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Sticky situation regarding partnership Defined Benefit / Safe Harbor 401k funds

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  • litovskyassetmanagement
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    I’ve been working through this some more, and going back and reading your responses with a better understanding has been really helpful.  Your first response contained more good information than I imagined.

    We’re looking into what our options are for splitting to a participant directed account, or else switching to a more sensible allocation for the pooled plans.  I think the second option is best if we can agree, or else we may go with the first, but I fear that will bring about even greater fees in our current firm.
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    The problem with picking a different allocation is that you have staff and it is an ERISA plan, so if allocation is picked because a partner ordered it, this is a problem.  An ERISA 3(38) should be picking the best allocation for the plan, and document this in an Investment Policy Statement, if you want to go with a pooled plan.  There is really no alternative here, otherwise you are simply not following the rules.  ERISA explicitly says that the plan sponsor should run the plan in the best interest of all plan participants, not just partners.

    I would consider a participant-directed plan instead, this way you don't have to make fiduciary decisions regarding allocation for everyone.  And in the process of conversion you can shed the expensive components.  This is also a fiduciary duty of the plan sponsor.  Personal advisers/brokers/planners can not be involved in managing retirement plans - this is yet another fiduciary breach by the plan sponsor if that is so.

    It is really not that difficult, but it is rarely possible to do using existing high cost providers.  In my experience, this come down to educating the partners about the retirement plan costs and investments, and finding the best solution that works for everyone.

    Leave a comment:


  • Molar Mechanic
    replied
    I've been working through this some more, and going back and reading your responses with a better understanding has been really helpful.  Your first response contained more good information than I imagined.

    We're looking into what our options are for splitting to a participant directed account, or else switching to a more sensible allocation for the pooled plans.  I think the second option is best if we can agree, or else we may go with the first, but I fear that will bring about even greater fees in our current firm.

    Leave a comment:


  • litovskyassetmanagement
    replied




    Thanks for the info.  We’ll be working though this this year.

     

    When you say the plan HAS to be managed by an ERISA, what do you base that on.

     

    I did go back through the plans, and the fees are not as high as what I quoted, but still higher than we would want.
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    You don't have to do anything, but if you do pick an adviser to assist you in managing plan assets and selecting low cost investments and providing education to plan participants, it is best that they are well-versed in ERISA and that they are fiduciary working in your best interest.  That's what an ERISA 3(38) fiduciary is for.  And it does help that your adviser should know how to manage investments as well as how plan design and compliance works so that they can provide you with advice that takes into account all aspects of your retirement plan needs.

    We typically do side by side analysis of fees just to demonstrate the long term effect of asset based fees vs. fixed fees.  Also, in addition to advisory fees there are record-keeping and mutual fund fees, and when everything is added together, especially if you have significant assets, it can make a big difference as far as total cost.

    Leave a comment:


  • Molar Mechanic
    replied
    Thanks for the info.  We'll be working though this this year.

     

    When you say the plan HAS to be managed by an ERISA, what do you base that on.

     

    I did go back through the plans, and the fees are not as high as what I quoted, but still higher than we would want.

    Leave a comment:


  • litovskyassetmanagement
    replied




    Howdy gang,

     

    I’m interested in what the collective braintrust has to offer on a sticky situation.  I’m a dental specialist more money than I ever imagined.  Outside of real estate, home, and practice assets, I have approximately $900,000 in invested assets.  I used to manage it all myself, and while my expenses were low, there was no good “plan” for what was invested where, and the scattershot investments stressed me out.  When I became a partner, I ceded control of assets to a firm that specialized in business consulting, financial planning, accounting, and wealth management for dentists exclusively.  They did  a good job, but with a “traditional” outlook on investing.  No churning, no whole life, no loads, but they did take a percentage off the top.  My problem is that they have a predilection for actively managed funds with the associated high fees.  Total fees are ~2% per year.  This year I took back control of all my accounts outside of the company accounts.

    We have significant money in a TSP, in Roth IRAs for my wife and myself, and taxable investments, which I control.  We have approximately $208,000 in a defined benefit plan, and $141,000 in 401k/profit sharing plan setup as a safe harbor plan which are still with the advising firm.  Total annual contributions between these plans are between $160k-$170k depending on what the actuarial wizards figure.

    These assets are invested as a group, including my partner and staff members assets.  My partner and staff are generally older than I am, and as a result have a much more conservative allocation, and my partner is all in on this firm and their guidance (he looks forward to our annual consult to hear his investments performance…no vision of it for 364 days per year, and thinks I’m a fool for handling my own portfolio.)  These two plans are approximately half of my annual investments, the rest is into taxable accounts or backdoor Roth IRA.  We are 50/50 partners, but don’t make changes unless we both agree.  These plans all predate my partnership, so he is the approving official for both plans, which means these plans will never change.

    My question is, what can I do to recapture control of my assets in these group investments?  I think the defined benefit plan is a lost cause as until the plan is dissolved, the money is locked in unless somebody knows better.  I’d love to be proved wrong though.  The 401k Profit sharing I’m hoping can be recaptured.  I can potentially annually roll that money into an IRA, but that sabotages the backdoor Roth.  I don’t see a way that I can get a 2nd 401k open.  I can potentially roll it into the TSP?  I haven’t investigated if an in-service rollover from the 401k is even an option, since it does me no good to try if I don’t have a plan.

    TLDR…making good money, am able to invest lots of money pre-tax, but all pre-tax investments go into plans with awful fees and allocations.  Want to get the money out, but not sure where I can put it, if I can even get it out.
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    So it sounds like you have a pooled 401k plan (and obviously a pooled Cash Balance plan, since that's pooled by default).  Also, sounds like whoever is managing the assets is not an ERISA fiduciary (this makes a huge difference for 401k and CB plans - you can't possibly justify a 2% fee in such plans anymore).

    While I'm a big proponent of pooled 401k plans, this is one case where I would not recommend it.

    It is actually very easy to handle this.  First, your personal assets have nothing to do with retirement plan assets, which are ERISA assets and have to be managed by an ERISA 3(38) fiduciary, not by a 'financial adviser' or 'financial planner' who in this case sounds more like a registered representative (and possibly even a broker).

    I would suggest the following:

    1) Set up a participant-directed plan with a record-keeper that has an investment menu with low cost index funds (with an expense ratio of ~0.15%).

    2) In the process of rolling the money into the plan, you can enable in-service withdrawals and you can move the money into an IRA if you would prefer.  I wouldn't recommend it though since asset protection is definitely better inside a 401k plan, but you can do it if you wish.

    Such pooled 401k plans can be a good idea, but only if they are managed by an ERISA 3(38) fiduciary who works in your best interest, and who does not charge any asset-based fees.  In fact, you can easily save hundreds of thousands by eliminating all asset based fees from your accounts, and your partner can also get his money professionally managed inside the participant-directed 401k plan for no added cost by investing in a model portfolio that can be set up for all to use inside your new plan.  Thus everyone can benefit tremendously and save lots of money in the process.

    Also, when it comes to a CB plan, there are ways to manage your portfolio in a prudent fashion using liability-driven approach so that NOTHING is lost in the process (in terms of cost, especially).  It is easy to manage such a plan for several partners with different retirement dates, and it simply takes some skill in setting up a portfolio to accomplish this (which I bet is not being done with your plan).  A typical investment cost for managing CB portfolio should not exceed 0.15% (and this is for mutual fund fees only).

    Here's some background information on what I'm talking about.

    Pooled vs. participant-directed 401k plan:

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

    How to significantly decrease your retirement plan cost:

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

    Why it is a good idea to hire an ERISA 3(38) fiduciary for your plan (especially if you have a complex combo plan that requires specialized portfolio management approach):

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

    I think it would help if you can put what you are paying for your plan side by side with a solution that has only fixed/flat fees:

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

    This can be also an excuse to review your plan's administration and compliance to make sure that everything is being done properly. By removing all asset based fees from your plan you can save significant money and also get much better investments and managed portfolios for participants, as well as regain control of both of your retirement plans.

    Leave a comment:


  • jfoxcpacfp
    replied
    Iow, the main interaction is the annual consult? If your partner is focused only on annual results rather than a long-term perspective within the context of an overall plan, the next bear market may actually be your friend. It sounds as if the “advisor” is a really good salesman - not of insurance, necessarily, but of what he is doing for your firm. Perhaps you could talk him into at least getting some second opinions and asking your current advisor what’s he is doing to justify the added fees. After all, what do you have to lose?

    Leave a comment:


  • adventure
    replied


    and my partner is all in on this firm and their guidance (he looks forward to our annual consult to hear his investments performance…no vision of it for 364 days per year, and thinks I’m a fool for handling my own portfolio.)
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    Perhaps showing some data on what 2% in fees costs him would be helpful. Maybe give hime a little chart that shows how much of his "Winnings" he gave away. Aka... 11%, instead of 13% is actually $xxx. If he likes the color graphics letter head he gets, then make your graph pretty too.

    I can't be of much help for the specific questions you asked, but thought I'd give my 2 cents anyway.

    Leave a comment:


  • Sticky situation regarding partnership Defined Benefit / Safe Harbor 401k funds

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