Understand the Fully Bundled Pensions

Physician's Money Digest, January31 2004, Volume 11, Issue 2

When discussing pension plans for youroffice, some advisors may give you theimpression that bundled pension productsare unnecessary, which is notalways the case. In fact, a bundled product might bethe best option for your office.

Bundled Products Review

A bundled pension product is a turnkey productwhere you look to one vendor to provide all youroffice's pension plan needs. A bundled provider willdo the following:

  • Provide a plan document
  • Have experts help you choose from the mutualfunds offered in your plan
  • Enroll your employees in the plan, motivatethem to contribute to it, and help them select theirindividual investment types based on their personalfinancial goals
  • Take care of all recordkeeping and administrativeservices (eg, quarterly statements, annual tax returns,and mandatory testing), ensuring that the planis in compliance with governing laws

An unbundled provider uses different companiesor consultants for these types of services. Typically, abank or mutual fund family will outsource the recordkeepingto a third-party administrator.

There are several key factors that physician-investorsshould look for when selecting a pensionplan for their practice. First, they should understandwhat to steer clear of.

In-House Mutual Funds

Most large banks, mutual fund families, and insurancecompanies use what I call "in-house" funds. Forexample, among many other in-house funds, Paine-Webber offers the Large Company Growth fund;Manulife Financial offers the Manulife Growth PlusStock fund; and American United Life InsuranceCompany® (AUL) offers the AUL American ConservativeInvestor fund.

The companies profit well from these in-housefunds. They receive the mutual funds' management fee(between 0.8% to 2.5% annually), rather than payingother fund managers that fee. Using in-house fundswould not be a problem if the funds performed as wellas the brand name funds that we all know and use forour own personal investments (eg, Fidelity, Janus, T.Rowe Price, etc).

However, in-house funds usually underperformbrand name funds. If the fund managers at Paine-Webber, Manulife, AUL, and all the other companiesthat offer in-house funds were that great, they would beat the brand name mutual fund companies. Besides thehigher internal expenses of in-house mutual funds,


their rate of return really makes them a poor choice.Using a pension provider that only uses the bestfunds in the best fund families can make your annualreturn 1% to 20% higher each year. : Have the mutual funds in your pension plancompared to the top funds of Fidelity, Janus, T. RowePrice, American Century, and Vanguard.

Fees and Surrender Charges

Your pension provider receives 12b-1 fees as akickback for putting clients in particular funds. Forexample, if you had a pension provider who advisedyou to use the growth fund of a particular mutualfund family, that company might be receiving asmuch as 2% of your assets as a 12b-1 fee when youput new money into the account. Anytime you findextra fees, that pension product is more expensivethan it actually needs to be.

Surrender charges are used to deter a businessfrom switching pension plan providers. Usually theamount is based on a percentage of assets. For example,let's say your office had $5 million in a pensionplan that had a contract clause stating that if youswitched pension plan providers within 5 years, youroffice would have to pay a 5% early-withdrawalpenalty. In this case, the surrender charge would be$250,000. Stay away from pension plans that stipulatesuch surrender charges.

Money-Saving Option

In general, bundled products with large banks,brokerage houses, and insurance companies are moreexpensive than unbundled products administered by asmall third-party administrator. For the expense ofusing a large company, you and your employeesshould receive the following benefits:

• Timely and readable quarterly statements. As isoften the case with a small benefit consultant firm,instead of receiving your quarterly statements withina few days of the quarter's end, you often wait over 30to 90 days. Usually a large provider who does theadministration in-house will provide statements withina week after the end of the quarter. Typically thequarterly statements are easier to read and giveemployees more information.

The problem:

• Timely disbursements upon employee termination.Many pesnion plans are evaluated quarterly. So,if an employee quits or retires on January 1, thatemployee's money is typically valued at the end ofMarch. When you don't roll thatemployee out of your plan in a timely fashion, thenegative financial consequences to the office could besubstantial. Let's say that at the end of March theretiring employee has $1 million in the plan, and youdon't roll that employee out for several months. If themarket goes down 20% by the end of June when youradministrator finally rolls out the employee's money,your office is responsible for the difference between$1 million (ie, the amount of money the employee hadin their pension at the end of March) and $800,000(ie, the amount in the plan at the end of April). Thisis a scary situation that many doctors and officeadministrators are unaware of.

• Daily Trading. While most experts will tell youthat you shouldn't be trading your retirement moneydaily, being able to trade at a moment's notice is veryimportant. If you have a few volatile funds offered inyour pension plan (eg, tech funds), an employee mightwant to move money in or out of that fund based ontimely financial information. Second, if the marketgoes on a big slide and an employee thinks it is prudentto move money out of the market and into amoney market fund, that employee needs the abilityto trade at a moment's notice.

For example, if you have $100,000 in a tech fundand you receive information that the Nasdaq is goingto plunge, in a quarterly trading plan, you have noway to get your money out of that tech fund. If theNasdaq goes down 20% in the time you're waiting totrade, you would have lost $20,000. The same holdstrue if the market in general starts to take a nosedive.If something dramatic happened in the financial worldand the market started a major slide, in a quarterlyplan, you might have to wait 3 months to move yourmoney to safer investments.

Bundled products tend to be about 1% moreexpensive. But higher fees are only a problem in theabsence of value. A large company that has the bestout-of-house mutual funds can roll employees out inshort order, and allows daily trading to pay for thatextra 1% in fees many times over. Learn more aboutyour current pension plan and how it compares towhat is available in the marketplace.

Roccy DeFrancesco is an attorney and author of"The Doctor's Wealth Preservation Guide." He hasrun a medical practice and lectured for many stateand national medical associations. For a free assetprotection, income, and estate tax reduction CD,or for questions, call 269-469-0537 or e-mailroccy@wealthpreservation123.com.