Longboat Retirement Solutions LLC

Your 401k Stinks April 5, 2016

 

Why Asset Allocation Doesn’t Matter In The Long Run June 27, 2015

 

Part Three: Self Directed Retirement Questions May 19, 2015

This is the third installment in the Self Directed Retirement Questions, Answered.

These are questions I’ve been asked, my answers to those questions, and some commentary.

Question:  What is the difference between a Self Directed IRA and a Solo 401k?

Answer:  A Self Directed IRA requires a Custodian.  Custodians are generally banks and investment houses.  These Custodians charge fees to baby sit your money and tell you where you can and cannot invest your savings.  An SDIRA is far better than a standard IRA, but it can still have high management fees, hoops to jump through, and limitations in what you can invest in.

A Solo 401k, which is designed for the self employed, enables you to invest in anything that the IRS allows.  You become the Custodian; therefore you don’t have any filters on your investments (within the framework of the IRS’s allowed investments).  You basically don’t have to ask permission to use your own savings as you see fit.  Since it is a 401k, you can also borrow up to 50% of the value, up to $50,000.  And again, you don’t have to ask permission or fill out piles of paperwork to take out a loan.  You draw up the terms, put the terms in your safe, write a check from your 401k to you, and then just make the monthly payments to your 401k.  Because you are making payments to your 401k, the interest is essentially free – you are paying yourself!  A Solo 401k also enables you to contribute as the employee and the employer; in other words you can contribute over $50,000 a year to your retirement account – or over $100,000 if your spouse is a partner in the business.  This is a BIG deal.

My thoughts on the two different approaches boils down to this:

If you can, go with the Solo 401k.

 

Why 401(k) Fee Disclosures May Fall Short November 17, 2012

Filed under: Corporate Malfeasance,Economics,Uncategorized — larsfforsberg @ 10:58 pm
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BY:  Anthony Kippins

Nov. 8, 2012

 

Quarterly 401(k) statements have always been vague at best regarding the fees that are being deducted from your accounts.

New federal rules concerning these fee disclosures were supposed to change all this, creating new clarity so that employees could easily see just how much they’re paying to whom for what.

But, as is often the case with new regulations, the federal rules aren’t having the intended effect — at least not yet. Instead, the large companies that provide these plans are testing the regulatory waters by disclosing fees in account statements in less-than-transparent ways, making it extremely difficult for employees to figure them out.

Doubtless, the issue of whether many plan providers’ statement modifications comply with new rules of the U.S. Department of Labor (DOL) will be the subject of extensive back-and-forth between the lawyers for the government and those for plan providers, who will argue that their companies are complying with the letter of the law (if not its spirit).

In the meantime, the tens of millions of employees in these plans still owe it to themselves and their families to get a grip on fees. Because plan providers have made this tough, with some of them gaming the new disclosure rules, most employees should ask their employers about it.

Does your plan have an independent advisor who can sit down with you and look at your fall account statement? If so, take advantage of his or her services to get a handle on your fees. If your plan doesn’t have an independent advisor, why not? After all, employee education and assistance is an important part of your employer’s responsibilities concerning these plans. This should also be a matter of concern to your HR department because the DOL requires companies to assure that fees are reasonable for the services being provided.

If all this seems like a lot of trouble, sit back and recall the last time you went to four different tire dealers to get the best price. Now ask yourself: Have you been opening and reading your 401(k) statements? This would be a good time to start. Paying higher-than-necessary fees can scramble your retirement nest egg and cut deeply into the resources you’ll need during retirement.

Fees aren’t the only significant factor determining how much you’re able to invest for retirement. Most 401(k) plans are underfunded, meaning that the holders don’t accumulate enough money to retire with dignity. Of course, not everyone makes enough to assure this. But many people could be contributing to their plans out of each paycheck by spending less on unnecessary items.

Some 401(k) holders aren’t taking full advantage of their employers’ matches to their contributions, so they’re leaving free money on the table. Again, it’s difficult for many to contribute enough because of the way their current, legitimate expenses stack up against their incomes. The point is to do the best you can to get the best possible retirement finance outcome for your individual situation.

In addition to fees coming out of your account, be sure to ask your plan’s advisor about the rationale for how the money in your account is being invested. This is a complex process foreign to many people who aren’t trained in financial matters, including many college graduates.

Arranging the right mix of investments in the right amount and adjusting for your personal risk tolerance requires basic knowledge of modern portfolio theory — a set of market maxims and principles that must be carefully applied. And to get the best results, the investments that you buy as a result must be carefully monitored and tweaked, or fundamentally shifted, as you go along.

Ask the advisor about the calculation for your retirement resources. Basically, here’s how that works: If you invest x amount a year for x number of years and receive an average return of x and inflation is x, then as of x date you’ll likely have about x dollars a year that you can take out of your investment accounts.

How much money you’ll have and need henceforth depends on a number of market and personal factors, including how long you’ll live. Look at your current plan contributions to see whether you’re on track. Chances are, you’re not. This calculation is no easy business, but with the right advice, you can make a stab at it.

If HR says your company doesn’t provide plan education and advice, ask them to check and see whether they’re paying for it. Ask them to check the documentation that all service providers are supposed to have filed with plan sponsors last spring, called a covered service agreement. In it, these service providers must state what they’re doing for plans and how much they’re charging for each service.

If your plan is paying for these services but not getting them, it may be time to change service providers. By working with your employer to get better advice, you and your fellow employees can get more out of your plan for the long haul and assure a better-funded retirement.

 

The Big Loophole in the DOL Fee Disclosure Regulations October 28, 2012

BY: Chris Tobe, CFA October 26, 2012

 

401k fee disclosure has a big loophole in one of the largest asset classes. Stable value, or

guaranteed funds, typically constitute 10-40% of assets in most 401(k) plans and have varied

and complex structures which complicate fee disclosure. Billions of dollars in what I call spread

based fees remain undisclosed under the new DOL fee disclosure rules.

 

Last month I saw my wife’s statement from Lincoln. It showed the stable value or fixed

product with 0% in fees, when I know they may make as much as 2% or 200 basis points (bps)

in spread profits based on my nearly 7 years experience as an officer of insurance companies. I

was recently quoted in the Wall Street Journal’s Marketwatch “These excessive profits, even if

called spread, act like fees and are used like fees,”

 

Insurance companies are manipulating loopholes for excessive profits. While they may

disclose some fees, it may only tell 25% of the story as they make the majority of their profit on

the spread. Even if the DOL continues to ignore this loophole I believe their hidden spread

fees will probably put them in danger of class action lawsuits. In addition they continue to pay

commissions out of the hidden spread which drive even more sales.

 

Currently if the insurance lobby gets their way these higher risk and higher fee bundled

products will appear to have lower fees (and higher returns) compared to a diversified

low risk low fee product, like the Vanguard Stable Value collective trust. In this scenario

an advisor with an insurance license can get a kickback in commissions for a product he can

show is DOL approved with higher yields and no fees.

 

Loophole

We need to look more closely at the loophole that the insurance companies are using. “ The

preamble to the participant-level disclosure regulation provides that designated investment

alternatives with fixed returns are those that provide a fixed or stated rate of return to the

participant, for a stated duration, and with respect to which investment risks are borne by an

entity other than the participant (e.g., insurance company). 75 FR 64910”.

 

I believe insurance companies are twisting and manipulating this rule.

I believe that the intent is to exempt a traditional GIC which functions like a bank CD, 3% rate

for 3 years that is sold in a competitive bidding environment. For example Vanguard in their

stable value plan has had a 20% allocation to a diversified basket of traditional GIC’s. When

they purchase a GIC which is never over 5% of their total holding they go to 5 or more insurance companies and get bids to get the highest rate for a GIC of say 3 years. This process

eliminates the excessive fees and the diversification eliminates excessive risk. Vanguard

discloses a management fee, but does not add any additional fees for the internal spread of insurance company.

 

Insurance company General Account products are usually part of a bundled arrangement.

There is no competitive bidding so they essentially set their own rates and their own profits

without any disclosure. Historically they have been allowed to vary their rates at the will of

the insurance company depending on their thirst for profit. However, I think in their attempt to

manipulate this loophole they will try to keep rates more constant to appear to fit the exemption

which states fixed or stated rate of return. The other qualification for the exemption is a

stated maturity or duration, and none of the insurance products I have seen do this and should

be eliminated from exemption based on that alone.

 

The insurance industry and its lobbyists have this spin on the loophole. “For general account

products or fixed income products, the Department of Labor (DOL) acknowledges that for a

product with a stated rate of return and term, it is not pertinent to have some type of expense

ratio related because the real driver of income is the rate being offered” I have never heard

this directly from the DOL, but neither have I heard them deny it. Again I think this applies to

diversified product in a competitive bidding situation, not in a captive bundled product.

 

Analysis

One of the reasons this loophole exists is because the vast majority of the largest plans

abandoned insurance products for their liability, risks and excessive hidden fees 10 to 20 years

ago. To understand this I think it is helpful to split the $4.5 trillion 401(k) market.

The top $3 trillion (68% of assets) is large fortune 500 type plans account for only 1% of the

plans and for the most part do not use single entity general account products iv However the

bottom $1.5 trillion is spread over 650,000 plans (99%) ranging from small Dr’s offices to midsize

manufacturers. The battleground for fee disclosure will be in bundled insurance company

products in small to midsized plans.

 

The financial crisis allowed some room for growth of these products to some larger firms as

reported in the Wall Street Journal in May 2010. Amid the shortage of wrap insurance, though,

some firms are seizing an opportunity to reintroduce older types of stable-value products that

are backed by a single insurer and carry considerable risks. OneAmerica Financial Partners

Inc.’s American United Life Insurance Co., for example, last month launched a stable-value

product backed by its own general-account assets. In such products, investors are taking on the

risk that this single issuer could go belly up.

 

In 2008 Federal Reserve Chairman Ben Bernanke said that “workers whose 401(k) plans had

purchased $40 billion of insurance from AIG against the risk that their stable-value funds

would decline in value would have seen that insurance disappear.” 

 

Many investment professionals believe that a plan sponsor is taking a severe fiduciary risk by having a single contract with any one entity such as AIG. The only counter to this relies on assuming that the

single insurance company backing the stable value option is too big to fail and has an implied government guarantee which is problematic on its face.

 

The National Association of Government Defined Contribution Administrators,

Inc. (NAGDCA) in September 2010 created a brochure with this characterization of general

account stable value that got beyond the high risks and right to fee disclosure. “Due to the fact

that the plan sponsor does not own the underlying investments, the portfolio holdings,

performance, risk, and management fees are generally not disclosed. This limits the ability of

plan sponsors to compare returns with other SVFs [stable-value funds]. It also makes it nearly

impossible for plan sponsors to know the fees (which can be increased without disclosure) paid

by participants in these funds—a critical component of a fiduciary’s responsibility. It is hard

to comprehend why the DOL lets these products escape disclosure.

 

Conclusion

1. High hidden stable-value spread fees are subsidizing administrative costs.

Revenue from general and separate account stable value options have typically

subsidized administration costs, making some participants pay higher

administration costs than those in mutual funds, and making products appear

competitive in requests for proposal that look at per head administrative costs.

 

2. Fees and commissions are not being fully disclosed. Insurance companies are

still fighting not to disclose any spread profits. These excessive profits, even if called spread,

act like fees and are used like fees. Commission kickbacks to consultants with insurance

licenses are common in plans with general and separate account stable value.

 

3. The structure creates a higher level of fiduciary duty for vendors and risks for plans. Since

general and separate account stable-value assets are on the balance sheet of the insurance

company, this creates an inherent conflict between the fiduciary care of pension investors and

company shareholders. If the firm needed more income they could get it by lowering rates paid

to plans since they are in captive non-bid bundled arrangements.

 

Most stable value products (IPG) provided in bundled insurance company products do not fit

this exemption in my opinion since its fixed rate is variable and the duration is variable. If the

DOL continues to listen to the insurance lobby higher risk and higher fee bundled products will

appear to have lower fees (and higher returns) compared to a diversified low risk low fee product like the Vanguard Stable Value collective trust.

 

Reduce Fees, Create Cash Flow October 23, 2012

Filed under: Real Estate Investing,Uncategorized — larsfforsberg @ 3:14 am
Tags: , , , ,

Self directed IRAs and Solo 401k’s can own real estate.

The fact that real estate prices throughout the U.S. have declined has self directed retirement account holders looking for undervalued properties that have the potential to generate cash flow. Cash flow real estate can be a valuable addition to your retirement account. You can’t get cash flow out of your stock portfolio, gold investments, CDs or tax liens.

Why do self directed IRA custodians and self directed IRA administrators charge such high transaction fees and annual valuation fees?  Why is a Solo 401k, if you qualify, a superior retirement account than a self directed IRA?

Large institutional IRA custodians like Merrill Lynch or Fidelity have minimal fees and offer correspondingly minimal choices.  The use of a TRULY self directed IRA or a Solo 401k will broaden your choices greatly.

Firms like Equity Trust Company and Entrust Administration specialize in the administration of self directed retirement accounts, but have fees that can add up quickly and demoralize your enthusiasm for self directed investing. These companies’ hit you with transaction fees, wire fees, cashier’s check fees, and same day service fees and annual valuation fees.

  • Would you like to avoid all of these transaction fees?
  • Would you like total control of your retirement account checkbook?
  • Would you like to avoid the cost of the IRA LLC structure, and its annual fees?
  • Would you like to avoid UDFI (unrelated debt financed income) when using leverage in your  retirement account?
  • Would you like to be able to personally borrow up to $50,000 from your retirement account with low interest and without a penalty?
  • Would you like to contribute up to $49,000 individually or $98,000 if married into your retirement account?

A Solo 401k may be the best choice for you….again, assuming you qualify, or can become qualified (self employed, with no employees). Can you produce self employment income?  Have you ever considered going on your own?  Ever dreamed of being your own boss?

You can retain your current employment, while moonlighting with your new business that allows you to create income and contribute to your Solo 401k.

 

401k Hidden Fees? September 12, 2012

Filed under: Corporate Malfeasance,Economics — larsfforsberg @ 2:37 pm
Tags: , , ,