Q: We are in the process of changing brokers. So far, we have heard from several CFPs and CFAs. By and large, they recommend staying with the 403b and switching vendors (from Great American). Only one CFP has vehemently recommended that we transition to a 401k because, among other things, the 403b is going to become "extinct" in the next few years. He says he has information from regulators that the 403b is going to be phased out and we will have to switch to a 401k anyway (he estimates by 2015). He is charging a flat percent fee of .85%, TPA inclusive. Is the 403b slated for phase-out? and Is his fee excessive? Would love some insight. thanks
The 403(b) is a tax deferred retirement plan available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code.
If the person you were talking to has any documentation concerning the demise of 403(b) plans, or is contending that your organization can set up a 401(k) plan, have them provide that to you in writing. Be sure to talk to an attorney or tax adviser before attempting to set up a 401(k).
When selecting an investment service provider, the services provider should make you aware of any potential conflicts of interest, such as revenue sharing, 12(b)(1) fees, loads, contingent deferred sales charges, etc. You should consider hiring an Registered Investment Advisor, who contractually accepts fiduciary responsibility. It is best that the Advisor or Broker signs on as a Section 3(38) fiduciary, but they should at least sign on as a Section 3(21)(A) fiduciary. In either case, your agreement should spell out with specificity what their duties and obligations are and what all the costs are.
You should also consider an unbundled solution, for your plan. That is you can hire a Third Party Administrator, custodian of the assets, record keeper, and investment advisor separately. There are advantages not being locked into a proprietary platform, in terms of cost, flexibility, and robustness.
A Registered Investment Advisor may be in a good position to help you find competent TPAs, custodians, and record keepers.
Byron you have been given some excellent guidance from the other responders here. I would ask for documentation as to the demise of the 403 b and verify that documentation. It appears the the CFP who is offering the services is a "producing" TPA from the way I read your wording he is going to provide the "investment broker/advisor" and the administrator That is a BIG RED FLAG for us. You want to keep ALL providers unbundled and conflict free when possible. As for resonableness of the 85 bps what are they offering in the way of services have they supplied a Service Agreement or Contract detailing exactly what they will do? are they assuming Fiduciary Liability in writing? Have they provided you a copy of their E&O coverage which includes ERISA coverage? Have you develop a decision Matrix to show any regulatory body who you vetted the prospective parties and why you choose them? Retirement plans are not about Investment only, lots of moving parts and compliance concerns you have to make sure you have a prudent documented process throughout.
In order to make an accurate analysis of .85% as an investment advisors fee, it would help to know the total value of assets in the plan, as well as the number of employees. With this information you can attain a real number, as to the cost of the advisors fee.
I honestly don't know about 403(b) “becoming extinct" but I'm a little confused about you "transitioning to a 401(k)." To do so your employer would have to offer a 401k, do they? How is advisor going to manage a 401(k); is he affiliated with your employer? Even if you stay with the 403(b), the new investment company and advisor needs to be approved by your employer. Perhaps they were discussing moving your 403(b) to an IRA but to do so you must have a triggering event such as leaving your present employer, being over 59 1/2 etc. Several years ago the IRS updated the regulations to make 403(b) abide by the same rules and regulations as the 401(k). The major difference being that there is actually one investment company for 401(k) plans but often many companies are offered as choices in the 403(b) marketplace. This is usually because the 403 (b) is more often a supplemental pension option with no match.
Also .85 is a very fair management fee but there are also fees charged by investment companies
. So you need to look at total fees.
My guess would be that his custodian doesn't service 403b accounts, so he is trying to talk you into something with which he can work.