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I have a financial adviser trying to sell me a 401k plan through transamerica for my 4 person small business,ideally is it better to go with plans that have higher costs/higher returns or an employee fiduciary model that has lower costs but performance not as high?

My asset allocation strategy for the ef plan would be vanguard funds using a David Swensen's lazy portfolio?

Oct 24, 2012 by Jory from West Jordan, UT in  |  Flag
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8 votes

Jory,

The decision of whether to use a 401(k) or a SEP IRA will definitely depend upon the structure of your business. If your employees have been with you longer than 3 years, then usually a Safe Harbor 401(K) will make more sense than a SEP IRA - especially if your business is profitable. The primary difference is the SEP'S requirement for you to put into your employee's account the SAME PERCENTAGE as what you put into YOURS. So, if you can put 20% of your compensation into YOUR SEP - then you must also put away 20% of your employee's compensation into THEIR SEP. That can sting - and is usually the reason business owners move from a SEP to a Safe Harbor 401(k).

Insurance-based plans are often more expensive than non-insurance based plans - as you have identified. This will affect not only the growth of the money in your employee's accounts - but yours as well. Theoretically, the cost of the plan you choose is a fiduciary responsibility. My advice ultimately would be to contact a retirement plan specialist - or a firm that specializes specifically in setting up and implementing low-cost retirement plans for small businesses. There are several such in my town (one is called Nest Eggs http://www.nesteggs.cc/). They truly specialize ONLY in retirement plans, and, as such, have a great deal more expertise in optimizing the plan and meeting all of your fiduciary responsibilities - which protects you from potential liability down the road.

If you choose the DITY (Do-It-YourSelf) route - personally, I would at least explore the Sharebuilder 401(k) that is through ING. It is not run on an insurance or annuity-based platform, and uses all ultra-low cost ETF's as the investment options. They have specialists to help you design your plan - and they charge a transparent setup and third-party administrator fee (that is deductible as a business expense) for the required Form 5500 filing with the Department of Labor that you will have to do. Their website is www.Sharebuilder401k.com.

I am NOT endorsing either NestEggs or Sharebuilder - just making you aware of them as a resource that has been helpful to our own firm and other firms we have seen set up their plans. Good luck with it; it is a significant step in creating wealth through your business.

Jon Castle http://www.WealthGuards.com

Comment   |  Flag   |  Oct 24, 2012 from Jacksonville, FL

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6 votes
Michael T. Prus Level 11

Jory,

You don't necessarily have to choose between 'low-cost/do-it-yourself' and 'high-cost/adviser involved.' My firm offers plans where we share fiduciary responsibility and I've yet to see any firm provide a more cost effective plan than us (including many that don't even offer education or fiduciary services). I'd be happy to run a proposal for you so that you can compare for yourself or to be a sounding board to help you choose. We'd love your business (obviously) but we're most interested in doing right by investors and if that means using our network to help you find an adviser locally we're happy to help in that way too.

Mike

Comment   |  Flag   |  Oct 30, 2012 from White Lake, MI

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James Holland Level 18

Jory why do you have to choose between Cost & performance? You can have both you just need to do your homework and find a team of independent un-conflicted qualified experts to help. There is nothing more important to the plan then running it in an ERISA compliant manner. Your Tax qualified status is dependent on it. ERISA clearly states if you are not a qualified expert, you need to hire one.

Comment   |  Flag   |  Oct 31, 2012 from Charlotte, NC

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George Cones, JD Level 20

Jory,

Unfortunately, the cost of investment choices do not necessarily correlate with performance. Many advisors that are long in the tooth might argue the opposite is usually true. The asset allocation often the more important factor. Depending on your assets, you may want to consider a SEP IRA, which could be less costly and more flexible for your company and allow a wider array of investment choices including ETFs. Once you grow the company, you could move to a 401(k) plan. Try to find a fee only advisor that will sign on as a fiduciary regardless of your choice. There are new plan designs that can get your internal management fees and administrative costs down significantly. Spend some time researching your options.

Comment   |  Flag   |  Oct 24, 2012 from Wilmington, DE

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4 votes
Don Level 19

Jory,

I will say this more strongly than others who are softly suggesting it: investment performance is INVERSELY correlated with fees. If you choose a high cost provider like Transamerica, you will likely experience long-term returns that are poorer than you would get with a low cost provider like Employee Fiduciary, Sharebuilder, 401kDIRECT, etc. If Transamerica or any other insurer actually offered individualized and fiduciary advice, which they don't, then I'd tell you perhaps they had a chance to make up their high fees with great advice. But they are also weak in the advice department, so don't buy into that argument should they offer it. Your best bet is to work with an RIA (if you can find one) who will help you source your plan and provide ongoing fiduciary investment advice for a reasonable, transparent fee.

I know some will feel this is a strong opinion, but I am more comfortable putting my name to it.

Best of luck to you.

1 Comment   |  Flag   |  Oct 24, 2012 from Middlebury, VT
Michael T. Prus

Jory, I second this opinion. TransAmerica is known for being one of the more expensive providers in the 401(k) space, so much so that plans with them are being singled out by some lawyers trying to make cases for excessive fees. I'm sure you can find an RIA in your area who would be able to provide fiduciary guidance for less. I'm also happy to provide a cost estimate if you'd like to get a ballpark idea of how an RIA with fiduciary coverage would compare to what TransAmerica is offering.

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Flag |  Oct 26, 2012 near White Lake, MI

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4 votes

Jory - You are definitely on the right track. As Donald said, performance and fees many times have an inverse relationship. A big driver of that are the hidden fees as they erode performance! In today's "full disclosure" environment, you should be able to find a vendor that suits your needs at a cost you can afford. I would suggest going with one of the lower cost providers and hire an adviser to assist you in getting set up. If you are happy with said adviser, keep him/her on board to advise on the plan. You will most likely end up paying the adviser's minimum fee which should be worth it to you and your employees in ensuring you have a well constructed plan that meets your needs. Take care!

2 Comments   |  Flag   |  Oct 24, 2012 from Long Beach, CA
Brian David Nolan

Jory- I agree with the aboved mentioned comments about cost, but more importantly I think you want to look into what the advisor is going to do for you and your employees. This meaning, he or she is getting paid on contributions but what are they providing to you in terms of service, fiduciary responsibility and meeting the goals, objectives, profiling and regular service on EACH individual in the plan. There are many 401K plans out there that are cost efficient, me personally have had a great relationship with John Hancock, but I think if the advisor does there job correctly with each participant individually, and I stress individually, he or she should present the best plan to meet your companies retirement needs. One of the biggest issues with selling retirement plans is the lack of continual service after the initiation of the plan. Make the advisor earn every penny they make on your plan.

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Flag |  Oct 24, 2012
Michael

Jory - I agree with both Brian and Marcus but would add one additional note of caution. Look for any conflict of interest and what that might mean for the long term service you will receive. As Brian mentioned the long term service and support you receive is very important to a successful employer plan for you and your employees. It would be worthwhile to ask yourself if the advisor you're speaking with only has one solution available and isn't working with you on anything else, is there truly going to be a motivation on his/her part to provide consistent service over the life of your plan.

Flag |  Oct 26, 2012 near Jacksonville, FL

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2 votes

Great question, but certainly difficult to answer without all the information. Assuming your Financial Advisor spent sufficient time getting to know the needs of you and your business and performed all the necessary due diligence, it would be hard not to suggest you trust his/her recommendation.

As George and Jon mentioned above, there are many options available to small businesses and it can often be an overwhelming world to navigate. If you are questioning the recommendation of your Financial Advisor, you might consider obtaining a second opinion.

2 Comments   |  Flag   |  Oct 24, 2012 from San Diego, CA
Jory

Thanks to all. I currently do have a sep ira(variable annuity) but I am in a position now that all my employees qualify so cost wise a 401k harbor makes more sense. My struggle at this point is that everything I've been reading lately stresses cost. The performance of the various funds my adviser is recommending looks good, however the plan costs do seem quite high to me. I just don't know the balance between the two. Lower cost/do-it your self options vs higher cost/adviser involved options. I've sought out multiple opinions just trying to make sense of everything that has been presented.

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Flag |  Oct 24, 2012 near West Jordan, UT
George Cones, JD

Jory, one of the issues that you will encounter with insurance and brokerage product is hidden fees, and high expense ratio funds. With insurance products it is very difficult to figure out the cost., but iIf your advisor uses an institutional version of a mutual fund, or the no-load A-share version of a mutual fund the cost is significantly less for the same investment.You pay the advisor's fee. He tries to build a portfolio that works best for you and your account. If compensation comes from commissions, then your interest may not be as well aligned.

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Flag |  Oct 24, 2012 near Wilmington, DE

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