Jeff worked with a personal friend (and fellow pilot) who was a local financial advisor to help establish the plan. While the advisor was a talented and experienced money manager, he did not have a background or expertise in retirement plans and had not worked on other 401(k) plans before. However, as a favor to his friend he agreed to be the advisor of record on the plan and with the help of a national, name-brand, retirement plan service provider, the Hutchens Aviation Services 401(k) Plan was born. The national, name-brand, retirement plan service provider handled the initial enrollment meetings and the plan was off to a strong start with more than 80% participation and more than $300,000 in contributions within its first year. Within several years, Hutchens Aviation Services had grown and the plan served over 40 participants. Plan contributions also increased (as did the stock market) and by the end of 2014, the plan had grown to a little over $2 million in total assets.
Nearing retirement himself, the advisor of record was now spending more time in the air than in the office. And since he had little experience with retirement plans or with enrolling or educating participants, the advisor had not visited with the employees of Hutchens Aviation Services since that initial meeting in 2011.
Jeff Hutchens received the mandatory fee disclosures from the plan recordkeeper each year and assumed someone would let him know if any action was need on his part. He was busy growing his business and trusted the “experts” to keep him out of trouble and alert him when decisions needed to be made. Over four years into the plan, no changes had ever been made to the investment lineup, fees, design, or education strategy.
Earl Smith is an accomplished RIA with an interest in expanding his book of business within the qualified retirement plan space. Earl knows that many small business owners are never educated about their fiduciary responsibilities to the plan, do not understand appropriate fee benchmarks for service providers, do not comprehend the fee disclosure materials that are provided, and do not understand enough about the retirement marketplace to know the options available to them. Earl recognizes that in many cases, there is a gap to fill in educating and serving the unique needs of Plan Sponsors. He’s excited about the prospect of building his business and partnering with service providers to create thoughtful, customized, expert solutions for his clients.
Earl Smith sent a short email about himself, his experience, and a copy of a fiduciary checklist to Jeff Hutchens with the request to meet over lunch to talk about his retirement plan and to provide a free analysis of his plan. Jeff accepted the invitation and they met for lunch. Jeff was shocked to learn of the risks, responsibilities, and even personal liability in sponsoring the Hutchens Aviation Services 401(k) Plan and asked Earl to provide a more in-depth analysis. After returning to the office, Jeff supplied Earl with the most recent fee disclosure report, a snapshot of the current investments and a copy of the adoption agreement. Earl forwarded the items to his External Sales Consultant at JULY and requested a total cost analysis of the current platform versus an open architecture platform. He requested the use of a low-cost, ETF-based lineup for comparative purposes. The JULY Sales Consultant used the fee disclosure reports to understand the current fees which were lined with asset based (wrap) fees and revenue sharing charges. The Total Cost Analysis Report was prepared to compare the comprehensive fees that were paid to the TPA, recordkeeper, and advisor under the current platform and the proposed platform. The analysis also showed a 40% cost savings within the proposed plan and a newly proposed fund lineup with significantly higher 1 year, 3 year, and 5 year historical returns than the current fund lineup.
A snapshot from the Total Cost Analysis Report is shown below:
This example shows an existing retirement plan with $2 million in assets, $350,000 in net additions, and 40 participants. The current plan is with a brand-name, national provider and the proposed solution is using open architecture with an ETF-lineup managed through a 3(38) investment fiduciary.
|$ Amount||% Assets||$ Amount||% Assets|
|Open Architecture Recordkeeping||$3,300||0.165%||$0||0.000%|
|Third Party Administration||$1,500||0.075%||$3,000||0.150%|
|Custodial / Trustee Services||$1,000||0.050%||$0||0.000%|
|Investment Contract / Wrap Fee||$0||0.000%||$4,200||0.210%|
|Investment Advisor Services||$10,000||0.500%||$10,000||0.500%|
|Gross Investment Management Expense||$3,600||0.180%||$15,800||0.790%|
|Revenue Sharing Credits||$0||0.000%||$0||0.000%|
|TOTAL FIRST YEAR COST||$19,400||0.97%||$33,000||1.65%||1.46%*|
|ESTIMATED CUMULATIVE COST|
Within three days of receiving the fee disclosure reports from Jeff, Earl scheduled a meeting to discuss the results of the analysis. The meeting began with a short discussion of Jeff’s situation and moved to the proposed solution. Earl discussed his role as the advisor to provide regular employee education and enrollment support, participate in quarterly investment committee / trustee meetings, and perform fund monitoring, selection, and due diligence. He also discussed 3(21) and 3(38) fiduciary options available to the Hutchens Aviation Services 401(k) Plan. Jeff quickly realized that his advisor had left him exposed and unaware of how a qualified plan should be properly administered and monitored. Jeff was surprised to see the total fees that he and the other plan participants were paying in the plan and the amount that could be saved without losing any significant features. During the meeting, he asked Earl to become the advisor of record for his plan and to transition his plan to the new open architecture platform.
Put a Plan into Action
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