Looking for Third Party Administrator for Personal Defined Benefit Plan

[Guest paytaxesforusa]

I am looking for a Third Party Administrator for a Personal Defined Benefit Plan (one owner-employee participant). Average fee seems to be $2000 for setup, $1500 for annual administration. Extras like distributions or loans typically carry their own fees. Providers typically ask for about a handful of parameters (basically current age, desired retirement age, current income, desired deduction), and come up with an automated written proposal, projections, etc., within seconds. Seems like a cookie cutter operation. With all due respect to the actuarial profession, and recognizing that annual actuarial valuation is needed, it would appear that with a large volume prototype plan and advancement of technology, basic economics would dictate this fee should come down to better reflect the "marginal cost of production". All calculations seem to be fully automated, and generic, based on only the few parameters mentioned above. Question: Is there any third party administrator geared towards owner-only plans that provides just that - a generic prototype document with the parameters filled in, no other marketing or sales gimmicks, preferably fully automated with little to no human interaction, at a more reasonable price?

[Bird]

We all have to be careful of discussing fees here due to concerns about price fixing/collusion. That said, you're partially right; the marginal cost of production probably isn't that high...but the fixed costs of maintaining a prototype, software, and just running a business can be high. And I definitely wouldn't call it "cookie cutter." There are all kinds of issues about accurately determining compensation, other businesses being involved, employees, etc. that can get you in deep trouble if you make things "too" automated.

You could probably find someone to do if for somewhat less. For whatever it is worth, the service might be just as good or better - while there is definitely some correlation between price and service in our industry, I've never seen how the really expensive folks do stuff any better.

[Andy the Actuary]

The poster is a breath of air. For the longest time I believe I've charged too much for my services. After all, I'm simply pushing buttons and all of my clients follow my advice explicitly. I am immediately cutting my rates by 50%. I have similar feelings about my internist who has been practicing medicine for over 40 years. Why should I have to pay for an expensive office visit for him to remove an ingrown toenail -- sounds pretty mundane to me and something she should be able to perform falling off a log backwards unless I experience anaphylactic shock from the local? I will go to the AMA website and offer up a post similar to the actuarial post just as soon as I can develop the chutzbah.

[GBurns]

Doesn't that depend on how much your internist charges relative to others for the same service, with allowance for setting and availability ?

In any case, should you be allowing an internist to remove an ingrown toenail? Should he be even offering the service?

[Andy the Actuary]

I feel blessed when I can get a timely appointment. I'd have the plumber remove my ingrown toenail but he charges too much for the house call.

[My 2 cents]

For a frame of reference, see recent thread called "Based on a Posting Under the DB Board"

[GBurns]

I would think twice about that internist who would so eagerly remove your ingrown toenail. He might just have another motive but is too shy .

[Lou S.]

The OP could just take the EA Exams and self administer the plan. Shouldn't be too hard. I mean all he has to do is take a few easy tests and then push some buttons.

[Andy the Actuary]

Lou, the late St. Louis Actuary Josh Jacobs was a highly intelligent (an attorney) who easily (no exaggeration) wrote Part 4 (Life Contingencies) about 15 times. Josh was plodding so just could not bring himself to rote memory and would have to derive formulas while taking the test so always left too many questions unanswered. All budding actuaries in the St. Louis area in the 1960-70s likely sat for Part 4 with Josh.

Josh finally got a 6 on Part 4 and perhaps was the only actuary in the history of the Society who became an ASA and FSA at the same time. Josh was finally able to push the button.

[Bird]

fwiw I don't have a problem with the question. There's knowing which button to push, and there might be a lot of people who know which button to push or even know of other buttons to push. Goods and services in our economy are exchanged at the rates which a willing buyer and a willing seller or provider agree, and generally, competition equalizes those prices.

[ETA Consulting LLC]

I'm with Bird on this one. I can also understand how Andy may be taken back by the suggestion that he should charge less for his service. I would be the first to argue that an Actuary is at the top of the food chain in our industry. There are things that require an actuary (i.e. Schedule B or SB for a DB plan) while other things may be done by any competent pension professional.

When you ask for a DB plan, you WILL NEED an actuary. With that said, your goal should be to fund your plan at a level that far exceeds what you could easily achieve through a solo(k) plan. If your goal is to fund $52,000 or less, then the solo (k) plan may be the most effective plan. However, you may wish to fund a personal retirement account with amounts exceeding $150,000 per year. In such cases, the actuary's fee is miniscule in comparison to what you are trying to achieve.

There are those cases where you may use a your Highest Three Year Compensation as a base to fund a DB plan with amounts in excess of $100,000 in a year while your Compensation during that particular year is very low (i.e. only $15,000). I'm not an actuary, so my elevator doesn't go that high on DB. My point is that in many instances the services of an actuary may be overkill when considered against your objectives.

When you lead, however, with a staunch critique of prices without a full understanding of the skills that are necessary to implement that plan, then emotions fly (not that I'm a psychologist). This is where Bird's point comes into play. It's very important to know what you are getting compared to the alternatives.

Good Luck!

[MoJo]

Pardon my jumping in, but the lawyer in me escapes and must comment occasionally.... It isn't "process" (automated or otherwise) undertaken that determines the fees charged - it's the liability for the actions taken. Management of that risk is a function of education, continuing education, experience, and competition. The services aren't a "commodity" but are professional in nature - and that means a premium for the service due to the expectations that services provided by a professional are backed by that education and experience.

Now that said, when a lawyer tries to collect a fee, clients always seem to think that if they "lose," it was because the lawyers wasn't any good, and when they "win," of course they were right and the lawyer added no value....

[Guest paytaxesforusa]

Trading a security on NYSE is a highly complex transaction, requiring sophisticated, capital intensive technology developed and maintained by highly qualified and educated technology experts, has tax implications, involves portfolio theoretic considerations that may be answered only by PhDs and other experts in the field, if at all, involves major risks, and can have significant ramifications on the financial future of the owner. And yet, a trade costs only about $1 today (about $10 10 years ago, $100 20 years ago).

My car tire is a highly engineered system, developed by sophisticated and highly educated engineers using latest technology, and it's proper functioning and installation can mean life vs. death. And yet, I can have my tire changed for about $5.

Setting up a solo DB plan requires about 5 input parameters, and can be produced with a few mouse clicks in less than a minute with all life cycle payment schedules, fully automated actuarial calculations with min/max contribution ranges, tax savings, and projections. The cost is a few thousand for that service, without any financial planning or special consultations. I personally think, with all due respect and no offense, this market is a little bit inefficient, and the skills of actuaries could be used for higher level services.

[Mike Preston]

You are, if nothing else, entertaining. There are a billion tires sold annually, there are about a billion shares traded every day. I would be very surprised if there were more than 10,000 one-participant DB plans sold in a year. Do the math and I think you'll find $4,000 is a steal!

[Guest paytaxesforusa]

You are, if nothing else, entertaining. There are a billion tires sold annually, there are about a billion shares traded every day. I would be very surprised if there were more than 10,000 one-participant DB plans sold in a year. Do the math and I think you'll find $4,000 is a steal!

Good point. Although, without the high cost, with more transparency and competition in the marketplace, and more awareness of the immense lifetime after-tax returns that retirement plans can provide, I believe the number could be many times higher. Although I still think that my observations have some merit, thanks for appreciating the entertainment value.

[Belgarath]

I can't quite make up my mind if you are for real, or one of those "trolls" who merely try to stir the pot to get people worked up.

At any rate, one does have to wonder - since you seem to know so much about it, how simple it is, the "process" - etc., etc., why don't you just do it yourself? IRS LRM language is available on their website. Draft your own document, file your own forms when necessary, calculate your own plan costs, and so on and on.

I'm not an actuary, although I have a bucketful of other designations, and I will tell you flat out that an EA's job is extremely difficult, ever-changing, and their time is indeed worth a lot more than mine. I don't begrudge that. I could have chosen to be an EA, and chose not to because it is too darned much work (for my lifestyle) to obtain and maintain EA standards and credentials.

However, since this is a free market economy, I wish you good luck in finding someone who does it RIGHT for a much lower price. You never know - there might be someone hungry enough - sometimes you get lucky. And all levity aside - just be careful - the financial consequences of incorrect plan administration can be severe.

[ESOP Guy]

A quick story that sums this question up in my mind.

Back when I first was learning this business from a guy who did mostly very small 401(k) plans-- doctor plans and such. We had a doctor that told us we weren't worth the money he was paying us. All we did was some easy allocations of earnings and a simple tax form. My boss wouldn't come down on the fee. So he fired us and he would save money by running his own 401(k) plan.

A few months later he called me up and asked me if I could send him a blank copy of the Form 5500. (This was back before you could get all the forms off the internet.) I said "no" we had special software that helped us complete the form and it printed the form. I gave him the IRS 800 number to order the forms.

A few weeks later he called up again and told me he was confused by a question on the Form 5500 and wanted to know if I could explain to him what it meant. I said "no" again. I told my boss about the conversation and he called the doctor and told him to stop calling me. It was for these very reasons he thought it was fair to charge what he charged the doctor.

All due respect to the OP but to me a good professional makes it always look easier then it is.

There are in fact costs to having specialized software AND the knowledge to use it. The question seem to think all you need is the software. I believe the business version of Turbo Tax has the 5500 on it doesn't mean every small business owner could or should do their own 5500. That first firm I worked for did both DC and DB plans. And yes they could give me data to process it through the software on a plug and chug basis. But I really don't think I could have done what I was doing and given meaningful results if the actuary wasn't guiding me and taking my results interpreting them for the client.

[Lou S.]

fwiw I don't have a problem with the question.

It is not the question that is the problem with the OP. It is the condescending way in which he asks it.

[My 2 cents]

Try to think of it this way: Suppose we are talking about a doctor's practice. The doctor has to take in enough to cover outstanding medical school and college loans, maintenance of an office (brick and mortar, presumably with parking available), with staff to handle patient interactions and appointment scheduling and to handle all the billing paperwork, large malpractice premiums, medical equipment and tests etc. with enough left over to make a reasonably decent living. When was the last time you got (for example) to pay $5 to have your blood pressure checked, because, truth to tell, the marginal cost of taking someone's blood pressure is low?

Remember, this is about setting up a new defined benefit plan. [Why does the original post even talk about loans? Loans have no legitimate place in defined benefit plans.] And don't things get real hard real fast if the owner-employee hires any non-owner employees without providing them suitable benefits? One presumes that if cost is a consideration, the defined benefit plan will be one that meets all of the IRC Section 401(a) safe-harbor rules (none of that new comparability stuff!). That non-discrimination testing makes the costs for a plan document look cheap.

[Andy the Actuary]

Lou, thank you!

[Guest paytaxesforusa]

fwiw I don't have a problem with the question.

It is not the question that is the problem with the OP. It is the condescending way in which he asks it.

I don't see what's condescending in the original question, and sorry if it came across that way - it wasn't meant that way, and I reiterated several times in this thread my appreciation for the actuarial profession in general. My observation was based on real inquiries with benefits consulting firms across the country that advertise "solo DB plans" to small business owners. In many cases, a sales rep clicks a button producing the "numbers" showing first year contribution and first year tax savings, and I can assure, has no clue how those numbers come about, let alone the fact that the first year tax savings is arguably a rather unimportant number, where the more important number would be the lifetime after-tax results after the taxable distribution at retirement, which have little to do with the first-year tax deduction. With many providers, you can be happy to get to see the projected level contribution amounts; some sales reps cannot even produce those upon request, as their sales/actuarial software seems to only spit out the first year "front-loaded" max contribution (based on past service years) to impress the prospective clients with the largest first-year deduction, which every half way intelligent person can figure is never sustainable in the following years to hit the max projected accumulation at retirement age given the 415 limitations. Then there are the 412i (now 412(e)(3)) insurance folks with their glossy brochures showing the extremely high deductions, without mentioning that those high deductions are correlated to the low returns of their fee laden products that they shove down your throat (this is not to say that this product might not be useful in some very specific cases). Having that said, I also know that some benefit consultants provide very good value that's worth every penny, and I strongly believe that those taking the time to read this message board largely belong to this group.

[shERPA]

Economic theory suggests that high prices and large profit margins will induce new suppliers to enter the market, and as supply increases prices will decline.

Clearly the OP has money to invest, otherwise he would not be looking to establish a defined benefit plan. In light of such high fees for low-cost work, he should be looking to purchase or start an actuarial and administration firm. I'm sure he could find a few willing sellers among the members of this board. I would think a business that can charge $1,500 for a service performed "with a few mouse clicks in less than a minute" should be worth something like 10 to 15 times annual revenue, right?

[Andy the Actuary]

Economic theory suggests that high prices and large profit margins will induce new suppliers to enter the market, and as supply increases prices will decline.

Andy T. A.'s law: When you're the last blacksmith in town, you are no longer in a competitive market. What about those actuaries who still use DOS systems. How do they make their calculations when their PC has no mouse?

[ETA Consulting LLC]

I think the OP has made some valid observations with respect to the high prices being charged under the auspices of complex work. I have witnessed this first-hand when working for several TPAs during my career. I also enjoy reading Ary Rosenbaum's write-ups on LinkedIn speaking about the same issues (don't know him personally, but in case anyone has read his blogs).

While I've witnessed this at TPAs, I've never witnessed it from an Actuary; as the services of an actuary aren't merely recommended, but required, in DB plans.

With that said, it becomes easy to associate one system to with another that is entirely different. I can see how someone could be led to think that an actuary isn't required to think as long as the actuary has a computer software package to do the work. BUT, you'd never hear me come close to saying that. I'm surprised there are still actuaries left after changes made to DB plan under PPA; These changes were complex. So, my hats off to actuaries.

But, we have consistently stated on this forum and others about some of these same issues with TPAs, and large vendors acting as TPAs. There is a difference between 1) 20 years of experience and 2) one year of experience 20 times. That difference is depth; actually making a choice to learn beyond pushing the same button for 20 years.

I think paytaxesforusa has made it clear that he/she believes members of this board have actually taken the time to learn their craft. That works for me. So, I never associated myself with the "arguably" condescending remarks in the initial post.

I can see how an actuary me be rubbed the wrong way, but could also see how that feeling should be quickly dismissed after the explanation of things we've all witnessed. So, let's try to sort through the vitriol and find the substance of the argument without questioning motives :-)

Good Luck!

[Andy the Actuary]

Last post before retiring to my banana tree, where I will do whatever I see.:

I've taken over tons of poor work that came off of some technically deficient valuation system prepared by an actuary who didn't exercise much care.. Sometimes, you can't even tell from the actuarial report what plan is being valued, the actuarial assumptions, or whether the data is reasonable.

Who is the Ayatollah that determines whether or not an actuary's fees are high?