Employer to only match while using financial advisor/firm

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Topgun514
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Employer to only match while using financial advisor/firm

Post by Topgun514 »

Good morning Bogleheads, I’ve been reading the forums for quite a while and been introduced by my brother, an avid saver and mentor. I’ve read a few Bill Bernstein books and consider myself an intro level student! I know enough to set it and forget it but have the luxury of using a TSP for work related match and savings.

My fiancé appears to be in a different scenario and this is where my question starts. Her employer appears to only allow for a 3% match for a simple IRA with the use of a financial advisor/firm (t Rowe price, Edward Jones, etc). We spoke with the advisor yesterday who mentioned the fee structure and we’re both fairly shocked at how high it is especially when she will likely use either a retirement date fund or a percentage mix of the 3 mains: SP500, International, bonds (60, 25, 15).

Our question is threefold. Should we pay into the front load fee structure of about 5.75% per deposit, pay ~2% per year on the account total, or lose out on the match and invest herself in a fidelity or vanguard account seeing as there are likely other fees included?

My gut says to choose the front load fee option into whichever fund that can match her goals. Seeing as, using this example, that if she put in $100 per pay period, the match would be an additional $30. The 5.75 % would bring the total to about $122 So she still is receiving matched monies. But I’m posting here to make sure this passes the sniff test because there is a break even point where her match actually disappears. For the other alternative: Within a few years my thought is that if she has $100,000 in her portfolio that the other scenario is that they take ~$2000 a year instead!

Thank you all!
Last edited by Topgun514 on Sat Jul 24, 2021 11:11 am, edited 3 times in total.
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retired@50
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Re: Employer to only match while using financial advisor

Post by retired@50 »

Topgun514 wrote: Sat Jul 24, 2021 8:35 am Good morning Bogleheads, I’ve been reading the forums for quite a while and been introduced by my brother, an avid saver and mentor. I’ve read a few Bill Bernstein books and consider myself an intro level student! I know enough to set it and forget it but have the luxury of using a TSP for work related match and savings.

My fiancé appears to be in a different scenario and this is where my question starts. Her employer appears to only allow for a 3% match with the use of a financial advisor. We spoke with the advisor yesterday who mentioned the fee structure and we’re both fairly shocked at how high it is especially when she will likely use either a retirement date fund or a percentage mix of the 3 mains: SP500, International, bonds (60, 25, 15).

Our question is threefold. Should we pay into the front load fee structure of about 5.75% per deposit, pay ~2% per year on the account total, or lose out on the match and invest herself in a fidelity or vanguard account seeing as there are likely other fees included?

My gut says to choose the front load fee option into whichever fund that can match her goals. Seeing as, using this example, that if she put in $100 per pay period, the match would be an additional $30. The 5.75 % would bring the total to about $122 So she still is receiving matched monies. But I’m posting here to make sure this passes the sniff test because there is a break even point where her match actually disappears. For the other alternative: Within a few years my thought is that if she has $100,000 in her portfolio that the other scenario is that they take ~$2000 a year instead!

Thank you all!
Welcome to the forum. :happy

I think you've over-stated the dollar amount in your example, by a factor of 10. 3% of $100 is $3, not $30.

I would completely avoid this arrangement as it's nearly certain to be a money loser for your fiance.

If you want more considered responses, please edit your post to include all the available funds in her plan, along with expense ratios and other plan expenses. The forum will help you analyze the situation.

ETA: OP clarified the match down-thread using a better example (3% of annual salary).

Regards,
Last edited by retired@50 on Sat Jul 24, 2021 10:15 am, edited 2 times in total.
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MishkaWorries
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Re: Employer to only match while using financial advisor

Post by MishkaWorries »

I don't see how getting 3% match per year would justify 5.75% plus 2% fees per year in expenses. You'd lose 4.75% a year.
We plan. G-d laughs.
student
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Re: Employer to only match while using financial advisor

Post by student »

retired@50 wrote: Sat Jul 24, 2021 9:27 am Welcome to the forum. :happy

I think you've over-stated the dollar amount in your example, by a factor of 10. 3% of $100 is $3, not $30.

I would completely avoid this arrangement as it's nearly certain to be a money loser for your fiance.

If you want more considered responses, please edit your post to include all the available funds in her plan, along with expense ratios and other plan expenses. The forum will help you analyze the situation.

Regards,
I am under the impression that 3% match means the employer matches dollar for dollar up to 3% of the salary. So if one contributes 10% of the salary to get the 3% match, then the $100 + $30 is in the correct magnitude. I also agree that OP needs to give more details.
exodusNH
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Re: Employer to only match while using financial advisor

Post by exodusNH »

retired@50 wrote: Sat Jul 24, 2021 9:27 am
Topgun514 wrote: Sat Jul 24, 2021 8:35 am Good morning Bogleheads, I’ve been reading the forums for quite a while and been introduced by my brother, an avid saver and mentor. I’ve read a few Bill Bernstein books and consider myself an intro level student! I know enough to set it and forget it but have the luxury of using a TSP for work related match and savings.

My fiancé appears to be in a different scenario and this is where my question starts. Her employer appears to only allow for a 3% match with the use of a financial advisor. We spoke with the advisor yesterday who mentioned the fee structure and we’re both fairly shocked at how high it is especially when she will likely use either a retirement date fund or a percentage mix of the 3 mains: SP500, International, bonds (60, 25, 15).

Our question is threefold. Should we pay into the front load fee structure of about 5.75% per deposit, pay ~2% per year on the account total, or lose out on the match and invest herself in a fidelity or vanguard account seeing as there are likely other fees included?

My gut says to choose the front load fee option into whichever fund that can match her goals. Seeing as, using this example, that if she put in $100 per pay period, the match would be an additional $30. The 5.75 % would bring the total to about $122 So she still is receiving matched monies. But I’m posting here to make sure this passes the sniff test because there is a break even point where her match actually disappears. For the other alternative: Within a few years my thought is that if she has $100,000 in her portfolio that the other scenario is that they take ~$2000 a year instead!

Thank you all!
Welcome to the forum. :happy

I think you've over-stated the dollar amount in your example, by a factor of 10. 3% of $100 is $3, not $30.

I would completely avoid this arrangement as it's nearly certain to be a money loser for your fiance.

If you want more considered responses, please edit your post to include all the available funds in her plan, along with expense ratios and other plan expenses. The forum will help you analyze the situation.

Regards,
I think the 3% match means 3% of her salary, not 3% of her contributions.

So, it's actually 1:1 (a 100% match) for the first 3% of her salary. Just to make the numbers easy, if she earns 10,000/yr and puts in 3%, that's $300/yr. Her employer would also put in $300/yr. But if she puts in 15%, for $1,500, her employer would still only put in $300.

It probably makes sense to contribute enough to get the full match. It's free money. Your girlfriend won't work there forever. She'll be able to roll her 401k into either her own IRA or her new employer's 401k.

There's a wiki article on crappy fund selection and how to make the best of what you have.
Humility101
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Re: Employer to only match while using financial advisor

Post by Humility101 »

This screams conflict of interest...why would an employer require a financial advisor unless they had perverse incentives? The employer would otherwise have no incentive to decide what you do with your money or a contribution by the employer as part of a benefits package.
exodusNH
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Re: Employer to only match while using financial advisor

Post by exodusNH »

MishkaWorries wrote: Sat Jul 24, 2021 9:31 am I don't see how getting 3% match per year would justify 5.75% plus 2% fees per year in expenses. You'd lose 4.75% a year.
3% of salary, not 3% of funds.
nolesrule
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Re: Employer to only match while using financial advisor

Post by nolesrule »

What type of retirement plan is this?

This smells of kickbacks.
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Topgun514
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Re: Employer to only match while using financial advisor

Post by Topgun514 »

My apologies, the example I used wasn’t the greatest and I should have been more explicit.

Her 3% match is based off of her salary, so if she puts in 8% and gets a 3% match based off of 50k salary.

8% is $4000 per year her contribution and 3% match would be $1500. 5500 x 0.0575=316.25 per year that goes to the advisor. So her match would be providing about $1200 in additional money from her employer. Unless I’m still off base here.

This is a for a new job so she is not invested in any particular account at this point. And by advisor I mean a firm, like a Morgan Stanley, T Rowe Price, or Edward Jones.
Last edited by Topgun514 on Sat Jul 24, 2021 9:57 am, edited 1 time in total.
2pedals
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Re: Employer to only match while using financial advisor

Post by 2pedals »

I find it hard to believe that the employer will only match through the use of a financial advisor. The employee-to-company match relationship is usually independent of the use of a financial advisor. I would thoroughly read the plan details and verify.
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retiredjg
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Re: Employer to only match while using financial advisor

Post by retiredjg »

Welcome to the forum. :happy

I think we need to know what kind of plan this is. It sounds like it might be a SIMPLE IRA at a place like Edward Jones. Depending on what type of SIMPLE IRA it is (5304 or 5305) there can be work arounds.
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retiredjg
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Re: Employer to only match while using financial advisor

Post by retiredjg »

MishkaWorries wrote: Sat Jul 24, 2021 9:31 am I don't see how getting 3% match per year would justify 5.75% plus 2% fees per year in expenses. You'd lose 4.75% a year.
I don't think the math works like that. The 3% is likely 3% of the salary. The 5.75% and 2% refer to the amounts contributed and the amounts in the plan.
Last edited by retiredjg on Sat Jul 24, 2021 9:59 am, edited 1 time in total.
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retired@50
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Re: Employer to only match while using financial advisor

Post by retired@50 »

Topgun514 wrote: Sat Jul 24, 2021 9:49 am My apologies, the example I used wasn’t the greatest and I should have been more explicit.

Her 3% match is based off of her salary, so if she puts in 8% and gets a 3% match based off of 50k salary.

8% is $4000 per year her contribution and 3% match would be $1500. 5500 x 0.0575=316.25 per year that goes to the advisor. So her match would be providing about $1200 in additional money from her employer. Unless I’m still off base here.

This is a for a new job so she is not invested in any particular account at this point.
Your hunch in your original post was correct, that if she's also paying an approx. 2% AUM fee to the adviser on her entire 401k plan balance, then by the time she gets a meaningful balance in this plan, the company match will be completely eaten up by the front-load and AUM fees.

Time to campaign for a better plan or explore the non-adviser option. Are all funds tagged with a front-load fee of 5.75%?

Link: https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: Employer to only match while using financial advisor

Post by neurosphere »

Topgun514 wrote: Sat Jul 24, 2021 8:35 amHer employer appears to only allow for a 3% match with the use of a financial advisor.
Something is shady. As already asked, what type of retirement plan is this? I've never seen a plan that would allow an employer to match only certain employees.

I suspect this is a SIMPLE IRA. And I also suspect that the advisor helped set it up. There is a way to get around the fees, maybe. SIMPLE IRA rules allow employees to rollover their funds to another kind of account even while working. First, contribute to the SIMPLE IRA but do NOT invest the funds, rather keep them in a money market. Then after 2 years you can roll the SIMPLE IRA over to a traditional IRA, but perhaps only once per year. You would be out of the market for a couple of years, but you'll get the match, avoid the fees, and then staring in year two be able to rollover the contributions each year and use the Traditional IRA to invest in the low-fee funds of your choice.

https://www.irs.gov/retirement-plans/si ... sfer-rules

btw, I may not have all the details correct on SIMPLE IRA rules, but that's my understanding.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: Employer to only match while using financial advisor

Post by MishkaWorries »

exodusNH wrote: Sat Jul 24, 2021 9:40 am
MishkaWorries wrote: Sat Jul 24, 2021 9:31 am I don't see how getting 3% match per year would justify 5.75% plus 2% fees per year in expenses. You'd lose 4.75% a year.
3% of salary, not 3% of funds.
Duh. :oops:
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nedsaid
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Re: Employer to only match while using financial advisor

Post by nedsaid »

This is probably a small business employer, this arrangement allows an employer to offer a retirement plan for little or no out-of-pocket costs. The sales load is charged with the purchase of mutual funds, 5.75% for stock funds and probably about 3.75% for bond funds. The load is charged up front, it is not an expense that you incur every year. You do have the annual expense ratios for the funds purchased. There might be an annual account fee.

I would rate this arrangement as less than ideal, the employer probably feels this is the best that he or she can do. Could you provide more detail?

The Assets Under Management Fee and up front commissions are either/or normally. In other words, if you are paying commissions there should be no Assets Under Management fee. If you are under an AUM arrangement, there should be no commissions.
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Topgun514
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Re: Employer to only match while using financial advisor

Post by Topgun514 »

nedsaid wrote: Sat Jul 24, 2021 10:11 am This is probably a small business employer, this arrangement allows an employer to offer a retirement plan for little or no out-of-pocket costs. The sales load is charged with the purchase of mutual funds, 5.75% for stock funds and probably about 3.75% for bond funds. The load is charged up front, it is not an expense that you incur every year. You do have the annual expense ratios for the funds purchased. There might be an annual account fee.

I would rate this arrangement as less than ideal, the employer probably feels this is the best that he or she can do. Could you provide more detail?

You’re correct, a small business with fewer than 30 staff. It is for a simple IRA, I’ll ask and get an answer on specifically if it’s 401k or 403b as soon as I can. What other details would be helpful?
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Re: Employer to only match while using financial advisor

Post by neurosphere »

Topgun514 wrote: Sat Jul 24, 2021 10:17 am You’re correct, a small business with fewer than 30 staff. It is for a simple IRA, I’ll ask and get an answer on specifically if it’s 401k or 403b as soon as I can. What other details would be helpful?
If it's a SIMPLE IRA, that's it. SIMPLE IRA, 403b, 401k, etc are mutually exclusive.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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retiredjg
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Re: Employer to only match while using financial advisor

Post by retiredjg »

Topgun514 wrote: Sat Jul 24, 2021 10:17 am You’re correct, a small business with fewer than 30 staff. It is for a simple IRA, I’ll ask and get an answer on specifically if it’s 401k or 403b as soon as I can. What other details would be helpful?
A SIMPLE IRA is a SIMPLE IRA. It is not a 401k or a 403b. Those are entirely different plans.

It is either a 5304 SIMPLE or 5305 SIMPLE plan. She will have to find out which and that may not be easy at all. Sometimes even the "advisor" doesn't realize there are two possibilities.

The workaround for a 5304 is different from the workaround for a 5305. The solution starts with finding out which it is.
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Watty
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Re: Employer to only match while using financial advisor

Post by Watty »

One other thing to check on is what the vesting schedule is for the employer match.

At least for a 401k she could end up leaving that job after a few years only to find that she is not fully vested and will lose at least part of the employer match.
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Re: Employer to only match while using financial advisor

Post by CAsage »

At her salary level, dodging taxes by funding a pretax 401K isn't as pressing as it would be in a higher tax bracket. I would suggest funding her 401k with 3~5% of her own salary to get 100% of the match, pick one fund to invest in with the absolute lowest fee available, and then save any other money in a regular taxable brokerage. Your fiancee can get Target date or index funds there, and the taxable burden isn't too bad.
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nedsaid
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Re: Employer to only match while using financial advisor

Post by nedsaid »

Topgun514 wrote: Sat Jul 24, 2021 10:17 am
nedsaid wrote: Sat Jul 24, 2021 10:11 am This is probably a small business employer, this arrangement allows an employer to offer a retirement plan for little or no out-of-pocket costs. The sales load is charged with the purchase of mutual funds, 5.75% for stock funds and probably about 3.75% for bond funds. The load is charged up front, it is not an expense that you incur every year. You do have the annual expense ratios for the funds purchased. There might be an annual account fee.

I would rate this arrangement as less than ideal, the employer probably feels this is the best that he or she can do. Could you provide more detail?

You’re correct, a small business with fewer than 30 staff. It is for a simple IRA, I’ll ask and get an answer on specifically if it’s 401k or 403b as soon as I can. What other details would be helpful?
Who is the provider? It could be a firm like Edward Jones, Ameriprise, Cetera for example.

Check on the fees. I suspect it is commission only, there should be no Assets Under Management fee. As I said, there might be an annual account fee, maybe $40 a year.

What fund choices are available?

Do you have the choice of setting the account up at another firm? I was briefly employed with a small employer who had a similar plan, I would have been able to set up the account at any provider who would be willing to do this. Where I worked, most employees just set their account with the Edward Jones advisor next door. I looked into options, American Century was willing to do it and so was my Independent Advisor. At American Century, I would have invested no-load and at the advisor I would have paid commission to buy ETFs at less cost than what you are paying. My employment ended with the end of tax season, what was supposedly permanent employment was only seasonal.
Last edited by nedsaid on Sat Jul 24, 2021 12:21 pm, edited 1 time in total.
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Re: Employer to only match while using financial advisor

Post by neurosphere »

retiredjg wrote: Sat Jul 24, 2021 10:26 am
Topgun514 wrote: Sat Jul 24, 2021 10:17 am You’re correct, a small business with fewer than 30 staff. It is for a simple IRA, I’ll ask and get an answer on specifically if it’s 401k or 403b as soon as I can. What other details would be helpful?
A SIMPLE IRA is a SIMPLE IRA. It is not a 401k or a 403b. Those are entirely different plans.

It is either a 5304 SIMPLE or 5305 SIMPLE plan. She will have to find out which and that may not be easy at all. Sometimes even the "advisor" doesn't realize there are two possibilities.

The workaround for a 5304 is different from the workaround for a 5305. The solution starts with finding out which it is.
Btw, here is some official IRS wording about 5305 plans:
Contributions in General. The Employer will make no contributions to the SIMPLE IRAs other than salary reduction contributions
(described in Article III, item 1) and matching or nonelective contributions (described in Article III, items 2a and 2b).
2 Vesting Requirements. All contributions made under this SIMPLE IRA plan are fully vested and nonforfeitable.
3 No Withdrawal Restrictions. The Employer may not require the employee to retain any portion of the contributions in his or her SIMPLE
IRA or otherwise impose any withdrawal restrictions
.
4 No Cost Or Penalty For Transfers. The Employer will not impose any cost or penalty on a participant for the transfer of the participant’s
SIMPLE IRA balance to another IRA.

5 Amendments To This SIMPLE IRA Plan. This SIMPLE IRA plan may not be amended except to modify the entries inserted in the blanks
or boxes provided in Articles I, II, III, VI, and VII.
6 Effects Of Withdrawals and Rollovers
a An amount withdrawn from the SIMPLE IRA is generally includible in gross income. However, a SIMPLE IRA balance may be rolled over or
transferred on a tax-free basis to another IRA designed solely to hold funds under a SIMPLE IRA plan. In addition, an individual may roll
over or transfer his or her SIMPLE IRA balance to any IRA or eligible retirement plan after a 2-year period has expired since the individual
first participated in any SIMPLE IRA plan of the Employer.
Any rollover or transfer must comply with the requirements of section 408.
b If an individual withdraws an amount from a SIMPLE IRA during the 2-year period beginning when the individual first participated in any
SIMPLE IRA plan of the Employer and the amount is subject to the additional tax on early distributions under section 72(t), this additional tax
is increased from 10% to 25%.
And here is 5304:
1 Contributions in General. The Employer will make no contributions to the SIMPLE IRAs other than salary reduction contributions (described in
Article III, item 1) and matching or nonelective contributions (described in Article III, items 2a and 2b).
2 Vesting Requirements. All contributions made under this SIMPLE IRA plan are fully vested and nonforfeitable.
3 No Withdrawal Restrictions. The Employer may not require the employee to retain any portion of the contributions in his or her SIMPLE IRA
or otherwise impose any withdrawal restrictions.

4 Selection of IRA Trustee. The Employer must permit each eligible employee to select the financial institution that will serve as the trustee,
custodian, or issuer of the SIMPLE IRA to which the Employer will make all contributions on behalf of that employee.

5 Amendments To This SIMPLE IRA Plan. This SIMPLE IRA plan may not be amended except to modify the entries inserted in the blanks or
boxes provided in Articles I, II, III, VI, and VII.
6 Effects Of Withdrawals and Rollovers
a An amount withdrawn from the SIMPLE IRA is generally includible in gross income. However, a SIMPLE IRA balance may be rolled over or
transferred on a tax-free basis to another IRA designed solely to hold funds under a SIMPLE IRA plan. In addition, an individual may roll over or
transfer his or her SIMPLE IRA balance to any IRA or eligible retirement plan after a 2-year period has expired since the individual first
participated in any SIMPLE IRA plan of the Employer.
Any rollover or transfer must comply with the requirements under section 408.
b If an individual withdraws an amount from a SIMPLE IRA during the 2-year period beginning when the individual first participated in any
SIMPLE IRA plan of the Employer and the amount is subject to the additional tax on early distributions under section 72(t), this additional tax is
increased from 10% to 25%
https://www.irs.gov/retirement-plans/si ... n-overview
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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retiredjg
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Re: Employer to only match while using financial advisor

Post by retiredjg »

nedsaid wrote: Sat Jul 24, 2021 10:11 am The Assets Under Management Fee and up front commissions are either/or normally. In other words, if you are paying commissions there should be no Assets Under Management fee. If you are under an AUM arrangement, there should be no commissions.
Not in a SIMPLE IRA. At least not after the fiduciary rule happened and then partially unhappened...makes one's head spin.

Sorry. Faulty memory. They dumped the front end loads and started charing a high AUM fee instead.
Last edited by retiredjg on Mon Jul 26, 2021 1:11 pm, edited 2 times in total.
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retiredjg
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Re: Employer to only match while using financial advisor/firm

Post by retiredjg »

TopGun514, would you edit your original post to show this is a SIMPLE IRA so people will stop giving you answers that do not apply to SIMPLE IRAs?

This is going to be confusing enough. Adding comments about 401ks and 403bs won't help. :happy
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Re: Employer to only match while using financial advisor/firm

Post by billfromct »

Depending on her age (the younger the better because more years to grow) & her salary (tax bracket), it may be better to put $6,000 into a Roth IRA.

30 or 35 years of tax fee growth & the ability to take money out state & Federal tax free after age 59.5, may be worth forgoing current tax savings. Also a no-load, low cost index fund is frosting on the cake.

bill
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nedsaid
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Re: Employer to only match while using financial advisor

Post by nedsaid »

retiredjg wrote: Sat Jul 24, 2021 10:48 am
nedsaid wrote: Sat Jul 24, 2021 10:11 am The Assets Under Management Fee and up front commissions are either/or normally. In other words, if you are paying commissions there should be no Assets Under Management fee. If you are under an AUM arrangement, there should be no commissions.
Not in a SIMPLE IRA. At least not after the fiduciary rule happened and then partially unhappened...makes one's head spin.

To get around the fiduciary rule, Edward Jones instituted an AUM and imposed front end loads on every fund except the money market fund. However, I remember the AUM being less than 2% .... maybe 1.3%? It has been awhile. I don't know what they are doing now.
Edward Jones AUM fee is 1.35%. I don't believe that they charge that plus 5.75% commissions even in a SIMPLE IRA. Normally the advisor compensation model is AUM or Commissions but not both for the same account. So an advisor might have client accounts that are Commission based and the same advisor might have other client accounts that are AUM. I can't imagine that an advisor would charge both AUM and Commission on the same account. Last I checked, Jones charges about 2% commission for Stocks and ETFs and loads on mutual funds for commission based accounts. On AUM accounts, they do have proprietary low cost funds that they use.

I have been checking into this because a couple of family members have accounts there.

Do you have a source?

I did a Google search and found this Bogleheads thread:

viewtopic.php?t=204277
by millennialfalcon » Tue Nov 29, 2016 7:28 pm

I have read many of the war stories/first-hand accounts on this forum in reference to your friendly neighborhood salesperson, Edward Jones. I have something I have not yet seen covered...Guided Solutions (not to be confused with Advisory Solutions). In this case, I have no beef with the EJ advisor; it is their damn new account.

My work has a SIMPLE IRA with Edward Jones that prior to the changes explained below consisted (for me) of two American Funds funds (Class A, 5.75% load that was partially waived based upon the combined account balances of my company exceeding $1M under management). I have not been at this job for very long, so I had not done any research to see how/whether I could to any better until just now.

If this were not bad enough, we were informed that because of the Department of Labor fiduciary rules, we could no longer have this account, our funds would need to be transferred to the new Advisory Solutions account, then liquidated to conform to the Advisory Solutions standards--what I have intuited to mean that there can be no Class A funds (only institutional) with more "diversification" (7 funds in lieu of my 2 with ERs in the range of .4% to .9%). The real kicker? The AUM fee for my account is 1.5% yearly because of my comparably low balance (4 figures).

I spoke with the EJ advisor about the new fee structure, and the advisor was forthcoming and explained the fees to me in terms I could understand, even offered to reduce the AUM fee to 1.3% (EJ advisor was selling me, of course). I informed the EJ advisor that I only contribute to get the 3% employer match, nothing more, and that I viewed 1.5% as something I could never swallow, understanding that fees compound over my 4 decade horizon.

This EJ account is not a large part of my portfolio. I am 30 and have a risk tolerance that I think is age appropriate. I have my Roth and a Rollover IRA both parked at Vanguard in a Target Retirement Fund (ER of .18%). If I open a SIMPLE account with Vanguard, I have enough assets with them for their yearly $25 per fund fee to be waived.

Now for the questions: I thought we had a 5305 SIMPLE IRA (that is what the EJ form says, which I understand prohibits me from designating where my payroll and employer match go), but the EJ advisor said I could open a SIMPLE account anywhere and submit the documentation to payroll for them to fund a SIMPLE account of my choosing. Can anyone provide any insight on a similar situation? Or if someone has some specialized knowledge of the two different kinds of SIMPLE IRAs, could they chime in? Because I thought the 5305 type of plan restricted me to it, I had planned on opening a "frozen" SIMPLE IRA account at Vanguard and doing direct transfer of cash (I would liquidate any fund holdings and choose the cheapest option I could fund, money market, etc.) to the Vanguard SIMPLE if this can be done. Obviously, if I can open my SIMPLE IRA at Vanguard and designate them as custodian to receive my payroll deduction with the employer match, I would much prefer that.

I absolutely love this forum, and I look forward to the responses I will receive.
Last edited by nedsaid on Sat Jul 24, 2021 12:15 pm, edited 1 time in total.
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retiredjg
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Re: Employer to only match while using financial advisor

Post by retiredjg »

nedsaid wrote: Sat Jul 24, 2021 11:24 am Do you have a source?
What I said is from SIMPLE IRA threads that occurred after the first fiduciary rule went into effect. Read the plan myself so I don't believe it was a misunderstanding by the poster. I'll see if I can find it, but might take awhile. :(

Some of the fiduciary rules were dismantled by a later administration. I'm not sure where things stand now.
Ping Pong
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Re: Employer to only match while using financial advisor/firm

Post by Ping Pong »

I believe they’re required to give everyone the same matching formula for the year. They can’t reduce it for some employees.
MBB_Boy
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Re: Employer to only match while using financial advisor/firm

Post by MBB_Boy »

Check and see if the load and AUM apply to ALL investment options.

My mom also had a pretty bad SIMPLE IRA at work, and I found a loophole. Simply contributing cash / money market account does NOT trigger the load, but it DOES trigger the match.

So her account there is all cash, and the rest of her portfolio is more aggressive to make up for it. Also could simply transfer the money and invest elsewhere, but I haven't done any diligence on this since the current system fits her needs
reln
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Re: Employer to only match while using financial advisor

Post by reln »

MishkaWorries wrote: Sat Jul 24, 2021 9:31 am I don't see how getting 3% match per year would justify 5.75% plus 2% fees per year in expenses. You'd lose 4.75% a year.
3% match is of salary.

5.75% and 2% are of invested amounts, initial and ongoing, respectively.
Last edited by reln on Sat Jul 24, 2021 11:43 am, edited 1 time in total.
reln
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Re: Employer to only match while using financial advisor/firm

Post by reln »

Topgun514 wrote: Sat Jul 24, 2021 8:35 am Good morning Bogleheads, I’ve been reading the forums for quite a while and been introduced by my brother, an avid saver and mentor. I’ve read a few Bill Bernstein books and consider myself an intro level student! I know enough to set it and forget it but have the luxury of using a TSP for work related match and savings.

My fiancé appears to be in a different scenario and this is where my question starts. Her employer appears to only allow for a 3% match for a simple IRA with the use of a financial advisor/firm (t Rowe price, Edward Jones, etc). We spoke with the advisor yesterday who mentioned the fee structure and we’re both fairly shocked at how high it is especially when she will likely use either a retirement date fund or a percentage mix of the 3 mains: SP500, International, bonds (60, 25, 15).

Our question is threefold. Should we pay into the front load fee structure of about 5.75% per deposit, pay ~2% per year on the account total, or lose out on the match and invest herself in a fidelity or vanguard account seeing as there are likely other fees included?

My gut says to choose the front load fee option into whichever fund that can match her goals. Seeing as, using this example, that if she put in $100 per pay period, the match would be an additional $30. The 5.75 % would bring the total to about $122 So she still is receiving matched monies. But I’m posting here to make sure this passes the sniff test because there is a break even point where her match actually disappears. For the other alternative: Within a few years my thought is that if she has $100,000 in her portfolio that the other scenario is that they take ~$2000 a year instead!

Thank you all!
Still worth it but only up to the full match. No more.
BitTooAggressive
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Re: Employer to only match while using financial advisor

Post by BitTooAggressive »

nolesrule wrote: Sat Jul 24, 2021 9:45 am What type of retirement plan is this?

This smells of kickbacks.
Agree. Lawsuit waiting to happen and with good justification at least morally, not sure about legally.
Unless a fantastic job it would be enough to get me to consider a job change. So unethical.
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nedsaid
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Re: Employer to only match while using financial advisor

Post by nedsaid »

retiredjg wrote: Sat Jul 24, 2021 11:30 am
nedsaid wrote: Sat Jul 24, 2021 11:24 am Do you have a source?
What I said is from SIMPLE IRA threads that occurred after the first fiduciary rule went into effect. Read the plan myself so I don't believe it was a misunderstanding by the poster. I'll see if I can find it, but might take awhile. :(

Some of the fiduciary rules were dismantled by a later administration. I'm not sure where things stand now.
These types of things like the Fiduciary Rule do change over time and there are all kinds of things that happen, so I suppose anything is possible.

Standard practice is either AUM or Commission but not both for a client account. I am learning about this stuff myself, if an Advisor is affiliated with a Broker/Dealer and holds certain licenses, an Advisor can operate on a commission model. This model is more like the old fashioned stockbroker who sells individual securities and loaded "A" or "C" share mutual funds. If an Advisor is affiliated with a Registered Investment Advisor, Assets Under Management is the norm though a subscription model can be used. Under this arrangement, an AUM fee is charged but the client often gets cheaper share classes such as Institutional, Y Shares, Advisor Shares, F2 shares. Advisors can be affiliated with both an RIA and a Broker Dealer and can offer commission model for some accounts and AUM for others.

My understanding is that Edward Jones AUM model uses the lower cost proprietary funds, might even be index funds. So they charge 1.35% for AUM, maybe 0.20% for a Portfolio model, and whatever the underlying expense ratios are for the funds. So this still is something like 1.7% a year or more to run an account, very expensive by Boglehead standards.

Last I checked, Edward Jones offers commission based accounts and still works as the old fashioned Stock Broker at a Full Service Brokerage Firm. Or you can go to the "Guided Solutions" and get an Assets Under Management arrangement.

I am sure that anything is possible but there are compliance departments within advisory firms to make sure that the regulations are followed. Not sure charging an AUM and 5.75% commissions would pass muster. Compliance is supposed to catch advisor confusion over regulations.
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exodusNH
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Re: Employer to only match while using financial advisor

Post by exodusNH »

BitTooAggressive wrote: Sat Jul 24, 2021 11:45 am
nolesrule wrote: Sat Jul 24, 2021 9:45 am What type of retirement plan is this?

This smells of kickbacks.
Agree. Lawsuit waiting to happen and with good justification at least morally, not sure about legally.
Unless a fantastic job it would be enough to get me to consider a job change. So unethical.
While that's of course possible, I tend to assume no malice unless proven otherwise. This may have been the employer's cheapest option. With the 3% match, she'll probably still wind up ahead. When she leaves this company, she can take her funds to a better plan.

My company has been offering a 401k since we were just two people -- 25ish years ago. It's only in the last 3 years I have been paying attention to fees. It simply never occurred to me that it was something that mattered.
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Re: Employer to only match while using financial advisor

Post by exodusNH »

Humility101 wrote: Sat Jul 24, 2021 9:39 am This screams conflict of interest...why would an employer require a financial advisor unless they had perverse incentives? The employer would otherwise have no incentive to decide what you do with your money or a contribution by the employer as part of a benefits package.
5305 SIMPLE IRA... it could just be ignorance on the part of the employer or it was the only way they could afford to offer it.
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Re: Employer to only match while using financial advisor

Post by Ryzen »

BitTooAggressive wrote: Sat Jul 24, 2021 11:45 am
nolesrule wrote: Sat Jul 24, 2021 9:45 am What type of retirement plan is this?

This smells of kickbacks.
Agree. Lawsuit waiting to happen and with good justification at least morally, not sure about legally.
Unless a fantastic job it would be enough to get me to consider a job change. So unethical.
You're wrong. This is not a 401k. This is for small businesses that otherwise would offer no plan. Nothing unethical about it.
Last edited by Ryzen on Sat Jul 24, 2021 11:56 am, edited 1 time in total.
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retiredjg
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Re: Employer to only match while using financial advisor

Post by retiredjg »

nedsaid wrote: Sat Jul 24, 2021 11:46 am Standard practice is either AUM or Commission but not both for a client account.
Right now, I'm thinking that only applied to SIMPLE IRA. The AUM thing was a "program fee" so maybe different from ordinary AUM that we think about.

I remember the solution was to invest in money market (no load) and transfer out to a frozen SIMPLE IRA.

I certainly agree with you that an advisor would not charge both to a retail customer. I'll keep looking later this afternoon.
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Re: Employer to only match while using financial advisor

Post by nedsaid »

BitTooAggressive wrote: Sat Jul 24, 2021 11:45 am
nolesrule wrote: Sat Jul 24, 2021 9:45 am What type of retirement plan is this?

This smells of kickbacks.
Agree. Lawsuit waiting to happen and with good justification at least morally, not sure about legally.
Unless a fantastic job it would be enough to get me to consider a job change. So unethical.
Don't think kickbacks are happening here. It is a matter of a small employer trying to offer a retirement to employees without a lot of out of pocket costs. The employer probably went to a local advisor and asked for help setting up a plan. Small employers are focused on keeping the bills paid, payroll met, and keeping the doors open; they may not have gobs of time to shop around for a retirement plan.

So for employees of very small businesses, retirement plans are often far from ideal. One big reasons that states are starting to step in and provide retirement plans that small employers can participate in.
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nedsaid
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Re: Employer to only match while using financial advisor

Post by nedsaid »

retiredjg wrote: Sat Jul 24, 2021 11:56 am
nedsaid wrote: Sat Jul 24, 2021 11:46 am Standard practice is either AUM or Commission but not both for a client account.
Right now, I'm thinking that only applied to SIMPLE IRA. The AUM thing was a "program fee" so maybe different from ordinary AUM that we think about.

I remember the solution was to invest in money market (no load) and transfer out to a frozen SIMPLE IRA.

I certainly agree with you that an advisor would not charge both to a retail customer. I'll keep looking later this afternoon.
I could ask around on Monday, there are different plans out there for small business, they are all different. Also there are variations in fee structures from investment firm to investment firm. This gets to be a really complex subject. I do tax work and I know some things about these plans but I have rarely been asked about what the best retirement plans are for small business. So I have learned a lot over the years but I don't regard myself as an expert. For example, I didn't know about the 5304 and 5305 SIMPLE plans. I also have worked in the securities industry and learned there as well. You pretty much have to carefully research these plan by plan.

Want to make it clear that I regard you as a great source of information on the forum. You have helped a lot of people here and your advice has always been well thought out and rock solid. Often I have left Portfolio review threads after you start helping clients because I find that I can't really add much to your advice. More than one time I have told people that they are in good hands with you.
A fool and his money are good for business.
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Re: Employer to only match while using financial advisor/firm

Post by niceguy7376 »

A Small business SIMPLE IRA at Fidelity is of NO COST TO EMPLOYER and to EMPLOYEES.
It was always a NO COST to EMPLOYER but a $20 per year per fund fee for Employees was also removed a few years back.

So, essentially this Employer went with these companies because they were sugarcoated into providing one and the Employer did not do further research.

SO OP (and their fiancee) can either try to talk to Employer about changing it or contribute and Rollover to Fido Simple IRA plan or directly contribute to their own Fido plan (in this case, does the employee get the Fed+State tax benefit?)
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Re: Employer to only match while using financial advisor/firm

Post by GoneOnTilt »

Topgun514 wrote: Sat Jul 24, 2021 8:35 am Good morning Bogleheads, I’ve been reading the forums for quite a while and been introduced by my brother, an avid saver and mentor. I’ve read a few Bill Bernstein books and consider myself an intro level student! I know enough to set it and forget it but have the luxury of using a TSP for work related match and savings.

My fiancé appears to be in a different scenario and this is where my question starts. Her employer appears to only allow for a 3% match for a simple IRA with the use of a financial advisor/firm (t Rowe price, Edward Jones, etc). We spoke with the advisor yesterday who mentioned the fee structure and we’re both fairly shocked at how high it is especially when she will likely use either a retirement date fund or a percentage mix of the 3 mains: SP500, International, bonds (60, 25, 15).

Our question is threefold. Should we pay into the front load fee structure of about 5.75% per deposit, pay ~2% per year on the account total, or lose out on the match and invest herself in a fidelity or vanguard account seeing as there are likely other fees included?

My gut says to choose the front load fee option into whichever fund that can match her goals. Seeing as, using this example, that if she put in $100 per pay period, the match would be an additional $30. The 5.75 % would bring the total to about $122 So she still is receiving matched monies. But I’m posting here to make sure this passes the sniff test because there is a break even point where her match actually disappears. For the other alternative: Within a few years my thought is that if she has $100,000 in her portfolio that the other scenario is that they take ~$2000 a year instead!

Thank you all!
This may have already been addressed in the thread, but I believe a SIMPLE IRA is the only employer plan where each year the entire amount can be moved out and transferred to a traditional IRA, match and all. This is the law. Check with an accountant or the IRS.

So your fiance could contribute, get the match and each year yank out all the money.

EDIT: Looks like there's a two-year wait rule for SIMPLE-to-traditional IRA transfers. Then it can be done annually:

https://www.thebalance.com/how-to-do-a- ... es-2894476

Hope this helps.
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Re: Employer to only match while using financial advisor/firm

Post by Enjoy11 »

Yeah, Ed Jones and the front end load and fees galore. I remember that. I’m bitter about it because I didn’t understand what a rip off it was for years.

Hey OP, take it from someone who’s been there and done that. The front end load is a rip off and destroys return. The other fees are an additional layer of rip off, because yeah, an instant 5% loss isn’t enough, they gotta have more. AUM and fund expenses, too? Give me a break.

I’ve lost a lot of retirement savings because I didn’t know better. Don’t fall for it. If you can’t find some way to avoid that sales load and those stupid expenses, I’d find some other way like a Roth or something else to partially or substantially fund retirement.

Please don’t fall for it like I did. I’m really struggling now to make up lost retirement returns that went for helping fund somebody’s buddy’s college fund.
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Re: Employer to only match while using financial advisor/firm

Post by Lee_WSP »

A simple IRA is still an IRA. The employee is able to direct their account as they wish. Are you sure the list of funds is that restricted? It should be no different than any other IRA held at that institution.

The most common one is the 5305. Administering a 5304 is a pita.
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Topgun514
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Re: Employer to only match while using financial advisor/firm

Post by Topgun514 »

These are really helpful, thank you and thank you for guiding questions in a helpful manner.

I will certainly see if there are other lower fee options and perhaps we can discuss the 2 year waiting period to transfer to a traditional IRA with fidelity or vanguard.

I’ll report back if I hear otherwise for investments locations (ie, if money can be put elsewhere).
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teen persuasion
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Re: Employer to only match while using financial advisor/firm

Post by teen persuasion »

Find out which type of SIMPLE IRA it is: 5305 (employER selected one financial institution everyone must use), or 5304 (each employee can chose own financial institution).

My employer decided to create a SIMPLE IRA for us a few years ago (3 employees) and decided to use Wells Fargo, because that's who manages the endowment fund (and the board of trustees weren't comfortable with DIY). I suggested using someone (anyone) else; the board asked me to present options, so I looked at Fidelity, Schwab, and Vanguard. All were free to set up. Vanguard (5305 only) had a $20/yr fee per fund used, until your balance reached $50k (ok for me, my Roth IRA is at Vanguard, but co-workers were starting from scratch). Fidelity (5304 or 5 IIRC) had no fees, but seemed to be limited to a list of approved fund families, which were all high fee managed funds (I wanted low ER index funds). Other Bogleheads have said they have no limitations on funds to buy, so perhaps I misinterpreted what I read in Fidelity's SIMPLE IRA page. Schwab had no fees, no limitations, and a very clear and short application form for employers to use to start a 5304 SIMPLE IRA. That's the one I recommended to the board, but they still opted to have Wells Fargo hold their hand and "do it for them". WF obviously chose to make it 5305, so I couldn't go elsewhere.

WF selected American Funds (expensive, managed funds only). There's a $10/yr account fee (plus an extra $10 setup fee). The fund class chosen has no front load fees, but ERs are 1.x%. I'm coming up on 2 years in the SIMPLE IRA, so I'm looking at rolling my balance out to a tIRA at Vanguard, while maintaining the SIMPLE IRA for new contributions going forward.

Despite the provider, I'm still thrilled just to have A retirement plan at work, instead of nothing. The ability to contribute pre-tax allows us to fine tune our refundable credits like EITC (tIRA won't work for this, it's not thru payroll), and control FAFSA numbers.

Details may have changed at each provider since I looked, but there definitely are more economical ones out there. The employer certainly doesn't need to use EJ.
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teen persuasion
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Re: Employer to only match while using financial advisor/firm

Post by teen persuasion »

Lee_WSP wrote: Sat Jul 24, 2021 4:06 pm A simple IRA is still an IRA. The employee is able to direct their account as they wish. Are you sure the list of funds is that restricted? It should be no different than any other IRA held at that institution.

The most common one is the 5305. Administering a 5304 is a pita.
I'm curious - why is administering a 5304 a PITA?
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Re: Employer to only match while using financial advisor/firm

Post by Lee_WSP »

teen persuasion wrote: Sat Jul 24, 2021 4:26 pm
Lee_WSP wrote: Sat Jul 24, 2021 4:06 pm A simple IRA is still an IRA. The employee is able to direct their account as they wish. Are you sure the list of funds is that restricted? It should be no different than any other IRA held at that institution.

The most common one is the 5305. Administering a 5304 is a pita.
I'm curious - why is administering a 5304 a PITA?
The employer needs to keep track of different accounts and providers. Not crippling, but annoying nonetheless.

And the form is more annoying.
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Lee_WSP
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Re: Employer to only match while using financial advisor/firm

Post by Lee_WSP »

Topgun514 wrote: Sat Jul 24, 2021 8:35 am]. We spoke with the advisor yesterday who mentioned the fee structure and we’re both fairly shocked at how high it is especially when she will likely use either a retirement date fund or a percentage mix of the 3 mains: SP500, International, bonds (60, 25, 15).
I can't find where you use the word AUM fee, but I believe you meant to say that the fund choices all have high expense ratios with a front load fee.

I'm not sure why offer others keep mentioning AUM fees.
BitTooAggressive
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Re: Employer to only match while using financial advisor

Post by BitTooAggressive »

Ryzen wrote: Sat Jul 24, 2021 11:55 am
BitTooAggressive wrote: Sat Jul 24, 2021 11:45 am
nolesrule wrote: Sat Jul 24, 2021 9:45 am What type of retirement plan is this?

This smells of kickbacks.
Agree. Lawsuit waiting to happen and with good justification at least morally, not sure about legally.
Unless a fantastic job it would be enough to get me to consider a job change. So unethical.
You're wrong. This is not a 401k. This is for small businesses that otherwise would offer no plan. Nothing unethical about it.
Does not appear to comply with irs regulations as explained.

https://www.irs.gov/retirement-plans/re ... s#employer
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