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Tampa Gator

Switching 403 (b) Vendors

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I am in the process of trying to switch from Valic to Vanguard for our 403b plan. I wanted to start a new post from the previous post because I have some specific questions.

 

However, I wanted to comment on the Full-Service Valic comment. Yes full service means a not so great Financial Planner (whatever that means) pushing high expenses funds to employees with no clue. Costs our employees an extra $200,000 a year based on our plan assets and extra fees that Valic charges. I can dam hire a full-time financial planner for less money and the Valic rep shares about 3-4 large hospital clients. Come on. In addition, companies like Vanguard actually provide Employee Education unlike a VALIC rep. I have seen one education experience for our employees and that is when the market was tanking. In addition, don't see the VALIC rep much since the market crashed. Now since its coming back around, I see her face more.

 

Back to my specific questions.

 

1) If you change vendors how do you get out of the 5% redemption fee that we have with VALIC if you roll-over your IRA. Is it exempt when your company changes vendors versus the employees leaving the company? This is going to be VALIC's biggest push to keep themselves. Can we let the contract expire? Do I need to read the contract?

 

2) I know VALIC will push the personal service of a rep. How do I easily combat that versus Vanguard. I think the service will be better, but how do I convince people.

 

Thanks,

 

Tampa Gator

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Back to my specific questions.

 

1) If you change vendors how do you get out of the 5% redemption fee that we have with VALIC if you roll-over your IRA. Is it exempt when your company changes vendors versus the employees leaving the company? This is going to be VALIC's biggest push to keep themselves. Can we let the contract expire? Do I need to read the contract?

 

Reply: yes the devil is in the detail. Read the contract!

 

2) I know VALIC will push the personal service of a rep. How do I easily combat that versus Vanguard. I think the service will be better, but how do I convince people.

 

Reply: Print out this post of yours and distribute it to your colleagues.

 

YOU ARE TO BE COMMENDED FOR DOING YOUR OWN DUE DILLIGENCE. Please keep us informed.

 

Peace,

Joel L. Frank

 

___________________________________________________

 

 

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Guest Daniel Clark

Tampa Gator,

 

In order to respond with precision to your questions and assist you with moving away from VALIC to Vanguard, please respond to the following:

 

1. Is the counter-party to the contract with VALIC the employer (Plan Sponsor) or each individual plan participant?

 

2. Does the employer make a contribution to the plan (now or ever in the past)?

 

3. Does VALIC have an exclusive arrangement with the employer or are there other contractors alongside VALIC?

 

4. Does the employer support employee remittances exclusively to VALIC or are there other contractors to whom the employer remits?

 

5. In aggregate, what is the size of the plan measured by plan assets and number of employees?

 

6. Is there a Broker of Record on your account? What is that person or firm providing by way of services to the employer?

 

The contract with VALIC is critical and you need to review every detail of that document. I do not believe you will find an easy way to avoid surrender charges. Rhetorical Question: why there is a surrender charge? The Broker of Record receives commissions up front for every new dollar contributed to the plan. The surrender charge is a way for VALIC to recover the dollars paid out up-front. And the surrender charge keeps plans from moving.

 

Assuming you cannot avoid the surrender charges, the next question is who is going to pay them. That's the reason for the questions above.

 

Regarding service, the key is to be exceptionally clear in defining service. In my experience with health care employer sponsored plans, on-site enrollment staffing has been a common service. You may get Vanguard or another vendor to add this service for a commensurate fee, another alternative is to hire an independent contractor or bring the work in-house. You can probably handle this work with a .5 FTE for under $30,000 annually. The other services are investment management and participant advice as to which funds participants should select.

 

As you have already discovered, Vanguard and other genuine no-load mutual funds (I'd include Fidelity, T. Rowe, Putnam, PIMCO, American Funds, and other) do a great job as investment managers - so long as you purchase the correct share classes.

 

Participant advice - which boils down largely to asset allocation & investment fund selection, in my thinking, is something VALIC probably does. And because the employer has contracted with VALIC, the employer may be at risk to actions resulting from poor advice rendered by VALIC. There are many services available that will provide a sound substitute, and indemnify the employer against employee lawsuits. I'd suggest that the employer should stay away from liabilities that stem from providing advice or any advice services unless it is indemnified against claims.

 

I echo what Joel said, Bully For You in investigating your alternatives to a vendor that delivers high & largely hidden costs to plan participants!

 

Regards,

 

Dan

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Daniel:

 

The following are my answers to your questions (thanks for your assistance so far)

 

1. Is the counter-party to the contract with VALIC the employer (Plan Sponsor) or each individual plan participant?

 

I NEED TO OBTAIN A COPY OF THE CONTRACT.

 

2. Does the employer make a contribution to the plan (now or ever in the past)?

 

THE EMPLOYER CONTRIBUTES A FLAT 6% NO MATTER WHAT THE EMPLOYEES PUTS IN. SO ITS A CONTRIBUTION NOT A MATCH.

 

3. Does VALIC have an exclusive arrangement with the employer or are there other contractors alongside VALIC?

 

I BELIEVE SOLELY VALIC

 

4. Does the employer support employee remittances exclusively to VALIC or are there other contractors to whom the employer remits?

 

I BELIEVE SOLELY VALIC

 

5. In aggregate, what is the size of the plan measured by plan assets and number of employees?

 

APPROXIMATELY $20 MILLION AND 750 EMPLOYEES.

 

6. Is there a Broker of Record on your account? What is that person or firm providing by way of services to the employer?

 

NOT SURE. NEED TO LOOK AT CONTRACT.

 

I guess at minimum we need to lower our extra fee from VALIC from 1.05% (average of 65 funds) to something more in the range of 0.50%. My biggest concern is convincing my boss (CEO) and Director of HR with regards to the redemption fee. I don't think they would pick up the tab whatsoever.

 

VALIC has been with our company for over 20 years and this is the first I have gotten to look at it. I have been with the company only 3 years.

 

Any other suggestions would help, but it looks like I have to get the contract.

 

Thanks,

 

Tampa Gator

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2) I know VALIC will push the personal service of a rep. How do I easily combat that versus Vanguard. I think the service will be better, but how do I convince people.

 

The Valic reps will come around and TELL participants what to do: what Valic funds to invest in. Vanguard has lots of educational material that will SHOW participants how to go about asset allocation and retirement planning (for no extra cost). Vanguard will also educate participants about stocks, bonds, retirement income planning, etc (for no extra cost).

 

Are the Valic reps available every working day, like the Vanguard phone reps are? You can pick up the phone any working day and contact someone at Vanguard. How hard is it to contact and get info from a Valic rep? What happens when they’re sick or out of town?

 

Are the Valic reps in any way qualified to give investment selection and asset allocation advice? If so, what are their qualifications? Any degrees, certifications, exams, experience, etc? Just because they work for VALIC doesn’t mean they have any qualifications. How can you be sure that you’re actually receiving good advice? Isn’t there a conflict of interest? How can this NOT be avoided when taking advice from a VALIC rep?

 

How is VALIC’s personal service better than Vanguard’s? Valic may come to your company. So what, I can call Vanguard anytime I please to get info. I don’t have to wait for a rep. I can download any info I want from their website, including educational material.

 

Another difference you may want to point out is the organizational structure of the two companies. Who owns Valic? Its shareholders/stockholders. Valic (owned by AIG) has to pass some of its profits to its outside stockholders and company owners. Who owns Vanguard? The people who buy shares of its mutual funds, e.g. the clients. Because Vanguard does not need to pass any of its profit onto outside stockholders, it can pass the profit onto its shareholders (you and me) in the form of lower costs. I also believe that Vanguard clients have access to Financial Engines for free.

 

Is Vanguard up front about their charges to the company and employees? How up front has Valic been? Have they volunteered such info, or have you had to ask a couple of times? Again, I can call Vanguard and find out in 5 minutes, or use their website. I don’t have to pour through pages of annuity contract info (in small print).

 

Alec

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Guest Daniel Clark

Yes, start with the contract.

 

By all means if you can work with VALIC and get them to modify the contract terms to be competitive, it is always far easier to keep a vendor and not have to push through a conversion to a new vendor. In my experience, you will need to persuade VALIC (with contract termination) to get much flexibility.

 

You are in a strong position to either receive favorable terms from VALIC or move the plan to a successor contractor with surrender fee mitigation (read: not have surrender fees borne by the employer or participants).

 

A couple things you mentioned caught my attention.

 

It sounds as though the plan offers 65 investment choices. How were funds selected and how is performance monitored? What is in place for plan oversight - a Plan Committee that makes decisions and serves as de facto fiduciary?

 

For any investment funds that are not proprietary (i.e. Fidelity, American Funds, other non-VALIC)what is VALIC receiving in revenue sharing?

 

You mention a 1.05% extra fee from VALIC. What is that? How is your boss and the HR director involved in overseeing the plan? Who are the internal plan fiduciaries?

 

I'd also suggest you have VALIC provide a hypothetical surrender charge so you see exactly what variable go into that calculation. I've seen many different surrender provisions and you need to get a precise & documentable illustration from the contractor.

 

 

 

 

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Guest Guest_Tampa Gator

You are in a strong position to either receive favorable terms from VALIC or move the plan to a successor contractor with surrender fee mitigation (read: not have surrender fees borne by the employer or participants).

 

WHY ARE WE IN A STRONG POSITION. IT WILL BE HARD TO MAKE A CHANGE IF WE HAVE HUGE SURRENDER CHARGES FROM VALIC. HOW DO YOU NEGOTIATE A BETTER SURRENDER CHARGE FEE MITIGATION.

 

It sounds as though the plan offers 65 investment choices. How were funds selected and how is performance monitored? What is in place for plan oversight - a Plan Committee that makes decisions and serves as de facto fiduciary?

 

THE FUNDS WERE SELECTED BEFORE MY TIME. WE USED TO HAVE A FIXED ACCOUNT OPTION ONLY AND THAT CHANGED TO 65 FUNDS. I PERSONALLY DON'T THINK THAT ANYONE MONITORS THE RETURNS. WHY DO WE NEED A FIDUCIARY, AND WHAT DOES THAT MEAN?

 

For any investment funds that are not proprietary (i.e. Fidelity, American Funds, other non-VALIC)what is VALIC receiving in revenue sharing?

 

I HAVE NO CLUE.

 

You mention a 1.05% extra fee from VALIC. What is that? How is your boss and the HR director involved in overseeing the plan? Who are the internal plan fiduciaries?

 

THIS IS THE DIFFERNCE IN OPERATING EXPENSES PER FUND. FOR EXAMPLE, SAY VANGUARD CHARGES 0.27% FOR WELLINGTON, VALIC CHARGES 1.32%, OR 1.05% HIGHER. 1.05% IS THE AVERAGE DIFFERENCE BETWEEN THE TRUE MUTUTAL FUNDS COSTS FROM THE MUTUAL FUNDS TO WHAT VALIC IS CHARGING OUR EMPLOYEES.

 

I'd also suggest you have VALIC provide a hypothetical surrender charge so you see exactly what variable go into that calculation. I've seen many different surrender provisions and you need to get a precise & documentable illustration from the contractor.

 

 

I AM MEETING WITH MY CEO ON WEDNESDAY AND GETTING A QUOTE FROM VANGUARD TO SHOW HIM VANGUARD WOULD CHARGE US ABOUT $35,000 FOR THE SAME THING VALIC IS CHARGING AN EMPLOYEES $200,000 FOR THE ENTIRE YEAR. I NEED TO CONVINCE HIM HARDER BECAUSE MY HR DIRECTOR JUST WANTS TO MEET WITH VALIC FOR OUR ANNUAL MEETING WITH THEM AND BE CASUAL.

 

ANY SUGGESTIONS PRIOR TO MEETING WITH VALIC. I KNOW SHE IS NOT TOO AGGRESSIVE, BUT I AM WORKING ON IT????

 

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Guest Daniel Clark

You are in a strong position to either receive favorable terms from VALIC or move the plan to a successor contractor with surrender fee mitigation (read: not have surrender fees borne by the employer or participants).

 

WHY ARE WE IN A STRONG POSITION. IT WILL BE HARD TO MAKE A CHANGE IF WE HAVE HUGE SURRENDER CHARGES FROM VALIC. HOW DO YOU NEGOTIATE A BETTER SURRENDER CHARGE FEE MITIGATION.

 

REPLY: You are in a strong position because your plan (based on current asset levels, headcount & contribution flow) generates a significant profit margin for VALIC now and in each future year and there are plenty of competitors that would offer attractive terms to become your new contractor because of the profitability of your plan to them. I believe the cost to administer you plan is approximately 0.15% of plan assets. The market for retirement plan services has been so poor in recent years that your organization should be able to obtain very competitive bids for services for your plan. You negotiate relief from the surrender charge as part of the new vendor selection process. If you do not find terms acceptable, you do not make the change. Vanguard is not the most likely vendor to assist you in addressing the surrender charge issue.

 

It sounds as though the plan offers 65 investment choices. How were funds selected and how is performance monitored? What is in place for plan oversight - a Plan Committee that makes decisions and serves as de facto fiduciary?

 

THE FUNDS WERE SELECTED BEFORE MY TIME. WE USED TO HAVE A FIXED ACCOUNT OPTION ONLY AND THAT CHANGED TO 65 FUNDS. I PERSONALLY DON'T THINK THAT ANYONE MONITORS THE RETURNS. WHY DO WE NEED A FIDUCIARY, AND WHAT DOES THAT MEAN?

 

REPLY: I believe your plan, by virtue of the 6% employer contribution, would be considered an ERISA Plan. As such, I would suggest that the plan sponsor automatically has a fiduciary responsibility to plan participants. In general, fiduciary responsibility is not something that anyone wants becuase it is accompanied by liability. I beleive it simply comes along with sponsorship of a qualified plan.

 

A fiduciary is anyone who carries out decision-making for your plan. Somehow it was decided that VALIC would be your contractor. Somehow, investment funds were selected for use by participants in your plan. Somehow, there will be a decision to retain VALIC or search for alternatives. The individuals involved in making those decisions, whether they like it or not, are plan fiduciaries.

 

Fiduciaries are personally liable for their decisions made on behalf of a qualified plan. It is therefore a good idea to identify fiduciaries, make them aware of their duties and the serious nature of the job and conduct deliberations with some formailty: regular meetings, minutes, votes on decisions, etc.

 

For any investment funds that are not proprietary (i.e. Fidelity, American Funds, other non-VALIC)what is VALIC receiving in revenue sharing?

 

I HAVE NO CLUE.

 

Reply: Think of VALIC as a provider of a range of investment products. Its easy to understand why they want to offer their own VALIC products. Typically they will offer non-VALIC investment funds reluctantly, as these choices will draw assets away from their own products. Revenue Sharing between mutual funds and the Platform (VALIC) have become common. You need to knoe the revenue sharing terms in order to understand how much total revenue (& margin) VALIC is earning on your plan. You should ask VALIC for a fund by fund accounting of revenue sharing and the form of payment: 12b-1 fees, sub transfer agent fees, dealer concessions, or other. If they will not give you this information, you should protest up the chain of command.

 

You mention a 1.05% extra fee from VALIC. What is that? How is your boss and the HR director involved in overseeing the plan? Who are the internal plan fiduciaries?

 

THIS IS THE DIFFERNCE IN OPERATING EXPENSES PER FUND. FOR EXAMPLE, SAY VANGUARD CHARGES 0.27% FOR WELLINGTON, VALIC CHARGES 1.32%, OR 1.05% HIGHER. 1.05% IS THE AVERAGE DIFFERENCE BETWEEN THE TRUE MUTUTAL FUNDS COSTS FROM THE MUTUAL FUNDS TO WHAT VALIC IS CHARGING OUR EMPLOYEES.

 

Reply: Thanks for the clarification. So there is a contract charge added to the fund expenses to give you an overall effective OER.

 

I'd also suggest you have VALIC provide a hypothetical surrender charge so you see exactly what variable go into that calculation. I've seen many different surrender provisions and you need to get a precise & documentable illustration from the contractor.

 

 

I AM MEETING WITH MY CEO ON WEDNESDAY AND GETTING A QUOTE FROM VANGUARD TO SHOW HIM VANGUARD WOULD CHARGE US ABOUT $35,000 FOR THE SAME THING VALIC IS CHARGING AN EMPLOYEES $200,000 FOR THE ENTIRE YEAR. I NEED TO CONVINCE HIM HARDER BECAUSE MY HR DIRECTOR JUST WANTS TO MEET WITH VALIC FOR OUR ANNUAL MEETING WITH THEM AND BE CASUAL.

 

ANY SUGGESTIONS PRIOR TO MEETING WITH VALIC. I KNOW SHE IS NOT TOO AGGRESSIVE, BUT I AM WORKING ON IT????

 

Reply: Without any kind of foundation establishing investment fund performance objectives and defining some degree of fee competitiveness for your organizations plan, you have no objective basis for evaluation of VALIC as a service provider, now or into the future.

 

As a plan participant, you know that the decision to retain VALIC is not in your best interest. And you are likely not alone. There is liability to your organization in retaining VALIC with a thorough examination of investment performance, other services & fees.

 

I would take the focus off of Vanguard as the sole alternative and urge your CEO & HR Director that there is a fiduciary duty for decision makers to assess VALIC versus other alternatives. Armed with that information, the decision to retain VALIC or make a change can be made & justified with data.

 

Good Luck & Keep us posted.

 

Daniel Clark

 

 

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