all of the contracts from all of the providers and I can put together a side by side comparison as far as fees and services.

At this point it is very clear to me what's going on.  By the way, I prefer using independent TPA not related to the investment company or to the record-keeper, this allows for better communication as well as for proper checks and balances.  I think the reason this is complicated is because providers are making it so, I don't think this should be complicated.  When you pick providers based on their merits (as a fiduciary should), and all providers are independent and they don't have any conflicts of interest at all or charge any asset based fees at all, things become really much simpler because you don't have to worry about who's getting what from your plan's assets (which is what this game is about, as you can see already).

[actuaryonfire]

I think most has been said here, but to the extent you find this useful...

You can completely unbundle the providers of the 401k and DB plan, and there are not usually great benefits to bundling them.

Cash Balance DB Plan

For the DB Plan you need three parties; Administrator, Actuary and Investment Adviser to the fiduciary committee. It can be much easier to have the same firm provide the actuarial and investment advice together. So really you just need two firms:

- Administrator

- Actuary and investment adviser

For a DB plan you don't need to provide financial advice to participants. I would leave that up to the individuals to sort out themselves.

For the administrator you want a reliable service for a good price. Note that going too cheap will compromise the service and HR will get inundated with irate calls from participants, and you run the risk that your plan's data will get screwed up by a bad administrator.

For the actuary and investment adviser you need a firm from the institutional space, not the retail space. This then gives you access to proper institutional products at institutional pricing. For example you won't be restricted to mutual funds with high fees you can use institutional commingled funds that can be much cheaper. You could also negotiate a fixed fee, rather than an asset based fee. You also want an independent firm that is not tied to a particular investment platform. Note that if a service is cheap then there will be a reason for that.

As Litovsky says you probably want your investment adviser to be a "3(38)" fiduciary, rather than a "3(21)" fiduciary. 3(38) provides the maximum fiduciary transfer permitted by ERISA and gives you more protection and allows that firm to complete more tasks on your behalf.

Here is a link to the top providers of these services as ranked by AuM. Not all of them additionally provide actuarial services, but many do. You can also hire a firm to do the search for you. But it will not be free.

LMK if you have any more questions.

 

 

 

 

 

[litovskyassetmanagement]

actuaryonfire wrote:

I think most has been said here, but to the extent you find this useful…

You can completely unbundle the providers of the 401k and DB plan, and there are not usually great benefits to bundling them.

Cash Balance DB Plan

For the DB Plan you need three parties; Administrator, Actuary and Investment Adviser to the fiduciary committee. It can be much easier to have the same firm provide the actuarial and investment advice together. So really you just need two firms:

– Administrator

– Actuary and investment adviser

For a DB plan you don’t need to provide financial advice to participants. I would leave that up to the individuals to sort out themselves.

For the administrator you want a reliable service for a good price. Note that going too cheap will compromise the service and HR will get inundated with irate calls from participants, and you run the risk that your plan’s data will get screwed up by a bad administrator.

For the actuary and investment adviser you need a firm from the institutional space, not the retail space. This then gives you access to proper institutional products at institutional pricing. For example you won’t be restricted to mutual funds with high fees you can use institutional commingled funds that can be much cheaper. You could also negotiate a fixed fee, rather than an asset based fee. You also want an independent firm that is not tied to a particular investment platform. Note that if a service is cheap then there will be a reason for that.

As Litovsky says you probably want your investment adviser to be a “3(38)” fiduciary, rather than a “3(21)” fiduciary. 3(38) provides the maximum fiduciary transfer permitted by ERISA and gives you more protection and allows that firm to complete more tasks on your behalf.

Here is a link to the top providers of these services as ranked by AuM. Not all of them additionally provide actuarial services, but many do. You can also hire a firm to do the search for you. But it will not be free.

LMK if you have any more questions.

 

 

 

 

 

Click to expand...

You don't need to go 'institutional' to get the quality.  In fact, 'institutional' just means higher price for lower quality because that's going to mean that you will get a one size fits all from a large provider which does not necessarily have the capability to handle custom-designed plans, especially in under $20M market. And most 'institutional' providers often outsource the actuarial/TPA duties to smaller firms anyway.  So why have another added layer of cost and complexity?

As far as 3(38) fiduciaries that are 'institutional', none are fixed/flat fee, and all charge AUM fees or really high fixed fees. Also, none can provide the type of customization or the type of advice that's necessary, and very few commit to index funds. You won't ever get an actual person to talk to, as the 3(38) would be the institution, thus it means no advice on how to set up the best plan, whether adding a CB plan would be a good idea, or any other fiduciary level advice that goes beyond the investment lineup for the 401k, etc.  Also, very few institutions will do a good job managing a CB plan, because in under $20M market I never saw liability driven investing - it is all just standard asset allocation which is a bad idea given that practices might not be around for very long.

Also, many firms simply bundle TPA/actuary/3(38), and that's also a bad deal for group practices because there is no oversight and no checks and balances. We often work with plans that came from the so-called 'institutional' market, and our prices are significantly lower, and quality is significantly higher all around, and we can handle much more complex situations because 'institutions' won't bother with you unless you have $20M and more in assets (significantly more in most cases), and even then their pricing is so inflated that it does not take very much to get a significant discount.

I believe that any plan of any size should be able to get institutional quality services for significantly lower prices than charged by anyone in the industry, simply because it is possible right now to set up a plan using low cost and high quality components in such a way as to make the everything much more cost-effective.  I think that bundled/AUM model is seriously outdated, and in the next decade or so things might change, albeit slowly.

[actuaryonfire]

Kon Litovsky wrote:

You don’t need to go ‘institutional’ to get the quality. In fact, ‘institutional’ just means higher price for lower quality because that’s going to mean that you will get a one size fits all from a large provider which does not necessarily have the capability to handle custom-designed plans, especially in under $20M market. And most ‘institutional’ providers often outsource the actuarial/TPA duties to smaller firms anyway. So why have another added layer of cost and complexity? As far as 3(38) fiduciaries that are ‘institutional’, none are fixed/flat fee, and all charge AUM fees or really high fixed fees. Also, none can provide the type of customization or the type of advice that’s necessary, and very few commit to index funds. You won’t ever get an actual person to talk to, as the 3(38) would be the institution, thus it means no advice on how to set up the best plan, whether adding a CB plan would be a good idea, or any other fiduciary level advice that goes beyond the investment lineup for the 401k, etc. Also, very few institutions will do a good job managing a CB plan, because in under $20M market I never saw liability driven investing – it is all just standard asset allocation which is a bad idea given that practices might not be around for very long. Also, many firms simply bundle TPA/actuary/3(38), and that’s also a bad deal for group practices because there is no oversight and no checks and balances. We often work with plans that came from the so-called ‘institutional’ market, and our prices are significantly lower, and quality is significantly higher all around, and we can handle much more complex situations because ‘institutions’ won’t bother with you unless you have $20M and more in assets (significantly more in most cases), and even then their pricing is so inflated that it does not take very much to get a significant discount. I believe that any plan of any size should be able to get institutional quality services for significantly lower prices than charged by anyone in the industry, simply because it is possible right now to set up a plan using low cost and high quality components in such a way as to make the everything much more cost-effective. I think that bundled/AUM model is seriously outdated, and in the next decade or so things might change, albeit slowly.

Click to expand...

Kon - gosh, there is so much here that either I disagree with, or are at worst wrong, and at best, misleading assertions.

OP - I don't think it would benefit the OP (or me) to go through this now. But shout if you think the minutiae of DB advice is useful to you.

I had missed the fact that the plan is only $20m. That does limit you, and you might have to land with a mom and pop RIA shop, or a wealth management group from a bank.

 

[litovskyassetmanagement]

actuaryonfire wrote:

Kon Litovsky wrote:

You don’t need to go ‘institutional’ to get the quality. In fact, ‘institutional’ just means higher price for lower quality because that’s going to mean that you will get a one size fits all from a large provider which does not necessarily have the capability to handle custom-designed plans, especially in under $20M market. And most ‘institutional’ providers often outsource the actuarial/TPA duties to smaller firms anyway. So why have another added layer of cost and complexity? As far as 3(38) fiduciaries that are ‘institutional’, none are fixed/flat fee, and all charge AUM fees or really high fixed fees. Also, none can provide the type of customization or the type of advice that’s necessary, and very few commit to index funds. You won’t ever get an actual person to talk to, as the 3(38) would be the institution, thus it means no advice on how to set up the best plan, whether adding a CB plan would be a good idea, or any other fiduciary level advice that goes beyond the investment lineup for the 401k, etc. Also, very few institutions will do a good job managing a CB plan, because in under $20M market I never saw liability driven investing – it is all just standard asset allocation which is a bad idea given that practices might not be around for very long. Also, many firms simply bundle TPA/actuary/3(38), and that’s also a bad deal for group practices because there is no oversight and no checks and balances. We often work with plans that came from the so-called ‘institutional’ market, and our prices are significantly lower, and quality is significantly higher all around, and we can handle much more complex situations because ‘institutions’ won’t bother with you unless you have $20M and more in assets (significantly more in most cases), and even then their pricing is so inflated that it does not take very much to get a significant discount. I believe that any plan of any size should be able to get institutional quality services for significantly lower prices than charged by anyone in the industry, simply because it is possible right now to set up a plan using low cost and high quality components in such a way as to make the everything much more cost-effective. I think that bundled/AUM model is seriously outdated, and in the next decade or so things might change, albeit slowly.

Click to expand…

Kon – gosh, there is so much here that either I disagree with, or are at worst wrong, and at best, misleading assertions.

OP – I don’t think it would benefit the OP (or me) to go through this now. But shout if you think the minutiae of DB advice is useful to you.

I had missed the fact that the plan is only $20m. That does limit you, and you might have to land with a mom and pop RIA shop, or a wealth management group from a bank.

 

Click to expand...

All of the plans on WCI forums would be under $20M, including the group practice plans. We also set up customized DB plans for small and medium group practices, and the investment management services we provide are a notch above anything I've seen, all for a fixed/flat price using low cost investments. Everything I write about comes from actual practice of setting up and managing such plans, and working with multiple providers. I know prices and services offered by these firms backwards and forwards, and I stand by everything I've said. We typically save group plans millions of dollars vs. all of the providers you've posted above and our services are way better, and this is not bragging, it is a fact. With plans in more than 20 states, we definitely know a thing or two about small practice plans and how to set them up cost-effectively. Our capabilities are significantly better as well, with access to ERPAs and ERISA attorneys, as well as the best low cost record-keeping platforms and top of the line TPAs and actuaries.

One big difference though is that we do not sell plans unlike everyone else in the industry - a fiduciary is in charge of the entire process, so no plan is recommended unless a thorough analysis is done to make sure that it is the appropriate plan.  That is something that simply does not exist in the retirement plan industry where all plans are sold as products and nobody cares about whether it is truly the best solution vs. alternatives.  This makes all the difference in the world for smaller plans.