Is my SIMPLE IRA charging a reasonable fee?

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Topic Author
blobking
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Joined: Tue Jul 08, 2014 3:09 pm

Is my SIMPLE IRA charging a reasonable fee?

Post by blobking »

Hi all,

This is my first post here. I apologize in advance if I leave out any necessary information. I've tried to find an answer in the forum history to no avail.

I'm 27 years old, my income combined with my wife's income is ~$140k, and our living expenses are about $30k per year. We plan to save/invest as much as we can and hopefully retire before our hair turns gray.

The small company I work for offers a SIMPLE IRA with a 3% match. Unfortunately, the plan uses Fidelity rather than Vanguard. Worse, the fund is administered (not sure if that is the right verb) through a broker/financial adviser. I met with this person today to find out what my options are. His fee for active management is 1.8%. As a budding boglehead, I have no interest in that. I told him that I'm really only interested in buying a fund that is the equivalent of VTSAX. Surprisingly, he was OK with that and didn't try to sell me too hard on his active management (which it seemed like he basically farms out to EdgeTech, for what it's worth). However, he said that even without his active management, I would still be charged a .8% annual fee, apart from any E/R fee for the fund I buy.

My question: is that a reasonable fee? I know that a 2% fee isn't great, but .8% seems a little better. My annoyance stems from the fact that he won't by doing anything to earn this fee. I'll be holding one fund (or two at the most, if I decided to buy a bond index later on). If .8% isn't reasonable, is it possible for me to negotiate a lower fee?

My other option is to contribute no more than the 3% match, which at ~$3,000 would be far below the $12,000 limit. I assume the tax benefits of the SIMPLE outweigh the .8% fee, right?

Thanks in advance, and sorry if I omitted any important information.
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The529guy
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by The529guy »

Welcome to the forum!

I don't have any experience with SIMPLE IRAs. However, I think you will find this post enlightening: http://www.bogleheads.org/forum/viewtop ... 785#p71502
["how-to" for performing periodic rollovers from bad SIMPLE IRA to good Vanguard tIRA after initial two years have passed]

If you haven't already visited the SIMPLE IRA wiki entry, check it out, too.
JDDS
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by JDDS »

blobking wrote: My other option is to contribute no more than the 3% match, which at ~$3,000 would be far below the $12,000 limit. I assume the tax benefits of the SIMPLE outweigh the .8% fee, right?
Most likely. You'll probably just have to hold your nose. The other forum post gives great info on getting the money out when eligible.
blobking wrote:
We plan to save/invest as much as we can and hopefully retire before our hair turns gray.
Rock on. Best of luck!
DSInvestor
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by DSInvestor »

I think SIMPLE-IRAs allow outbound rollovers to another IRA after 2 years.

See IRS FAQ on SIMPLE-IRA:
http://www.irs.gov/Retirement-Plans/SIM ... -Rollovers
IRS wrote:Can I transfer an amount from my SIMPLE IRA to another IRA in a tax-free trustee-to-trustee transfer?

During the 2-year period, you may transfer an amount in a SIMPLE IRA to another SIMPLE IRA in a tax-free trustee-to-trustee transfer. If, during this 2-year period, an amount is paid from a SIMPLE IRA directly to the trustee of an IRA that is not a SIMPLE IRA, then the payment is neither a tax-free trustee-to-trustee transfer nor a rollover contribution. The payment is a distribution from the SIMPLE IRA and a contribution to the other IRA that doesn’t qualify as a rollover contribution. After the expiration of the 2-year period, you may transfer an amount in a SIMPLE IRA in a tax-free trustee-to-trustee transfer to an IRA that is not a SIMPLE IRA.
Perhaps you should check to see if your SIMPLE-IRA will allow outbound rollover after 2 years. If rollover is allowed, you could max out and pay the higher fees for 2 years and shift everything to a low cost Traditional IRA at Vanguard or Fidelity. I'm not sure what happens to new contributions after you've been a participant for 2 years. How soon after contribution can your rollover to the low cost IRA?
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Spirit Rider
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by Spirit Rider »

blobking wrote:Unfortunately, the plan uses Fidelity rather than Vanguard. Worse, the fund is administered (not sure if that is the right verb) through a broker/financial adviser.
Your problem has nothing to do with Fidelity vs. Vanguard. They both have essentially expense ratio competitive index funds. The advantage goes to Vanguard in that they more index fund options.

Your problem is the factor that you have an Advisor based plan. It should be criminal for your company to have a Advisor based Simple IRA. Since all the providers have direct Simple IRA plans that have extremely low costs (hundreds not thousands/year). Also, Advisor plans typically have a subset of funds available (with most of them being expensive Advisor funds). Whereas the direct plans allow full access to all the firms funds.

Almost any provider's direct Simple IRA plan would be far better than this. In the mean time:
1. Choose what ever are your least expensive options.
2. Try to convince your company to move to a direct provider SIMPLE IRA plan.
3. As others have noted you can start doing SIMPLE IRA -> IRA rollovers two years from your first contribution. Don't do it before. It becomes a non-qualified distribution and subject to a 25% (yes 25%) penalty and subject to ordinary income tax. However, this is a single triggering date (not a date on subsequent contributions.) Once you are eligible for rollovers, you can do them at will (subject to possible costs).
mah001
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by mah001 »

You can open a different SIMPLE Ira account anytime and do a transfer anytime. See Notice 98-4, question and answer I-3 and I-4.
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The529guy
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by The529guy »

mah001 wrote:You can open a different SIMPLE Ira account anytime and do a transfer anytime. See Notice 98-4, question and answer I-3 and I-4.
I read your reference, but I'm not convinced this conclusion is accurate. From the wiki:
Form 5304-SIMPLE plans give each employee the freedom to select the financial institution that will act as custodian for their SIMPLE plan account.

Form 5305-SIMPLE plans do not allow employees the freedom to select their own account custodian. Rather the employer designates the financial institution that all employees must use.
If an employer has the latter type of plan, how would an employee open an alternate SIMPLE IRA someplace else? If you notice on Vanguard's SIMPLE IRA page, "participants" are business owners rather than employees.
mah001
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by mah001 »

Vanguard's description for 'participant' is misleading. Simple Ira statute is at IRC section 408(p). 408(p)(4) speaks of employees eligible to participate, which include the owner/employee and others. The first sentence of 408(p) says a SIMPLE Ira is an individual retirement plan. This means the employee completely controls when the funds exit. The employer can dictate which institution receives the contributions, but after that a person is free to distribute or transfer at will, leaving enough in the original account to keep it active. Normally, the employee must sign the Ira agreement. Only if an employee refuses (same as with a SEP Ira), the employer is then mandated to set up the Ira when the first contribution is made for a balky employee. Notice 98-4 contains virtually everything in the statute and a bit more, in easier to digest Q and A format. Read I-3 and I-4 a bit more carefully.

Also see Q and A J-1 of the Notice 98-4.
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pennstater2005
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by pennstater2005 »

Just an additional link regarding a Simple IRA. I roll my wife's simple into a traditional with vanguard. Make sure you post back here with your options in your plan. You at least need to get the employer match. .8% isn't great but it ain't the worst either :happy

http://www.bogleheads.org/forum/viewtop ... a#p1949670
“If you think nobody cares if you're alive, try missing a couple of car payments.” – Earl Wilson
niceguy7376
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by niceguy7376 »

We have our small company simple ira with fidelity. We, employers, deduct the employee contributions through payroll and then login to fidelity website to make the contributions of each employee and the corresponding employer match. There are no middle men / brokers etc. Then employer role ends. It is upto employee to then move that amount from money market to any fund offered by fidelity. If you go with fido admiral funds, their ERs are very low.

The fee for the company is $250 per year max. The fee for employee is the ER of the funds. Thats it.

I dont understand your company setup.
Topic Author
blobking
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by blobking »

Thanks to everyone who has responded so far. Most of the advice concerned rolling the money in my Simple account to a TIRA, so I'll start there with my questions. Let me first make sure I have the process right: (1) two years from now, I roll over my entire (?) Simple balance to a traditional IRA. (2) every month/quarter/year? I transfer the entire balance in my Simple IRA to the TIRA. Repeat until retirement.

Questions: (1) Do those transfers count against the $5,500 contribution limit that I would otherwise have for my TIRA? (2) Won't I still pay the .8% fee on any balance in my Simple IRA? If so, what does this accomplish? Maybe this method is better primarily because the balance in the Simple will always be artificially small?
mah001 wrote:Vanguard's description for 'participant' is misleading. Simple Ira statute is at IRC section 408(p). 408(p)(4) speaks of employees eligible to participate, which include the owner/employee and others. The first sentence of 408(p) says a SIMPLE Ira is an individual retirement plan. This means the employee completely controls when the funds exit. The employer can dictate which institution receives the contributions, but after that a person is free to distribute or transfer at will, leaving enough in the original account to keep it active. Normally, the employee must sign the Ira agreement. Only if an employee refuses (same as with a SEP Ira), the employer is then mandated to set up the Ira when the first contribution is made for a balky employee. Notice 98-4 contains virtually everything in the statute and a bit more, in easier to digest Q and A format. Read I-3 and I-4 a bit more carefully.

Also see Q and A J-1 of the Notice 98-4.
It looks like there are different opinions on this. Can anyone resolve whether I'm actually able to set up my own Simple IRA like mah001 suggests? That would be a neat solution, but it seems unlikely.
niceguy7376 wrote:We have our small company simple ira with fidelity. We, employers, deduct the employee contributions through payroll and then login to fidelity website to make the contributions of each employee and the corresponding employer match. There are no middle men / brokers etc. Then employer role ends. It is upto employee to then move that amount from money market to any fund offered by fidelity. If you go with fido admiral funds, their ERs are very low.

The fee for the company is $250 per year max. The fee for employee is the ER of the funds. Thats it.

I dont understand your company setup.
I'm irritated by the setup, too. Based on the wiki link that the 529guy graciously provided, it looks like my employer probably uses a 5305 Simple rather than a 5304 simple (does anyone know how I could confirm which it is?). That means I can't choose which financial institution/custodian I use. I'm forced to work through the middle man, even though all I want to do is buy one simple fund.

Thanks again for the help, everyone! I've been learning everything I can about personal finance for the last month or so, and I still have a lot to learn. Resources like this are really valuable, and I appreciate your time.
Last edited by blobking on Tue Jul 08, 2014 10:42 pm, edited 1 time in total.
DSInvestor
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by DSInvestor »

Rollovers from SIMPLE-IRA to Traditional IRA do not consume TIRA or Roth IRA contribution space. Traditional IRA and Roth IRA share an annual contribution limit of $5,500 ($6,500 if age 50+).
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kenyan
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by kenyan »

A SIMPLE IRA has its own contribution limit, currently $12,000 for participants under 50. It's akin to a 401k limit, though it is lower (for no good reason other than the IRS says so).

Transfers never count against a contribution limit. Nor do rollovers. Neither of these things are contributions.

I used to transfer my wife's SIMPLE IRA once per year, but we recently started maximizing our contributions to this plan and I like to transfer funds out more frequently. Our plan has a fixed annual participant fee, expense ratios between 2-3% for every fund, and a early termination/sales fee (1% for funds held less than one year, decreasing over time). Though we eat some of the sales fee, it's better than paying those expense ratios all year long.

Perhaps you should compute the fees you'll be paying - maybe it's only the 0.8% extra multiplied by your SIMPLE balance - and then determine a threshold for how much you're willing to pay before you go through the transfer exercise. It *is* admittedly a bit of a hassle to file the paperwork, as it involves paper forms printed out and snail mailed. No online transactions for this at Vanguard. The other factor is that your money will be out of the market for a week or so (and the whole process can take up to 3 weeks). Right now, 6 months is the right number for me. Doing this monthly really wouldn't be worth the effort IMO. I transfer everything out except $500-$1000.
Retirement investing is a marathon.
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The529guy
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by The529guy »

mah001 wrote:The first sentence of 408(p) says a SIMPLE Ira is an individual retirement plan. This means the employee completely controls when the funds exit. The employer can dictate which institution receives the contributions, but after that a person is free to distribute or transfer at will, leaving enough in the original account to keep it active.
Thanks, I have read carefully, but I hope you will share more. I understand it's an individual retirement plan, established by an employer. Where you see certainty, I see ambiguity. I understand that SIMPLE IRA money can be moved via a trustee-to-trustee transfer to another SIMPLE IRA during the initial two-year period:
I-3: Section 408(d)(3)(G) provides that the rollover provisions of § 408(d)(3) apply to a distribution from a SIMPLE IRA during the 2-year period described in Q&A I-2 only if the distribution is paid into another SIMPLE IRA.
Where does this "another SIMPLE IRA" come from? You imply an employee can go open it themselves. I interpret this to mean you can transfer to a pre-existing SIMPLE IRA that an individual has from a previous employer. There are many threads on this forum where individuals with Form 5305 SIMPLE IRAs are advised to wait the two years to rollover into a tIRA, rather than go out and create a new SIMPLE IRA account. What are we missing?

FWIW, that IRS Note is from the period when SIMPLE IRAs were transitioning from "generic" to the current two varieties (5304 vs 5305):
This notice also amends the answers to certain questions in Notice 97-6 in order to reflect the issuance of Form 5304-SIMPLE (Not Subject to the Designated Financial Institution Rules) and provides a transition period for the use of Form 5305-SIMPLE (for Use With a Designated Financial Institution) for a SIMPLE IRA Plan that does not use a designated financial institution.
mah001
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by mah001 »

I find that reading the Internal Revenue Bulletin 3 column version of things somehow makes these IRS pronouncements easier to take in. On page 32, at Q and A J-1 it says that not only can you do a transfer but the transfer must be done "without cost" to the employee. See Example 1 of q and a J-1. Also see example 2 or 3, which speaks of what happens when the employee fails to set up an account. Finally, try calling around and asking different institutions whether a person who is only an employee is entitled to set up a SIMPLE IRA with them. It's not the same as setting up "the plan" part, which has to be done by the employer. The SIMPLE Ira account merely holds the assets. Q and A j-2 goes into particulars of the transfer, which can limit this to a particular time frame each year.
Last edited by mah001 on Wed Jul 09, 2014 8:20 am, edited 1 time in total.
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The529guy
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Re: Is my SIMPLE IRA charging a reasonable fee?

Post by The529guy »

Fair enough. If the OP explores this route, I hope he will report back to us.
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