How do you invest your money over the long-term? Orchid Wealth Management embraces and uses the evidence based investing approach. So what does that mean?
 
What Is Evidence-Based Investing?

Evidence-based investors build and manage their portfolio based on what is expected to enhance future returns and/or dampen related risk exposures, according to the most robust evidence available. This also means sticking with your long-view, evidence-based strategy once it’s in place, despite the market’s uncertainties and your own self-doubts you’ll encounter along the way.
 
Evidence-Based Investing, Applied
 
Do you hope …

1. Investors can come out ahead by finding mispriced stocks, bonds, and other trading opportunities; and/or by dodging in and out of rising and falling markets?

 
Or do you accept …

1. The market’s rapid-fire trading creates relatively efficient pricing that is too random to consistently predict?

 
There is an overwhelming body of evidence suggesting investors should skip the first approach and act on the second assumption. This has been the case since at least 1952, when Harry Markowitz published Portfolio Selection in The Journal of Finance. In their book, “In Pursuit of the Perfect Portfolio,” professors Andrew Lo and Stephen Foerster describe:
 
“While it’s commonplace now to think of creating a diversified portfolio rather than investing in a collection of securities that each on their own look promising, that wasn’t always the case. It was Harry Markowitz who provided a theory and a process to the notion of diversification. He helped to create the industry of portfolio management.”
 
Markowitz’s work became known as Modern Portfolio Theory (MPT). Academics and practitioners have been building on it ever since. His initial work and others’ subsequent findings strongly support ignoring all the near-term noise and taking a long-view approach. This involves building a unified investment portfolio, and focusing on more manageable details, such as:

• Tilting toward or away from entire asset classes to tailor your risks and expected returns
• Minimizing avoidable risks by diversifying globally
• Reducing unnecessary costs
• Controlling your own damaging behavioral biases

 
How Do You Decide Which Evidence To Heed?
So far, so good. Then again, at first blush, nearly every investment recommendation may seem “evidence-based.” After all, few forecasters would peer into actual crystal balls to make their predictions. And no market guru would admit their stock-picking track record has been no better than a dart-throwing monkey’s (even though that’s usually the case).
 
Instead, stock-picking and market-timing enthusiasts tend to argue their cases by turning to articulate analyses, smart charts, and convincing corporate briefs. They use these props to explain the late-breaking news, and recommend what you should supposedly be doing about it.
 
There’s nothing wrong with facts and figures. The critical difference is how we apply them as evidence-based investors. As financial author Larry Swedroe describes it:
 
“In investing, there is a major difference between information and knowledge. Information is a fact, data or an opinion held by someone. Knowledge, on the other hand, is information that is of value.”  
— Larry Swedroe, ETF.com
 
No matter how compelling a call to action may be, we discourage frequent reaction to the never-ending onslaught of information. First, we must determine:
 
Which information might add substantive value to our decisions by refuting or adding to the existing evidence? Which is just more of the same old noise, already factored into your evidence-based investment strategy?
 
The Evidence-Based Silver Bullet: Academic Rigor
Because there is a lot more noise than there is valuable knowledge, the basic recipe for evidence-based investing begins and ends with academic rigor. It should always be a key ingredient in separating likely fact from probable fiction:

• It requires robust data sets that are large enough, representative enough, and free from other common data analysis flaws.
• Authors should be impartial, lacking incentives to “torture” the data to make a point.
• Other studies should be able to reproduce the same findings under different scenarios, suggesting the results are more likely to persist upon discovery.
• The data, methodology, and results should be published in reputable, peer-reviewed forums where informed colleagues can comment on the findings.
• Enough time must pass to make all of the above possible.

 
After that, we also must be able to apply the results in the real world. In other words, even if a theoretical strategy is expected to enhance your returns, it must do so after considering all practical costs and portfolio-wide tradeoffs involved. For example, sometimes one source of
expected returns may offset another, even bigger source. Sometimes, we can combine them for even stronger results; other times, it’s best to favor one over the other. 
 
Evidence-Based Investment Factors
So, which factors appear to best explain different outcomes among different portfolios? In what combinations are these factors expected to create the strongest, risk-adjusted portfolios? What explains each factor’s return-generating powers, and can we expect those powers to persist?
 
Based on the academic answers to these practical questions, we typically mix and match the following factors in our evidence-based portfolios, varying specific exposures based on each investor’s personal goals and risk tolerances:

• The Market: Stocks (equities) vs. bonds (fixed income)
• Company Size: Small vs. large company stocks
• Relative Price: Value vs. growth company stocks
• Profitability: High-profit vs. low-profit company stocks
• Term: Long-term vs. short-term bonds (based on maturity date)
• Credit: “Safer” vs. “riskier” bonds (based on credit quality)

 
What’s in an Evidence-Based Name?
Last but not least, it’s worth mentioning, others may refer to the same or similar approaches by various names, such as factor-based, asset-based, or science-based investing. These terms are relatively interchangeable, but there’s a reason we’ve chosen evidence-based as our preferred expression. Heeding sound reason and rational evidence is at the root of what we do. Therefore, we believe it should be at the root of what we call it.
 
What would your best evidence-based investment portfolio look like? It depends on your personal financial goals; as well as your willingness, ability, and need to take on investment risks in pursuit of those goals.
 
Orchid Wealth Management helps you structure the right investment mix and navigate today's information overload. Learn more; let's talk.

Orchid Wealth Management is an independent Registered Investment Advisor headquartered in Palo Alto; Orchid a fiduciary advisory that is fee-only. Seth Swenson, MBA is President at Orchid Wealth Management, and provides objective financial advice.

​The term financial advisor is used by many different types of people and can mean different things. For the purposes of this article, the term financial advisor shall mean a person that provides financial advice and planning to individuals in order to help them save enough money to provide them income for their retirement years typically after they have stopped working. 


Fee-Only Financial Advisors also known as (AKA) Fiduciary Financial Advisors, are a type of financial advisor that provide objective advice for a fee. This fee is usually an annual percentage of the assets that they manage on an ongoing basis. For example, if the advisor’s fee was set at 1% of $500,000 of assets under management this would be an annual fee of $5,000. This fee may also be looked at on a quarterly basis as .25% or $1,250 per quarter.

Fee-Only Financial Advisors are typically Investment Advisor Representatives (IAR) of a Registered Investment Advisory (RIA). Fee-only Advisors AKA Fiduciary Financial Advisors provide objective financial advice. The fee-only financial advisor does not sell the client investments for “loads” aka commissions or 12b-1 fees also known as on-going 3rd party commissions. The fee-only advisor is also acting as a fiduciary and abides by the fiduciary standard.

The fiduciary standard essentially means that the advisor must always put the client’s best interest first. By charging a fee-only and not commissions, the fee-only advisor lowers the potential for conflicts of interest and is able to provide objective advice to the client. In fact, the client’s interest in having his or her assets grow are in alignment with the fee-only advisor’s interests. As the client prospers, so does the fee-only advisor. If the client’s investments decline in value, the fee-only advisor’s income will decline as well.

There is another type of financial advisor that is “fee-based”. This means that the advisor charges a fee and can also be paid commissions upon sales of investments such as mutual funds, by third parties. These advisors typically are employed by broker-dealers and are often encouraged to promote and sell certain investments. This can lead to conflicts of interest between the client and the advisor. This may cause the client’s retirement account to face annual fees that considerably higher than other similar investments. Ultimately, this may be problematic since this may lower the client’s portfolio return on investments.

One of the few predictable and consistent variables in the world of investing are the annual expense ratios associated with mutual fund investments and exchange traded funds (ETFs). These fees can range from .04% to 2% and are generally known to increase as opposed to decrease similar to inflation. By controlling these annual fees, an investment portfolio can at a minimum reduce the annual hurdle that must be overcome just to break even.

When it comes to individual investments such as individual mutual funds and ETFs not even the great Warren Buffet can predict the future. This year’s top performing stock is likely to wind up in the middle of the pack or down towards the bottom of the pack next year. This is due to the statistical phenomenon of regression to the mean.

Assuming that an investment portfolio #1 with fees that are 1% lower annually when compared to a similarly asset allocated portfolio #2, then portfolio #1 will save 30% in fees over a 30 year period. Over time this means that portfolio #1 would have been able to keep an extra 1% of his or her money invested in the financial markets. This would happen over a period of 30 years and add up to 30% more money invested over the period. This also means that portfolio #2 would have 30% less money to have invested over the same period.

By simply utilizing fee-only advisor an investor/retirement planner would likely be able to count on at the very least not paying as much in annual fees out of his or her investment portfolio. This means the hurdles to success are lower.

To prove the point that fees will erode portfolio returns, Warren Buffet the greatest investor in the modern era made a $1,000,000 bet in 2008 with the hedge fund industry that he could beat their returns over 10 years simply by purchasing a low fee S&P 500 Stock Market Index Fund. The fund he picked had  an annual expense ratio of just .04%.
Warren Buffett said that the hedge fund industry charged exorbitant fees that the funds' performances couldn't justify. A hedge fund called Protégé Partners LLC was willing to accept Warren Buffet’s bet. They ended up investing their money in a handful of other hedge funds and ultimately losing the bet.

Generally speaking, hedge funds are known to collect 2% of assets they manage annually regardless of the fund's performance (or underperformance) and take 20% of the gains in years when the fund has a positive return. At the end of 2017, Buffett's index fund bet had gained 7.1% per year, or $854,000 in total, compared to 2.2% per year for Protégé's picks – just $220,000 in total.

Conclusion:

When utilizing a fee-only financial planner investors will benefit greatly from lower annual fees and knowing that their best interest is being put first. Investors can feel confident knowing that conflicts of interest are lowered since the fee-only advisor cannot sell investments for third-party one-time commissions or annual on-going commissions. All of these aforementioned benefits can result in reaching retirement goals on-time and with enough money to retire with dignity and in style.

The investor must also not be confused by the term “fee-based” advisor which sounds so similar to “fee-only” advisor that it may lead a person to think that they are getting a fee-only advisor when in fact they are getting an advisor that is likely incentivized to sell them investments that pay them commissions leading to major conflicts of interest.

Finally, the investor should be aware of dually registered financial advisors that are both “fee-only” and “fee-based”. These advisors can put on either hat when convenient to them. This situation can be confusing and can lead to the conflicts of interest mentioned above.

In order to find a “fee-only” advisor one may simply search online for “fee-only” advisor and find them listed in the geographic area of choice. Be certain to verify that the financial advisor is indeed fee-only and also a fiduciary advisor.

Orchid Wealth Management is an independent Registered Investment Advisor headquartered in Palo Alto; Orchid a fiduciary advisory that is fee-only. Seth Swenson, MBA is President at Orchid Wealth Management, and provides objective financial advice.

 A Shot of Adrenaline for your Retirement Savings
​Jan 23, 2019
By Seth Swenson MBA 
Many doctors are simply not saving enough money. A late start to saving for retirement due to years of school and training combined with low retirement plan contribution limits creates the potential for an underfunded retirement portfolio. Many doctors also build their practices, assuming that they will one day sell them and use this financial gain to retire. Unfortunately, this may not be enough money to maintain the lifestyle that they are accustomed to. 
It is generally considered safe and recommended to take retirement money distributions of no more than 3.5 to 4 percent as this will maintain a retirement account portfolio balance without drawing it down too quickly, and perhaps even allow it to grow. This means that a $1 million portfolio will provide $35,000 to $40,000 per year. Savings of $3 million or more may be necessary for many physicians.
Physicians who want to adequately fund their retirement must consider a cash balance plan. Like a shot of adrenaline, a cash balance plan can inject the funds necessary to stimulate weak retirement savings.
​
Cash balance plan basics
A cash balance plan is a type of qualified retirement plan that typically is layered on top of a combination 401(k)/Profit Sharing Plan. It is a defined benefit pension plan with similar characteristics to a defined contribution plan such as a 401(k) plan. For example, like a 401(k) plan, the participant sees their own individual account balance. Additionally, the cash balance plan allows for a portable account balance so upon departure from the company the participant may roll over the balance into another qualified plan such as an Individual Retirement Account (IRA).  
Participants are promised a quantified benefit at retirement; this may be in the form of an annuity or a lump sum.  At age 62 the payable annuity amount is up to $225,000 per year, or a lump sum amount up to $2,877,495.  
A cash balance plan allows medical practice owners to contribute money annually to participant accounts on top of the money that has been contributed to a 401(k)/Profit Sharing plan. This company “pay credit” is a percentage of pay, usually 5 to 7 percent, or a specific dollar amount. The annual contribution can range from $55,000 to more than $300,000, depending on the individual’s age and income. Additionally, participant accounts are guaranteed an annual interest crediting rate from the invested money. This rate may be fixed or variable and is typically tied to an index such as the 30-year Treasury Bond. Cash Balance Plans are designed to be in operation for a minimum of five years and a maximum of 10 years. 
​
Seven major benefits of cash balance plans
1) Multiply retirement savings: Doubled or even quadrupled annual retirement plan savings are possible. A 401(k) plan allows contributions of up to $19,000 per year plus an extra $6,000 per year “catch up” for individuals 50 years old and over. Profit sharing allows up to an additional $37,000 for a total of $62,000 per year. A cash balance plan allows an extra $55,000 to $336,000 of deductible savings.
2) Tax deduction: A medical practice can deduct all contributions made for employees. As individuals, medical practice owners and partners may deduct dollar for dollar the money invested into a cash balance plan. Typically, this can be much larger than even the homeowner's mortgage interest payments deduction.
3) Tax deferral: Money is invested tax deferred and may ultimately be rolled into an IRA account where it will continue to grow tax deferred. 
4) Tax savings: At a 40 percent tax rate, the savings can range from $22,000 to $136,00 per year. This is money that would have gone to the IRS in taxes, but instead it is invested to grow, tax deferred. 
5) Attract and retain employees: Cash balance plans are very attractive to current and future partners and employees. When a cash balance plan is implemented, retirement plan participation improves. 
6) Protection from creditors: As a qualified retirement plan, the cash balance plan assets are protected from creditors. This includes protection from bankruptcy proceedings andcivil lawsuits.
7) On-time, comfortable retirement: Cash balance plans allow significant annual contributions from $55,000 to $340,000, depending on variables including age and income. They allow physicians to catch up and save an adequate amount of money for a comfortable retirement.

During their careers, physicians expertly provide care for their patients while often neglecting their own financial health. A cash balance plan will put more of their hard-earned money to work for them, instead of into the hands of the IRS. By the time retirement comes, these physicians will have enough savings to last all through their retirement years. 
 
Seth Swenson, MBA, is president of Orchid Wealth Management in Palo Alto, CA. He may be reached at seth@orchidwealthmanagement.com or (650) 334-6104 ​

My recently published article in Medical Economics compares the refinancing of a loan into a lower interest rate, to the lowering your investment portfolio's annual investment fees. The type of savings that may be achieved over the long run is similar and can have a major impact on your retirement goals. Whether it is a home loan, student loan, business loan, or even credit card debt, we can all understand how a lower interest rate benefits us and our finances. Yet when it comes to our investment portfolios we typically are not aware of the ongoing "little expenses" we are being charged, and in fact event if we are aware of them we pay little attention to these ongoing fees. This is a major investment mistake and one that most investors make. Reviewing a portfolio for excessive fees is painless and can make all the difference between retiring on-time, and having to work additional years in order to reach your financial goals. Please contact me directly for a complimentary portfolio review, and if you have any questions about this important subject.  seth@orchidwealthmanagement.com   1(650)334-6104

​Refinance Your Investment Portfolio
Seth Swenson, MBA, President at Orchid Wealth Management
 
Most people understand the benefits of refinancing their home loan or student loan. By lowering the annual interest rate, the owner of the home is able to reduce the loan payments and achieve greater leverage and purchasing power. Over the life of the mortgage, the savings in interest payments can be tremendous.
However, when it comes to investments such as mutual funds and exchange traded funds (ETF’s), most people bury their heads in the sand and cringe at the thought of figuring out how to reduce their investment’s annual expenses. This can be a huge mistake.

Consider three hypothetical mutual funds that have the same portfolio holdings. Each portfolio generates an average annual compound return of 7%. The only differences among the three are the annual fees charged to the investors:
Portfolio 1 is charged annual fees of .25%, portfolio 2 is charged 1% and portfolio 3 is charged 2%. The three portfolios start with $100,000 and are invested for 30 years.
Portfolio 1 earns 7% - 0.25% = 6.75%.  At the end of 30 years it will have earned $753,324.
Portfolio 2 earns 7% - 1% = 6%. At the end of 30 years it will have earned $602,257. This 0.75% difference results in $151,049.00 less earnings than portfolio 1.
Portfolio 3 earns 7% - 2%= 5%. At the end of 30 years, it will have earned $446,774.00. This 1.75% difference results in $306,550 less earnings than portfolio 1. The 1% difference between Portfolio 3 and Portfolio 2 results in $155,483 less earnings.
Here’s why fees really matter
Assuming that an investor invests an average of $20,000 per year in their retirement plan, the $151,049 in lost savings in portfolio 2 would require an extra 7.55 years of work. Assuming the investor’s lost savings were $306,550, as in portfolio 3, it would take that person an extra 15 years of work to make up the difference!
Fees can be the difference between an on-time retirement and a delayed retirement. They can even mean the difference between reaching your financial goals and not reaching them.
Many physicians have experienced large amounts of debt such as mortgages, car loans, practice loans and student loans. The illustrations above show how investment fees are similar to the interest rates on loans. Much like the interest paid to a banker, mutual fund fees are money you are paying to enrich the mutual fund company and the broker-dealers selling the funds. Lowering your investment fees is similar to lowering your loan interest rates. It means that you will pay less and keep more of your hard-earned money.
Physicians enjoy their careers and love helping their patients. However, there may come a time when the physician would like to change their daily routine and do something else, such as change careers, hobbies, travel or philanthropy. Physicians want to know that they have a high likelihood of reaching their target date for retirement and their financial target. The chance of reaching these goals is increased when fees are kept to a minimum. Conversely, the chance of not reaching these goals is heightened by paying higher (unnecessary) investment expenses.
What are these fees?
Here’s what some of the most common fees really mean.
Annual Expense Ratio: The annual expense ratio is the ongoing fee an investor pays to the mutual fund or ETF company to operate the fund. The operation of the fund or ETF consists of management costs as well as marketing costs. The expense ratio can be found in the prospectus. There, the management fee and the marketing fee (12b-1 fee) are broken out. Expense ratios can range from as low as 0.05% for an equities index fund to 2.50% for an actively managed fund, a huge 2.25% difference. One mutual fund found with the Morningstar Fund screener has an annual expense ratio of 9.64%.
Turnover Ratio: John C. Bogle referred to turnover ratio as the “invisible cost” in his book, Bogle on Mutual Funds. The turnover ratio is a measure of the annual frequency of trading activity (the buying and selling) of investments within a mutual fund or ETF. The higher the turnover ratio, the higher the expense. This dollar amount can be found in the “Statement of Additional Information” (not the prospectus). As an example, if a turnover ratio is 50%, then the portfolio is buying and selling half of its portfolio’s holdings every year. This means that if a mutual fund has $100,000,000 in assets, then it bought and sold $50,000,000 of assets and it transacted $100,000,000 in purchases and sales. These transaction costs can be considerable.  
Additional expenses: Front end loads (sales charges) typically range from 4% to 6%. Back end loads (contingent deferred sales charges and redemption fees) are sales charges incurred when an investor sells shares of a mutual fund. These charges can be similar to front end loads but decrease over time since 12b-1 fees are charged annually and thus the sales charges are paid for over time. All of these fees are paid by investors to the mutual fund company at different times and are dependent upon which share class is purchased. This information is found in the prospectus.
Passive funds (index) vs. actively managed funds
Index funds generally have lower expense ratios than actively managed funds. This is due to the fact that they do not have to pay a team and a staff of people to actively manage the fund by selecting the underlying investments. The investments are simply selected based on the index they are tracking. Index funds do not typically have loads of any kind. Additionally, the turnover ratio in an index fund is usually quite low, around 5% or lower. The Vanguard S&P 500 Index fund is an example of an index fund, with no loads, no 12b-1 fees and a very low expense ratio.
Actively managed funds have higher expenses since they have a manager, a management team and analysts selecting investments for the fund. Additionally, there are typically 12b-1 fees that are paid to the broker-dealers that sell and market the fund. These extra fees are passed along to you, the investor. The turnover ratio on an actively managed fund can sometimes be as high as 100%.
Passively managed funds and actively managed funds can both be excellent investments. Fees are one aspect of the decision to invest in a mutual fund or an exchange traded fund. Passively managed funds have lower fees and lower turnover and have a lower cost hurdle to overcome. It is also known that over time the majority of actively managed funds have difficulty outperforming index funds.
Some experts believe that because actively managed funds have higher expenses to overcome, the fund managers are prone to taking extra risk in order to achieve better returns. Actively managed funds can be excellent investment choices and the fees can range considerably. So they should be well researched. 
Consider refinancing your portfolio
“Refinancing” your investment portfolio is powerful and may be as important as refinancing your home mortgage loan. Just as there are lower lending rates, there are typically lower expenses available with investments such as mutual funds.
Consider getting a second opinion on your investment portfolio from a Registered Investment Adviser (RIA). RIA’s are fiduciaries (they must always put the client’s best interest first) and do not get paid commissions from third parties. They are likely to give you objective advice and avoid conflicts of interest.
By taking the time to evaluate your portfolio’s expenses and adjusting them accordingly, you may increase the likelihood of reaching your retirement goals on time. Simply reducing your annual investment costs can help you lower financial hurdles and achieve your financial goals sooner and more efficiently.
Seth Swenson, MBA is President at Orchid Wealth Management, a Registered Investment Advisor, providing financial advice to physicians and other healthcare professionals. Palo Alto, California.

My recently published article in Medical Economics to Doctors comparing failing to comply with their fiduciary duty with physician malpractice. There is a legal responsibility to providing comprehensive retirement plans to employees that should not be overlooked. My parents are both Doctors and I have first hand experience in seeing how large private practice offices could use a second opinion when it comes to the health of their retirement plans. This is one case where the doctor and the staff could gain from a little financial TLC of their own. Please contact me directly if you have any questions about this important subject.  seth@orchidwealthmanagement.com   1(650)334-6104

Are you liable for retirement plan malpractice?

Seth Swenson, MBA, President at Orchid Wealth Management

Most physicians in America  know all about medical malpractice risks, but many are unaware of another type of liability exposure: retirement plan malpractice.
As a physician offering a retirement plan such as a 401(k) you are a plan sponsor and fiduciary to your plan participants. Per the Employment Retirement Income Security Act of 1974 (ERISA), a fiduciary has important responsibilities under ERISA, including:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
• Carrying out duties prudently
• Following the plan documents (unless inconsistent with ERISA)
• Diversifying plan investments
• Paying only reasonable plan expenses

 As a fiduciary, your personal assets could be at risk and could be used to compensate for fiduciary losses. Additionally, these obligations can follow you into bankruptcy via liens on personal property and garnishments of future income. Lawsuits are expensive, time consuming and stressful. There is no immunity from fiduciary liability lawsuits. Any business that provides a retirement plan could be sued.
Physicians and smaller companies have been sued by former employees. These companies were sued because they allegedly either ignored lower-cost options that were available to their plans or simply were not aware that there were other options.The problem is that once employees were ready to retire, they were coming up short on retirement savings due to excessive fees.
Proper administration of a retirement plan will result in liability exposure reduction and an optimized plan. Here are five ways to reduce fiduciary liability.

1. Create an investment policy statement (IPS) that is easy to follow. ERISA states that a plan must create a clear, prudent, documented procedure and process for investment-related decision making in relation to the plan’s goals and objectives for plan investment. This statement would include the processes for selecting and monitoring the plan’s investments. The IPS helps to reduce liability exposure by providing evidence of a prudent investment decision-making process. If a plan is being audited, the U.S. Department of Labor will routinely ask for a plan’s statement. Once the IPS is created, it should be well communicated to plan administrators and plan participants so that everyone clearly understands it.
2. Eliminate revenue sharing. Reduce liability exposure and save on fees by working with a record keeper who uses a fixed, per-participant, fee model and is not being compensated by revenue sharing. These fees can start out at a reasonable level, but over time, as the plan assets grow, the fees may become excessive, thus increasing liability exposure. Fixed per-participant fees help to ensure that costs do not become exorbitant as the plan’s assets grow and the plan sponsor’s liability exposure is reduced[CM1] . Talk with your retirement plan advisor about finding a record keeper that offers this fixed per-participant fee structure.
3. Get a second opinion from a fee-only registered investment advisor (RIA) that specializes in retirement plans. An RIA is a fiduciary and must put their client’s best interests before their own and since they cannot participate in revenue sharing, they should tend to recommend investments and funds that have lower expense ratios. Benchmarking your plan with what is currently available and possible is the best way to determine if your plan is paying excessive fees. Fees are relative and you can only know if you are overpaying if you shop around.
4. Maintain the required ERISA Fidelity Bond of no less than 10% of the plan’s assets as of the beginning of the year. ERISA’s minimum required bond is $1,000 and the maximum  is set at $500,000. A fidelity bond will help to insure the plan’s assets against fraud or dishonesty on the part of anyone handling the plan’s assets. By not having this fidelity bond, it could signal to the Department of Labor (DOL) and others that fiduciary duties are not being met.
5. Obtain fiduciary liability insurance. Insurance goes beyond the fidelity bond and covers plan sponsors and their legal expenses  if a breach of fiduciary duty occurrs. 

Seth Swenson, MBA is a retirement plan advisor and is President of Orchid Wealth Management in Palo Alto, CA

​Many of the world’s largest companies and employers including Apple, Google (Alphabet), Gap Inc., Facebook, Wells Fargo, Safeway, and Genentech are here in the San Francisco Bay Area. They attract the smartest and most talented people in the world. At any given time, people are either being hired on as a new employee or leaving a company to join a new one. One of the biggest decisions that a person needs to make when they are joining a new company or leaving a company is what to do with their current retirement plan money.

There are a few options to decide from.

• Cash out.
• Keep the money in the current 401(k) plan.
• Rollover into the new company’s 401(k) plan.
• Rollover into an IRA plan. 

The decision is not always easy or cut and dry. There are several factors to consider such as:

• Plan investment options and flexibility.
• Plan fees.
• Company match.
• Contribution limits
• Tax considerations

​
One quick way to quickly check the quality of a company’s 401(k) plan compared to its peers is to check its BrightScope rating. BrightScope is a third party company that compares and rates 401(k) retirement plans using the data found within the publicly accessible Department of Labor/IRS Form 5500. The form 5500 is filed by plan sponsors annually and is available to the public and employees who want to get specific information about the plan and its vendors. BrightScope rates the 401(k) plans on Total Plan Cost, Company Generosity, Participation Rate, Salary Deferrals, and Account Balances.

Here are some of the San Francisco Bay Area 401(k) plan ratings as of April 2016:

Apple Inc. 401(k) rating of 77. The highest in the peer group is 90.
Google 401(k) rating of 89. The highest in the peer group is 90.
Gap, Inc. 401(k) rating of 63. The highest in the peer group is 84.
Facebook, Inc. 401(k) rating of 84. The highest in the peer group is 90.
Wells Fargo 401(k) rating of 80. Highest in the peer group is 92.
Safeway, Inc. 401(k) rating of 50. Highest in the peer group is 80.
Genentech, Inc. 401(k) rating of 86. Highest in the peer group is 90.
Uber Technologies, Inc. 401(k) rating of 63. Highest in the peer group is 88.
Linkedin, Inc., 401(k) rating of 86. Highest in the peer group is 92.

It is a good idea to work with your company and its human resource department to determine whether or not to stay in a plan or roll it over to another plan or an Individual Retirement Account. Additionally, it is smart to talk with a financial advisor who is a “fiduciary” to get additional insights and thoughts on the pros and cons of each option.. The 401(k) rollover decision is very important and can make a major difference to your future retirement and ultimate nest egg. ​
__________________________________________________________________________________________

​Orchid Wealth Management has a stress free strategy to help you grow your portfolio.
Call Seth Swenson at 1(628)400-7384 to schedule a free consultation. Thank you.

Plan sponsors should benchmark their retirement plans on a regular basis. This means the plan services and fees should be compared with what is currently available. 401(k) plans are often established and implemented with the set and forget approach. This can cause problems in the future when the plan’s assets grow and the fees increase at the same rate of growth. Many companies are facing litigation from employees due to alleged excessive fees.
​
When a plan utilizes “revenue-sharing” the services are being paid for mostly by the mutual fund fees, which are being paid for by the plan participants. These services that are being paid for through the mutual fund fees include record keeping, third party administration, and custodial services. Plans that use revenue-sharing tend to have funds and investments with fees that are much higher than necessary.

As an alternative to revenue-sharing, the record keeping, third party administration, and custodian fees can be “fixed per participant”. This means that the mutual funds and investment lineup selection can have significantly lower expense ratios. A “fixed per participant” fee model prevents a 401(k) or 403(b) plan’s fees from becoming excessive as the assets within the plan grow year after year. Instead the fees increase nominally per participant. Using this type of fee structure can result in plan participants reaching their retirement goals more efficiently and plan sponsors meeting their fiduciary duty more reliably.

Here are two recent examples of San Francisco Bay Area 401(k) plans which have 401(k) plan fees that can be reduced significantly:

Plan 1)  A Bay Area distribution company with just over $100,000,000 in 401(k) plan assets is paying $916,735.00 per year, including $823,389.00 in annual mutual fund expenses. The total “all-in” cost for the plan is .83% of the plan’s total assets per year. Based on an initial analysis, the plan could reduce its mutual fund and investment lineup fees to $229,636.00, and its “all-in” fees to $483,336.00 or .43% of the plans total assets. This is a total annual savings of $433,398.00. In just ten years, this becomes $6,251,130.00 when compounded annually at 7%. This is a 47% reduction in annual fees. This example assumes that the current annual fees are stagnant, which they are not, so the savings would likely be greater. 

Plan 2) A San Francisco Bay Area construction company with approximately $49,000,000.00 in 401(k) plan assets is paying $329,000.00 per year in fees, including $320,000.00 in annual mutual fund expenses. The total “all-in” cost for the plan is .66% of the plan’s total assets per year. Based on an initial analysis the plan could reduce its mutual fund and investment lineup fees to $57,000.00, and its “all-in” fees to $138,000.00 or .28% of the plan’s total assets. This is a whopping 57% reduction in annual fees. This is a total annual savings of $190,000.00. In just ten years becomes $2,500,000.00 when compounded annually at 7%. This example assumes that the current annual fees are stagnant, which they are not, so the savings would likely be greater. 

These examples are actually the rule and not the exception. Companies and retirement plan advisors take advantage of plan sponsors by putting their own best interests before their client’s best interests. The result is excessive fees and ambiguous retirement plan costs. This is not an excuse for the plan sponsors however, and it can even lead to personal liability for any person who is seen as a plan administrator. Simply not benchmarking a 401(k) plan and thus being unaware of current options may be interpreted as a breach of fiduciary duty.

In summary, by getting a second opinion from a Registered Investment Advisor rather than a Broker Dealer, a plan sponsor is more likely to receive objective advice as opposed to commission driven advice. Cutting a retirement plan’s fees can make the difference between employees reaching their retirement goals on-time and falling short of their goals and thus having to work additional years. It may also be the difference between a plan sponsor being sued for breach of fiduciary duty and not being sued.
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Orchid Wealth Management is a Registered Investment Advisor and offers complimentary, objective 401(k) plan benchmarking. Orchid eliminates revenue-sharing in retirement plans and ensures transparent, easy to understand fees that do not become excessive and increase liability.
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Orchid Wealth Management has a stress free strategy to help you grow your portfolio.
Call Seth Swenson at (650) 334-6104 to schedule a free consultation. Thank you.
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