Help!! Vanguard 401k for small business: Do I need a 401k Advisor????

[orthodds]

We are switching from Principal to Vanguard for our small business 401k.  We will pay the modest plan fees from the business account and each participant will only have expense ratios to pay out of their invested money.  I think it's a fantastic plan.  We are tentatively planning to work with Vanguard directly since I see no reason to have a 3rd party advisor involved (we do have our own TPA and he is good and charges a reasonable fee).  However, one of my partners met with a 3rd party advisor from UBS and this advisor has scared him into thinking we have to have a 3rd party advisor.  The advisor would charge 30 basis points on all AUM.

The advisor says one of his main functions would be to provide "documentation" of how and why we chose the funds on the 401k menu available to plan participants so that in the event of a law suit we could show the documented rationale for our decisions and why we have fulfilled our role as plan fiduciary.

Our 401k plan will be beautiful and simple with limited, well diversified fund options with target date defaults.  Vanguard will provide assistance and advice in choosing the funds and will help each participant to get their investments set up.

Am I crazy, or is there really a good reason to pay a 3rd party advisor to do documentation (whatever that really means) and sit around and do nothing for the next 30 years while collecting money for "advising" our plan participants?

[spiritrider]

Last I knew Vanguard does not directly offer 401k plans to businesses with < $20M in assets. The small business plan Vanguard refers to is really a plan with Ascensus as the TPA. Last I knew the minimum administrative fee was $3475/year for 15 employees with somewhere around $2K for a set up fee.

I would think a local TPA would charge less than that and provide better support. If you design a simple TSP like plan with adequate coverage of asset classes and target date funds an advisor should not be necessary.

[orthodds]

I think it is a fairly recent development, but yes, Vanguard does offer 401k plans direct to businesses with less (much less in fact) than 20M in assets.  Currently they charge a base record keeping fee of 2500 dollars for up to 15 participants, then another 70 dollars for each beyond 15 up to 50 participants.  There is a one time set up fee of 850 dollars. Average expense ratio is 8 basis points.  We will pay the record keeping and set up fee out of the business so our participants will only pay around 8 basis points to participate in the 401k through Vanguard.  Not bad I would say.  Our TPA has annual fees of around 1800 dollars.  That is it in terms of fees.  No AUM fees.

 

Simple TSP-like plan with basic index funds covering asset classes and target date funds is exactly what we are planning on.  I'll put you down as a vote for no third party advisor for our 401k.

 

Thank you!

[Virajith Wijeweera]

There are four components you have to consider as the Plan Sponsor:

• TPA


• Recordkeeper


• Custodian


• ERISA 3(38) or 3(21) Fiduciary

With Vanguard's bundled package at $3,475, you are getting TPA, RK, and Custodian services.  This does not include Fiduciary services.  I believe they offer this at an additional fee of around 25 to 30 bps of Plan assets.  If you do not hire an ERISA 3(38) Fiduciary, you will be held responsible for selecting and maintaining the investment lineup for the Plan.  I do not believe your TPA offers this services unless they specifically state that (I could be wrong).

[spiritrider]

Orthodds, this still sounds very much like it is the small business plan administered by Ascensus. This is what Vanguard says about their Small Plan 401k (Vanguard Retirement Plan Access).

Retirement plan recordkeeping and administrative services are provided by The Vanguard Group, Inc. (VGI). VGI has entered into an agreement with Ascensus, Inc., to provide certain plan recordkeeping and administrative services on its behalf. Ascensus is not affiliated with Vanguard Marketing Corporation, The Vanguard Group, Inc., or any of its affiliates.

You can get a recordkeeping credit to lower your yearly administrative fee. For example, if you select Investor Shares instead of Admiral Shares, you will get a record keeping credit of the difference. In other words you would be shifting some of the administrative costs from the employer to the employee.

[litovskyassetmanagement]

orthodds wrote:

We are switching from Principal to Vanguard for our small business 401k.  We will pay the modest plan fees from the business account and each participant will only have expense ratios to pay out of their invested money.  I think it’s a fantastic plan.  We are tentatively planning to work with Vanguard directly since I see no reason to have a 3rd party advisor involved (we do have our own TPA and he is good and charges a reasonable fee).  However, one of my partners met with a 3rd party advisor from UBS and this advisor has scared him into thinking we have to have a 3rd party advisor.  The advisor would charge 30 basis points on all AUM.

The advisor says one of his main functions would be to provide “documentation” of how and why we chose the funds on the 401k menu available to plan participants so that in the event of a law suit we could show the documented rationale for our decisions and why we have fulfilled our role as plan fiduciary.

Our 401k plan will be beautiful and simple with limited, well diversified fund options with target date defaults.  Vanguard will provide assistance and advice in choosing the funds and will help each participant to get their investments set up.

Am I crazy, or is there really a good reason to pay a 3rd party advisor to do documentation (whatever that really means) and sit around and do nothing for the next 30 years while collecting money for “advising” our plan participants?

Click to expand...

As others have said, there are several pieces to having the best 401k plan.  Vanguard's plan is basically just Ascensus as the record-keeper.  You have one important piece in place already: TPA.  This is one of the most important services that has to be provided by someone other than the record-keeper.

You do not have to have anything, but it can help you in different ways:

http://whitecoatinvestor.com/how-to-run-a-successful-retirement-plan-for-a-medical-or-dental-practice

First, if you do pick an adviser, they have to be an ERISA 3(38) fiduciary:

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

What's the benefit of working with an adviser?  For starters, Ascensus selects investor share classes for your funds as a default.  Your adviser has to select an optimal lineup for the plan, and also have the ability to build model portfolios.  I'm not a big fan of TDFs, for multiple reasons described elsewhere on WCI. Your adviser also has to interface with the TPA to make sure that your plan design is optimal and has all of the features you need.  Also, depending on the size of the practice, your ERISA 3(38) fiduciary can assist you in developing a participant education program that's more comprehensive than just some brochures and online videos.  Yes, there is the fiduciary liability issue, but that's not really that big of a deal in my mind.  I think that administrative penalties are a lot more common than being sued for investment options.  That said, it does help to have an Investment Policy Statement for the plan, as well as to follow the IPS and to have a prudent fiduciary process in place.  This is just good housekeeping.

But if you do pick an ERISA 3(38) fiduciary to assist you, they have to work in your best interest, recommend low cost index funds, provide comprehensive services (not just picking a handful of investments), and above all, charge a fixed/flat fee:

http://whitecoatinvestor.com/how-to-reduce-your-practice-retirement-plan-cost/

A big role of the ERISA 3(38) is to advise the plan sponsor, not plan participants.  For example, if you ever want to add a Cash Balance plan, your ERISA 3(38) should be able to oversee the proposal process as well as to offer their services in designing the CB portfolio, which can get tricky with partnerships and larger practices.  Basically, hiring a 3(38) is a way to outsource plan's investment management functions to a professional who knows how to do it best. There are some plans where decisions are made by a doctor committee, but I've seen their investment lineups, and they are just not up to par.  Plans that hire 3(38) fiduciaries want someone who knows what they are doing to take full responsibility for investment selection and model portfolio creation and management, as well as for providing plan level fiduciary advice to the plan sponsor.  This is just another plan function that can be outsourced.  If that's what you want to do, it might be a good idea is to get several proposals to understand exactly how an ERISA 3(38) can help your plan do better, but there is no reason to hire someone unless they are charging a fixed/flat fee, and are able to put together low cost investment options with an expense ratio of ~0.15% or lower.

[litovskyassetmanagement]

Another overlooked aspect of retirement plans is actual ERISA compliance. While a startup plan can be set up properly without any issues, ongoing compliance can be a challenge.  For example, some doctors might want to start doing things like using outside brokerage windows, or bring in their personal advisers to manage their individual brokerage accounts.  So another function of an ERISA 3(38) fiduciary is to make sure that your plan is always in compliance with ERISA. This is definitely cheaper than hiring an ERISA attorney, although there are cases when such an attorney has to be brought in to fix up a plan that's out of compliance.  This usually happens to older plans that have been around for a while, however, it is really easy to screw up even the best set-up plan over time, especially when there is no fiduciary advice and oversight offered to the plan sponsor.  Ascensus and TPAs typically don't get involved in ERISA issues, so unless the plan sponsor is an expert, they need to at least have access to someone who can provide ongoing compliance advice.

[orthodds]

Thank you for the responses.  I'm still struggling with whether we need an adviser 3(38).  Here is a little more detail on what we have set up currently as we make the transition to Vanguard:

 

1.  Good TPA (same one we have used for many years)

2.  Vanguard platform with a lineup of target date funds, broad index funds that cover all major sectors, a few balanced funds and a few of Vanguards actively managed, balanced funds.  We have the TDF set up as the primary default with an income fund set up as the secondary default.  We have reviewed the fund list and along with the basic, required participant education we can definitely check the box that it is 404(c) compliant.

3.  We have an Investment Policy Statement which makes clear our intentions to be 404(c) compliant.  It describes the rationale and the underlying criteria for fund options.

4.  We pay Vanguard and our TPA directly as a business, so the participants will only be paying the expense ratios on the funds they choose.  There are currently to AUM fees whatsoever.

 

My problem is I don't see what more a 3(38) adviser could do for us that would justify a significant fee.  By biggest issue is that there is no way an AUM fee would be appropriate for this 3(38) adviser.  I suppose if there was a reasonable fee for a 3(38) that was based on an hourly charge or yearly fee then that might be more palatable.

We want to have an excellent 401k/Profit sharing plan that works for the owners, but that is also the best it can be for our employees.  Given the set up I described above, I have a hard time understanding how we could ever be sued.  If total participant expenses are around 15 basis points total then how can you do better than that?  If we have provided for a 404(c) approved fund lineup with appropriate defaults, how could this be an issue?  Our TPA will ensure compliance.  Vanguard and the TPA will make sure all required documentation is done.  Of course over time we will have a periodically scheduled review of our plan to make sure it is still the best it can be and to make sure it is working for all of the participants.

Mr. Litovsky, i can't argue too much with what you have written about on this forum, but when I go through your checklists I believe we are checking all of the boxes you lay out.  What more would a 3(38) adviser provide?  Peace of mind?  Help with periodic reviews?  Confirmation that what we are setting up is indeed as good as we think it is?  Could you give me an idea of how you charge for 3(38) services?  Lastly, you have said you don't like TDFs.  For a participant who doesn't know anything whatsoever about investing I think they make sense.  Of course when they are set up the choice of which fund is most appropriate should be based on the individuals situation, not their birth date, necessarily.  Also, there should be a periodic review to make sure the TDF chosen is still the most appropriate.  There are potential tax issues if held in a taxable account, I know.  Is there something I'm missing?

Thank you again for all of the feedback.  This forum is pretty impressive.

[litovskyassetmanagement]

orthodds wrote:

Thank you for the responses.  I’m still struggling with whether we need an adviser 3(38).  Here is a little more detail on what we have set up currently as we make the transition to Vanguard:

 

1.  Good TPA (same one we have used for many years)

2.  Vanguard platform with a lineup of target date funds, broad index funds that cover all major sectors, a few balanced funds and a few of Vanguards actively managed, balanced funds.  We have the TDF set up as the primary default with an income fund set up as the secondary default.  We have reviewed the fund list and along with the basic, required participant education we can definitely check the box that it is 404(c) compliant.

3.  We have an Investment Policy Statement which makes clear our intentions to be 404(c) compliant.  It describes the rationale and the underlying criteria for fund options.

4.  We pay Vanguard and our TPA directly as a business, so the participants will only be paying the expense ratios on the funds they choose.  There are currently to AUM fees whatsoever.

 

My problem is I don’t see what more a 3(38) adviser could do for us that would justify a significant fee.  By biggest issue is that there is no way an AUM fee would be appropriate for this 3(38) adviser.  I suppose if there was a reasonable fee for a 3(38) that was based on an hourly charge or yearly fee then that might be more palatable.

We want to have an excellent 401k/Profit sharing plan that works for the owners, but that is also the best it can be for our employees.  Given the set up I described above, I have a hard time understanding how we could ever be sued.  If total participant expenses are around 15 basis points total then how can you do better than that?  If we have provided for a 404(c) approved fund lineup with appropriate defaults, how could this be an issue?  Our TPA will ensure compliance.  Vanguard and the TPA will make sure all required documentation is done.  Of course over time we will have a periodically scheduled review of our plan to make sure it is still the best it can be and to make sure it is working for all of the participants.

Mr. Litovsky, i can’t argue too much with what you have written about on this forum, but when I go through your checklists I believe we are checking all of the boxes you lay out.  What more would a 3(38) adviser provide?  Peace of mind?  Help with periodic reviews?  Confirmation that what we are setting up is indeed as good as we think it is?  Could you give me an idea of how you charge for 3(38) services?  Lastly, you have said you don’t like TDFs.  For a participant who doesn’t know anything whatsoever about investing I think they make sense.  Of course when they are set up the choice of which fund is most appropriate should be based on the individuals situation, not their birth date, necessarily.  Also, there should be a periodic review to make sure the TDF chosen is still the most appropriate.  There are potential tax issues if held in a taxable account, I know.  Is there something I’m missing?

Thank you again for all of the feedback.  This forum is pretty impressive.

Click to expand...

This is really great!  I wish every plan sponsor was as thorough as you guys obviously are.  This is the very first step to have an excellent retirement plan.

First, your TPA will not ensure ERISA compliance.  They are not fiduciaries for your plan.  A good TPA will help make sure that you are in compliance on the administrative side, but the execution depends entirely on you.  Vanguard will provide very minimal oversight (next to none). They are a broker (yes, really), so their job is to just sell you the funds, and their 'education' is online, and very ineffective.

I wouldn't worry about lawsuits, though participants can sometimes sue for various issues (many of these are administrative in nature, such as money owed to them that was not paid). Most compliance issues with small practice plans are administrative in nature, and your TPA will never take responsibility, so if IRS/DOL fines your plan, it would be all on you. However, there are many issues that come up over which your TPA will not offer you an opinion because it is not something that they are responsible for.

The role of an ERISA 3(38) who knows what they are doing is to make sure that when it comes to ERISA compliance that your plan is always in good shape.  Look at it as a 3-legged stool.  A 3(38) is just another leg of the stool.  They are a fiduciary, and they work exclusively for you, and not only that but they are fully liable for their decisions and so you can expect that a good 3(38) will take full responsibility for making sure that your plan is in compliance.

You can not possibly see this with a startup plan when everything seems perfectly aligned.  Wait for some time until you get new partners who want to open their own brokerage window with a broker of their choice.  Your TPA will not complain, but this would create huge issues.  I rarely see TPAs even bother with things like that because it is not their job.  This is the job of an ERISA 3(38) to make sure that issues like that get addressed before they become issues.

Another point that is not apparent until you get there.  If/when you want a Cash Balance plan, your TPA will give you an illustration, but they will not do a full blown financial analysis to make sure that this plan would work for you going forward, nor would they spend the time to educate the group on how to use this type of plan, and how this would work in the best interest of all partners.  Also, managing investments in a CB plan for a group can get very tricky, so that's not something that doctors should do themselves.

I mentioned before that Target Date Funds are not ideal, and I never use them in my plans in favor of risk-managed portfolios vs. target-date.  But this type of analysis is not something that I expect doctors to do themselves.  Also, while it is nice to have an IPS, it also has to be followed.  If someone does most of the work on the plan, and is then replaced by a partner who has no idea what's going on you can expect that individual doctors can start messing up with the plan lineup and disregard IPS. This is exactly what happens with group plans where there is no fiduciary oversight from someone who knows what they are doing.

So in short, there are many ongoing issues that a 401k plan will face going forward, and while you started on the right foot, it takes ongoing diligence to make sure that your plan remains on target.  This is exactly the job of an ERISA 3(38) fiduciary. Your ERISA 3(38) fiduciary has to work with the TPA to make sure that your plan design and architecture is optimal, and also work with individual partners to make sure that they are utilizing the plan in their best interest.  A fiduciary is someone who is always in charge, so hourly does not work here (there are no hourly fiduciaries), but a fair fixed/flat fee that's not based on assets is the best way to go (as this becomes a business tax deduction).