May 23, 2018
Design the Best Pension Strategy for Your Cash Flow: What Are the Various Expenses of a Qualified Plan?
As a practice owner, one of the major concerns when identifying the right qualified plan(s) for your circumstances will be its costs. Qualified plan expenses can be separated into three buckets: plan administration fees, advisory fees and investment fees. The plan sponsor (you, as the business owner) should evaluate these fees from a cost-benefit perspective.
In this article, I’ll look at each fee category, explain the value of the cost, and discuss the specific benefits you should look for in exchange.
Plan administration fees: These are the fees charged by the Third Party Administrator (TPA). The TPA will be responsible for running allocation scenarios, administrative paperwork and qualified plans’ federal filings. If a TPA is qualified, the administrative paperwork and federal filings are a fairly standard service whereas the allocation work done by actuaries can provide the greatest benefit to plan sponsors. Allocation studies are the process of distributing funds to plan participants and must be done in a way that passes federal discrimination tests. As the practice’s owner, you want actuaries familiar with a dental office’s unique demographics and able to maximize your allocations while controlling contributions to participants. When you design qualified plans to meet specific savings goals, the actuarial team you use is important. The ability to retain more funds as the practice owner in the profit-sharing bucket can be worth the cost of using a TPA that understands your financial plan and provides allocation results that optimize owner-to-employee allocations. These services should be included in the TPA’s annual administration fee. Plan administration fees generally range from $1,800-$3,800 annually.
The TPA also offers participant-level services. As these services create administrative work, they carry costs. Given these services are optional and specific to the participant, TPAs generally charge the individual participant requesting them. A few examples of these services are self-directed accounts, plan loans, qualified domestic relations order processing and hardship withdrawals.
TPAs also can take on the ERISA 3(16) fiduciary responsibilities from the plan sponsor.
Advisory (investment advisory) fees: The investment advisor should provide the plan sponsor (again, you, the practice’s owner) advice in building the plan, choosing a TPA and communicating across the various stakeholders, as well as present ideas on controlling costs and increasing tax savings. The advisor should provide plan participants regular investment and financial education. Of course, the advisor also should be responsive to plan participant (and plan sponsor) questions. The investment advisor is responsible for the investment options within the plan. Hopefully the advisor provides model portfolios, selects prudent fund options, and helps participants choose or design the right portfolio for their needs.
Advisory fees are generally priced as a percentage of assets under management. The fee will likely be tiered based on the size (in terms of assets) of the plan. These fees generally start in the range of 1%-1.5% for the first tier under management and decrease from there. As the plan grows, the marginal cost of the next dollar would decrease. A mature plan with, say, $2 million or more in assets generally should have a blended investment advisory fee under 1%.
Investment advisors can take on the ERISA 3(38) fiduciary liability for the plan sponsor. However, this is not universal across all advisors. Fee-only, fiduciary advisors can relieve the plan sponsor of the liability of choosing, monitoring and implementing participant portfolios.
Investment fees: These are the mutual-fund-level fees charged by the actual investment vehicles in the plan. Lower-cost funds can provide better odds of superior long-term results for participants, as fund fees are a direct cost against annual returns. There have been several advances in transparency surrounding fund-level fees, but we are not yet in a world where they are universally straightforward, easy to understand, and proactively brought to the attention of participants. Often these fees take multiple forms and can be difficult to uncover. The ultimate source of information on fees is the fund’s prospectus.
Investment fees are the result of the advisor’s investment choice, so you should be able to rely on the advisor to identify and explain these fees. Fund fees, all in, can range from less than 0.2% for index funds to more than 2% for some active funds.
Some plan designs are too good to be true, by which I mean that the best option isn’t always the lowest-cost one. Conversely, the most expensive plans aren’t always the most beneficial. What matters is finding the lowest-cost option with the right tools to create the retirement plan, or plans, needed to meet your financial goals.
This commentary originally appeared May 23 on DentalTown.com
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