Options to setup 401k with Profit Sharing

[HumbleInvestor]

I read numerous posts on this site and other sites and have some understanding of what I need in a 401k plan for a small business with a highly compensated owner and other non HCE employees. The basic building blocks are:

A good plan design to maximize employer contributions while lowering costs that can withstand cross testing.

An independent TPA that charges flat fee.

A good record keeper/custodian.

Access to low cost index funds

A plan adviser that keeps everything smooth.

Coming to the plan itself, a safe harbor 401k with profit sharing meets most of the requirements but employer contributions vest immediately. I have seen some 401k plans with 6yr vesting schedule. Can that vesting schedule be flexible in the plan design to make it less restrictive(say 4 years instead of 6)?

If you have a fee only financial adviser with appropriate fiduciary responsibilities already, can you select a good TPA, record keeper etc and build a 401k plan with out the need for yet another adviser who oversees just the retirement plan? If so, what are some good TPA and record keeper options to look in to?

Appreciate your feedback.

[fbaum818]

I see two questions in this post:

1.  Can a 401(k) plan be less restrictive than a 6 year vesting schedule?

2.  If you have a fee-only financial adviser, can you select a good TPA, recordkeeper, etc. to build a plan without hiring another adviser?

Let's answer them one at a time.

1.  A traditional 401(k), which is subject to discrimination testing, can be less restrictive than a 6 year vesting schedule.  According to the IRS, a qualified plan must allow employer contributions to vest according to one of two schedules:

-3 year cliff vesting.  This means that the employer can allow 0% vesting for years 1 and 2, but must allow 100% vesting by the end of year 3.  This favors employers with high turnover.

-6 year graded vesting.  This means that the longest that an employer can stretch out a vesting schedule is 6 years:

Year 1:  0%

Year 2:  20%

Year 3:  40%

Year 4:  60%

Year 5:  80%

Year 6:  100%

Any traditional plan can be more favorable to the employee, but can never be less so.  So, you could implement a plan with a 4-year graded vesting schedule, but not a 4-year cliff vesting schedule.

2.  If you have a fee-only financial adviser, they might be able to help set up a solo 401(k), SEP, or SIMPLE IRA for you.  However, the ERISA fiduciary requirements are cumbersome, tedious, and require a lot of attention to detail.  The larger the plan, the more likely your financial planner will not want to personally do it, but will try to help you find someone who can do it for you. Keep in mind, retirement plan fiduciaries also have to be qualified under ERISA Section 3(38), so it's not like you can just hire out the recordkeeping, administration, fund selection, and investment management WITHOUT hiring someone with a specialty.

Just like most generalist doctors will refer cases with which they do not feel comfortable, to preferred specialists, I would expect a sound financial adviser to refer complicated plans to someone who specializes in them.  In fact, I would be wary of the adviser who tries to take it on themselves.

[litovskyassetmanagement]

HumbleInvestor wrote:

I read numerous posts on this site and other sites and have some understanding of what I need in a 401k plan for a small business with a highly compensated owner and other non HCE employees. The basic building blocks are:

A good plan design to maximize employer contributions while lowering costs that can withstand cross testing.

An independent TPA that charges flat fee.

A good record keeper/custodian.

Access to low cost index funds

A plan adviser that keeps everything smooth.

Coming to the plan itself, a safe harbor 401k with profit sharing meets most of the requirements but employer contributions vest immediately. I have seen some 401k plans with 6yr vesting schedule. Can that vesting schedule be flexible in the plan design to make it less restrictive(say 4 years instead of 6)?

If you have a fee only financial adviser with appropriate fiduciary responsibilities already, can you select a good TPA, record keeper etc and build a 401k plan with out the need for yet another adviser who oversees just the retirement plan? If so, what are some good TPA and record keeper options to look in to?

Appreciate your feedback.

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The 6-year vesting schedule is a good idea because that prevents the plan from being leaky.  As Forrest mentioned below, you can indeed use a less restrictive schedule (or none at all).

At the very least, I would recommend working with an ERISA 3(38) fiduciary.  It is not enough to be a Registered Investment Adviser, because they are a fiduciary under Adviser's Act of 1940, but they are NOT an ERISA fiduciary, and they will not take the responsibility/liability for your retirement plan, so any advice they provide will be fully your responsibility.  Not only that but they are most likely not experienced enough to deal with all of the retirement plan issues that arise, including record-keeper selection, and TPA selection, development of an Investment Policy Statement, addressing controlled/affiliated groups, setting up managed portfolios and providing participant education, as well as working with the TPA and record-keeper to give you the best possible plan design and services.

So if you work with a financial planner that's one thing.  Retirement plans are best left to ERISA fiduciaries who are specializing in working with complex retirement plans, and who have multiple plans under management. When an adviser is providing both ERISA and personal planning, they have to have two separate contracts, one for ERISA plan (ideally as an ERISA 3(38) fiduciary) and one for personal advice, and these are two completely separate engagements.  I used to do both, but quickly realized that it takes way too much work to be able to do both well, therefore, I specialize in setting up and managing retirement plans for doctors and dentists, and I leave personal planning to top notch flat/fixed fee advisers such as Forrest.

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[HumbleInvestor]

Thank you for your replies and clarifications. I anticipate we will be contributing between 85K-125K a year including our share and any match and profit sharing depending on the number of employees (less than 10) that participate in the plan. Some of the quotes I received are in the 5-6K range and that is a significant expense equivalent to 5% AUM or more in the first year. At that rate, the fee does not get under 1% AUM until after 5-7 years and under 0.5% well around 10 years with market average compounded returns. Given the small size of the assets in the plan, I am trying to keep costs down. Any suggestions for TPA's and record keepers I could use?

[Hank]

Financial_Consultant wrote:

If you’re trying to maximize your own savings, there are advanced strategies that can be used. I can provide additional information if you contact me privately.

 

 

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There's really no need for HumbleInvestor to contact you privately.  You can give him the pitch for annuities or life insurance as an investment right here in front of the whole forum.  Why should only that one poster get to hear about "advanced" or "complex" strategies from an Axa salesperson?

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[Hank]

Are you a fiduciary?  If so, are you a fiduciary all of the time, or do you switch to a "suitability" standard when you're selling annuities and other insurance products?

 

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[Jaqen Haghar MD]

Financial_Consultant wrote:

Hank wrote:

Are you a fiduciary?  If so, are you a fiduciary all of the time, or do you switch to a “suitability” standard when you’re selling annuities and other insurance products?

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I don’t know who tried to sell you on what and why but you can’t just attack me.

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Don't listen to him Diana!

 

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[AlexDDS]

We use Employee Fiduciary https://www.employeefiduciary.com/401k-plan-pricing/ and they are great, there is another low cost 401k provider -America`s Best 401k  https://americasbest401k.com/ -you can directly communicate with CEO Tom Zgainer
[email protected]
855.905.4015
www.americasbest401k.com
and receive you plan design illustrations in a 30 min after you submit your employee census.

[litovskyassetmanagement]

HumbleInvestor wrote:

Thank you for your replies and clarifications. I anticipate we will be contributing between 85K-125K a year including our share and any match and profit sharing depending on the number of employees (less than 10) that participate in the plan. Some of the quotes I received are in the 5-6K range and that is a significant expense equivalent to 5% AUM or more in the first year. At that rate, the fee does not get under 1% AUM until after 5-7 years and under 0.5% well around 10 years with market average compounded returns. Given the small size of the assets in the plan, I am trying to keep costs down. Any suggestions for TPA’s and record keepers I could use?

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Please use the following calculator do do a proper comparison:

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

Reducing a net fee to an AUM number is just plain silly.  Doing the opposite with an AUM fee (and reducing it to a dollar amount) is also silly. The entire idea is to pay a fair fixed fee rather than AUM fees, and to compare the cost over the long term (rather than for a single year).

What you need to do is the following as far as TPA:

1) Make sure that you have the best possible design, and that your TPA will be modifying your design on an annual basis to keep it optimal.

2) Get the worst case scenario design to make sure that you are not missing the forest (such as including all eligible staff, and considering what happens if you hire new staff in the future).  This typically is left behind by most TPAs.

3) Make sure that there are no AUM fees charged by either record-keeper or TPA.

Record-keeper has to be open architecture and have minimal AUM fees as well. Most TPAs and record-keepers charge competitive fees.  Looking for the lowest fee is not going to save you money long term because those who charge the lowest fees also don't provide the best service, which a plan like yours will definitely need, but when looking for record-keeper fees, you absolutely want the lowest AUM fee (typically 5 bps or less).

There are tons of TPAs and record-keepers, and I've spent a lot of time vetting those.  The whole idea is to have a plan where everyone works together, and this is why it is important to have an ERISA 3(38) fiduciary oversee the whole process (and also to help you minimize the fees you pay).  In many cases getting a proper plan design can save you more in fees than you are paying to all of your providers, and sometimes you can save a multiple of what you are paying to your providers.  Who's to know whether your employer contribution can be cut in half if only you do X?  The TPA often works with just the numbers you provide.  So if your W2 is $150k, they'll run an illustration with $150k.  Little would you know that if your W2 goes up to $270k your employer contribution can decrease significantly, offsetting the increase in payroll taxes (this does not work for everyone, but it does work).  This is the kind of stuff that nobody seems to be talking about, but in practice this can save you a lot of money, so while you are concentrating on the fixed fees your providers charge, you should be concentrating on the details that can matter a lot more, such as making sure that your design is optimal every year.

[litovskyassetmanagement]

AlexDDS wrote:

We use Employee Fiduciary https://www.employeefiduciary.com/401k-plan-pricing/ and they are great, there is another low cost 401k provider -America`s Best 401k  https://americasbest401k.com/ -you can directly communicate with CEO Tom Zgainer
[email protected]
855.905.4015
http://www.americasbest401k.com
and receive you plan design illustrations in a 30 min after you submit your employee census.

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I've posted my critique of EF and other bundled providers here before (including Vanguard Ascensus).  I'm yet to see a cross-tested profit sharing out of EF, and big bundled providers such as ABK have significant AUM fees that make them extremely expensive for startup plans and for plans with existing assets alike.  We can easily beat ABK fees for a plan of any size (and especially for plans with assets).  And as far as EF, they have an 8bps fee which means I would not use them as a record-keeper only. EF does not have a TPA that is assigned to your plan, so that results in low quality designs, which is bad for profit sharing plans that experience significant demographic changes and require a lot more support than plain Safe Harbor plans. Also, none of the above set up pooled 401k plans, which are really good for small practices, and which can save money on record-keeping and reduce complexity:

http://www.dentaltown.com/Dentaltown/Article.aspx?i=393&aid=5411

EF is a bundled provider just like others, and their service quality will not be enough for more complex profit sharing plans.  While they do offer an ERISA fiduciary service, this is just an automated platform that charges an AUM fee, and this is not an adviser who is going to help you save money and oversee plan operations (as well as provide advice to the plan sponsor in many different areas).  It is a one-size-fits all which can work ok for smaller Safe Harbor plans, but when it comes to complex group practice plans that's a totally inappropriate solution.

In fact there are many open architecture bundled providers, so EF and ABK are only several of many that are available, and they are not the best ones by a long shot.  I prefer providers who are independent and of the highest quality because ultimately this will make a huge difference on the bottom line, not the lowest cost. While this does take more work to find the best providers, over the long term this is the best solution since presumably these plans will be run for decades, so making sure you got the best providers that are looking out for your bottom line is more important than finding the lowest cost ones.