FAFSA question; Fidelity 0.5% pension mgmt fee

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mariezzz
Posts: 4
Joined: Mon Oct 02, 2017 11:02 pm

FAFSA question; Fidelity 0.5% pension mgmt fee

Post by mariezzz » Mon Oct 02, 2017 11:17 pm

I've lurked here for a while and learned quite a bit. Thank you all. All of a sudden in the last day, 2 issues have arisen (I'll start another thread for the other). Here's the first:

A friend has a child who will be heading off to college in 2 years. I made some suggestions about increasing 401k contribution, and the friend went and talked to Fidelity. The changes to the 401k were made. That is good.

The friend also has a pension account of some kind and Fidelity suggested they manage the pension for a 0.5% fee. That's all I know at this point, but the fee seems pretty high. Does anyone know anything about Fidelity managing pensions for such a fee? I can try to get more info, but may not be until weekend.

The friend had also made a Roth contribution for 2017 at another firm, and I suggested the person recharacterize the Roth contribution as a TIRA contribution, as a way to reduce income. Fidelity argued that Roth assets don't count against you on the FAFSA. I know that is true, but that isn't what the issue was - I made suggestion to lower the person's income, which would lower the money available to count toward the "parent contribution" toward college costs. Is my argument correct? Or is there a way on the FAFSA to show Roth contributions and effectively lower your income by subtracting it out on t he FAFSA?

NotWhoYouThink
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Joined: Fri Dec 26, 2014 4:19 pm

Re: FAFSA question; Fidelity 0.5% pension mgmt fee

Post by NotWhoYouThink » Tue Oct 03, 2017 7:04 am

Retirement contributions do not lower your income for FAFSA purposes. The calculation treats those contributions as income you could have spent on college. Starting the calendar year that starts when the student is a sophomore - so 2018 for this year's sophomores - FAFSA treats all retirement contributions as income. Any money already in retirement accounts by the end of this year will not count for this year's sophomores.

teen persuasion
Posts: 330
Joined: Sun Oct 25, 2015 1:43 pm

Re: FAFSA question; Fidelity 0.5% pension mgmt fee

Post by teen persuasion » Tue Oct 03, 2017 7:11 am

If the student is entering college in fall 2019, they will file the FAFSA in October 2018 using 2017 tax return and asset values as of the date of filing (Oct 2018).

Assets already inside retirement accounts are NOT included in available asset calculations. However, contributions to retirement accounts for the tax year are added back to available income calculations. So all 2017 pre tax retirement contributions will be added back to AGI. In this way, Roth vs traditional makes no difference to the FAFSA.

One quirky way that traditional is better than Roth on the FAFSA is if lowering AGI gets you below the Simplified Needs Test (< $50k AGI) or Auto EFC = 0 (< $25k AGI) AND you meet the other qualifications (can file 1040A or EZ, displaced worker, free/reduced lunch, SNAP, etc.). The Auto EFC = 0 skips all calculations, while the Simplified Needs Test ignores assets and only considers income (retirement contributions are still added back, however).

dbr
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Joined: Sun Mar 04, 2007 9:50 am

Re: FAFSA question; Fidelity 0.5% pension mgmt fee

Post by dbr » Tue Oct 03, 2017 9:00 am

mariezzz wrote:
Mon Oct 02, 2017 11:17 pm

The friend also has a pension account of some kind and Fidelity suggested they manage the pension for a 0.5% fee. That's all I know at this point, but the fee seems pretty high. Does anyone know anything about Fidelity managing pensions for such a fee? I can try to get more info, but may not be until weekend.
Is there a problem with your friend managing this account himself as apparently he has been up til now? Naturally Fidelity would like to make money managing this account so they are trying to sell a service. 0.5% is on the lower side for account management in general, but it may be totally unnecessary. Are they explaining what they do to earn their money? Claiming they will get better return does not count. While your friend is at it he should examine what those investments are costing him in ER and other costs.

dbltrbl
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Joined: Thu Mar 01, 2007 11:52 am

Re: FAFSA question; Fidelity 0.5% pension mgmt fee

Post by dbltrbl » Tue Oct 03, 2017 10:31 am

Put the money in 4 in one index at fidelity and your friend can relax.

rgs92
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Joined: Mon Mar 02, 2009 8:00 pm

Re: FAFSA question; Fidelity 0.5% pension mgmt fee

Post by rgs92 » Tue Oct 03, 2017 10:59 am

The problem is that Fidelity uses funds from many providers that, anecdotally, have expense ratios of about .5 to .7% (although institutional versions that are slightly cheaper to run). So adding this to the fee yields an overall cost always over 1%.
It's not super expensive, but on the high side.

Yep, the 4-in-1 index fund is good, but it's about 85% in stocks, and that's high.

Can't he just do a very simple index portfolio with 60% in the Fidelity Premium index total stock market fund and 40% int the total bond market index fund and rebalance every 6 months back to 60/40 with one easy calculation and one easy free transaction?

If he wants to get add foreign exposure, he can just add the Premium index international fund to the mix, but this adds more complexity and is probably not worth the trouble and may discourage him from what looks like a preference for set-and-forget (or close to it).

mariezzz
Posts: 4
Joined: Mon Oct 02, 2017 11:02 pm

Re: FAFSA question; Fidelity 0.5% pension mgmt fee

Post by mariezzz » Thu Oct 05, 2017 12:10 am

Thanks for all the replies. I agree that there's likely no need to have Fidelity manage the pension. I myself don't have a pension, so know nothing about how those get handled, but I was surprised to hear that Fidelity was getting a 0.5% fee.

Thanks also for the replies about the FAFSA; I didn't know about the benefits of getting AGI < 50K for the Simplified Needs Test. That might be tough in this situation, but I'll read up on it & let my friend know. I'll see him in under 2 months so can discuss things a little better in person. I might try to get some details over the phone - like what is the pension and what exactly is Fidelity managing?

I'll find out if the pension can be move to some other arrangement and lose the management fee as soon as that is done. Hopefully there's no requirement the pension stay in that arrangement or else suffer a penalty.

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