Financial advisor who wants to do good

[Santo Gold]

Any thoughts or ideas on this situation are appreciated:

Most self-directed 401(k)s and PS that we work are run through a fund or multi-fund family, with all the bells and whistles of web-access, unlimited trades at little to no cost, (within the same family), etc. I am working with a new financial guy who seems to have a problem that no one else does. It appears that he wants to/must use brokerage accounts for the 401(k) prospect. However, with all trades will cost approximately $15-$20 to execute. So, for 10 participants, who have 401(k) money deposited each month, into on average 4 funds each, there would be $1,200 - $1,600 in fees that he would have to pay each month to accomplish all of this. Obviously that is not workable. When I asked about using the more common approach above (big daily val system), he claims that the employer actually ends up paying more in fees using that approach and he wants to avoid doing that.

Its really not my problem to solve, but I just wanted to understand this dilemna a little better, as no one seems to have run into this before. Even the few other clients that we have that use brokerage accounts have never mentioned this problem before.

One solution would be to no permit self-direction, which would allow the trustee to control things and that would reduce the number of trades. But in allowing self-direction, the trustee is obligated to have the partiicpant's money invested "within a reasonable time period". Could the advisor impose a minimum deposit threshold for the funds, say $1,000? No investments into this fund until there is at least $1,000 to invest into it? Doesn't that violate a BRF if the HCEs are reaching that threshold sooner than the others?

Thanks for any comments.

[Belgarath]

If I'm reading your post correctly, the client would be paying annual fees of between 14,400 and 19,200 for depositing the deferrals for a 10 person 401(k) plan.

If that's the case, and this financial "advisor" asserts that it is more expensive to do it using a (normal?) daily valuation/investment system, I'd assert that he's either looking at different plans than I see, or he's using a particularly high grade of hallucinogenic substances.

Maybe I just see better plans than he does. Or I'm misunderstanding your post.

[Guest BXO]

The dilemma may be that he does not have a competitively-priced product to offer. If he says that the typical way of doing things is more expensive, an apples-to-apples comparison is in order. The link below is to the DOLs fee disclosure template.

http://dol.gov/ebsa/pdf/401kfefm.pdf

[Santo Gold]

If I'm reading your post correctly, the client would be paying annual fees of between 14,400 and 19,200 for depositing the deferrals for a 10 person 401(k) plan.

If that's the case, and this financial "advisor" asserts that it is more expensive to do it using a (normal?) daily valuation/investment system, I'd assert that he's either looking at different plans than I see, or he's using a particularly high grade of hallucinogenic substances.

Maybe I just see better plans than he does. Or I'm misunderstanding your post.

I wasn't clear in my post; its is the financial advisor and their firm who are paying the costs of executing the trades, and $14,000 - $19,000 estimated transaction fees would be absorbed/paid by their office, not by the plan sponsor. He is seeing only 2 options - either this approach where the financial firm pays all of these extra fees, or the common approach (which I will call Daily Val) without the transaction fees. It is this latter approach which he claims is more expensive for the sponsor and he does not want to use. In other words: Brokerage accounts = lower sponsor fees, but sky high fees paid by the financial firm VS. Daily Val = higher sponsor fees but no fees paid by financial firm.

Do these options sound correct and something that most financial pro's confront with most plans, with 99% opting for the daily val approach?

My impression is that he wants to stand out from the crowd and show the plan sponsor how his fees will be so much lower than that of "the other guys", who lock you into higher fees by using this daily val arrangement. So he hooks them with that promise, but then wants to limit the number of buys/sells so as to no get killed on transaction fees.

[four01kman]

The financial advisor in questions obviously is not truly conversant in the field. First, the numbers don't make sense (10 people times 4 funds times $20 equals $800. Second, there is an easy alternative: have a master account that does all the trades (4 times $20 equals $80) and then transfer the appropriate number of shares to each participant (hopefully, at not cost -- at least it doesn't cost anything with my b-d). Of course, my clients are fee-based, and don't generally pay transactions costs (because they have funds that don't have require transaction cost).

If you have a good relationship with the client, I would strongly suggest they reconfigure the investment options or absent that, reconfigure the adviser.

[Archimage]

There are daily platforms that use only funds that pay very high expense ratios, sub-TAs and commissions to compensate the broker/advisor and the TPA. There are others that use funds that use very low expense ratios. It all depends on what funds he uses and whose platform you are using. What he is saying makes no sense (at least to me).

[Bird]

It's just a bad fit - he only has square pegs for a round hole. I do have some small plans with self-directed brokerage accounts, and they can work OK, but it's not my preference. And with those trading fees it sounds (nearly) impossible to make it work. But if he's bound and determined to do it that way, he might just hold the deposits in the cash account until it's worthwhile to make purchases, or maybe instead of splitting each deposit 4 ways, buy fund A one month, fund B the next, etc. But then I'd want the participant investment elections to say "deposit my money in the cash account and I'll give further instructions" (and then have them give further instructions as outline above) instead of "25% fund A, 25% fund B..." At the end of the day it's a really awful way to run a plan, and your admin fees should accordingly be much higher, so the whole thing collapses of its own weight. I'd tell him it's simply not an option.

[leevena]

I have another thought on this. Could there be a selfish reason why he/she would want to do this? Aside from all of the prior discussion about the true costs of doing this, why would he/she offer to cover the costs? Does he/she gain in any way from structuring the plan in this manner? I don't mean to offend this person, but it does sound a little strange. As a client, I would immediatly think that something is not right.

[Santo Gold]

Having 1 master brokerage accounts instead of individual FBOs is an option. But even with that, the cost to the financial advisor is still significant. Even limiting trades to once a month, you'd still have money deposited from Money market to the 4 funds each month ($80) times 12 months, for $960 annual fee that the advisor will cover. This is a small plan, less than $200,000 in assets so he can't be making that much extra to absorb something like this, at a minimum, every year.

And thats not mentioning if someone wants to move their existing money around, which could also happen.

Holding the trades and moving money quarterly would probably work fee-wise, but with self-directed accounts, it would be disingenious to tell participants that they have 100% self-direction for their 401(k) money, and then leave some of it sitting in a money market for up to 3 months not invested where they want it. I think that is asking for trouble.

Can we get creative with the document and say something like participants having partial self-direction, with a limit of "X" number of times each year they can move money, and current 401(k) money will only be invested on a quarterly basis? That would blow 404© to pieces, but is it still allowable?

His motives, I think are what I indicated: That he can offer the lowest fee to the sponsor using this approach and wants hang his hat on that, with everything else falling into place after that.

[Guest Pensions in Paradise]

IMHO, if the client insists on using this broker it might be time for you to resign. The whole thing smells bad.

[E as in ERISA]

What is questionable is his suggestion that there are only those TWO methods and nothing else (1) individual brokerage accounts for each participant with transactions for each trade and (2) plan with no individual brokerage accounts - investment in mutual funds - with daily valuation by recordkeeper and IVR. There are many small plans run using individual brokerage accounts to give "daily valuation" to participants with recordkeeper doing a report at the quarter or year end. I'm not familiar with all the fee arrangements. But I'm pretty sure that most don't have transaction fees. The size of the plan may be an issue here and limit options. But I'd still check other service providers.

[Bird]

Now it makes a little more sense - the broker is picking up the ticket charges, so those are not sponsor or participant fees. I still think it doesn't work - inevitably, he's going to want to discourage trades that cost him more than the commissions, and it's not a good situation, especially when there are so many other options that work so much better.