Self-Employed 401(k) v. SEP-IRA

[southerndoc]

I will be at a fee-for-service location next year as an independent contractor.

Which would be better for a retirement plan? SEP-IRA or SE-401(k)? I would like to contribute the highest amount possible.

Any opinions of the two?

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[The White Coat Investor]

I will be at a fee-for-service location next year as an independent contractor.

Which would be better for a retirement plan? SEP-IRA or SE-401(k)? I would like to contribute the highest amount possible.

Any opinions of the two?

These guys can answer your question better than I can.

http://www.diehards.org/forum/viewtopic.php?t=5933&highlight=solo+401k

 

[spyderdoc]

I've been doing the SEP-IRA and maxing out the contribution. I thought it was 44K, but I will look to see if it changed this year. If so, I will put in the other 1k....

I think since you are making enought to max it out, I dont really think it will make a difference which one you put it in....

I was using Fidelity when I first opened up teh SEP-IRA, and since we started using a financial planner, they use Schwab, so I rolled everything over to them.....

Good luck!

 

[etf]

I was using Fidelity when I first opened up teh SEP-IRA, and since we started using a financial planner, they use Schwab, so I rolled everything over to them.....

Good luck!

weird - most advisors let you use either fidelity, vanguard, or schwab...i'm surprised you had to move your money elsewhere.

 

[Tenesma]

spyderdoc - you should always be wary of Financial Planners that require anything - because what that implies is that they are getting kick-backs that they are NOT telling you about - which means that they are looking out for their best interest more than they are looking out for your best interest.

the ideal Financial Planner is somebody who charges a set fee without commissions (that fee can be an hourly rate or if they are very sophisticated and provide multiple levels of service than a percentage of portfolio) and who is able to act as your stockbroker, insurance planner, asset protection planner and your retirement planner with a variety of investment vehicles.

as soon as they say: it has to be Schwab, it has to be American Express, it has to be American Funds - start looking for a new financial planner

sometimes it is very well hidden because it doesn't look like there are any fees - but when your return is 9.6% per year (because 1.6% is disappearing in other peoples pockets) vs 11.2% then something is up...

 

[spyderdoc]

Oh, these guys are pretty good. Most of the senior guys in our group use them. They charge only a set fee, 1.25%/yr of your portfoilio for the first $1M, then less for each $1M after. They only put money into stocks and the only fee that is charged outside the portfolio fee is trade fees (charged by Schwab not them). They try to buy stocks for the long haul, so after the initial buy, there aren't a ton of trades going on...

The FP group is called Golub Group, www.golubgroup.com. I feel pretty comfortable with them, and they seem to do consistently better than S&P 500.

 

[etf]

yeah i don't think i would be that wary if they were forcing me to use schwab, since they pretty much invented the idea of discount brokerage. but yeah, watch out for mutual fund fees if they put you into them.

 

[The White Coat Investor]

Oh, these guys are pretty good. Most of the senior guys in our group use them. They charge only a set fee, 1.25%/yr of your portfoilio for the first $1M, then less for each $1M after. They only put money into stocks and the only fee that is charged outside the portfolio fee is trade fees (charged by Schwab not them). They try to buy stocks for the long haul, so after the initial buy, there aren't a ton of trades going on...

The FP group is called Golub Group, www.golubgroup.com. I feel pretty comfortable with them, and they seem to do consistently better than S&P 500.

Keep in mind that nearly everyone has beat the S&P 500 over the last 7 years because large cap growth stocks have been somewhat out of favor since 2000. Also note that 1.25%/year is outrageous. I know an excellent investment manager who uses 0.25/year for the first $5 Million
http://www.portfoliosolutions.com/v2/main.aspx?id=about_us/fees

Here is what 1.25% per year will do to your end result. Let's say you have $1 Million and plan to invest it for 30 more years. Let's assume your long-term return prior to fees is 8%. That comes to a grand total of $10.1 Million. If you pay 1.25%, that is the equivalent of a 6.75% return. Your grand total after 30 years is now $7.1 Million, a difference of about $3 Million dollars. Divided by 30 years, that works out to $100,000/year. Do you really think that planner is worth $100,000 per year?

 

[spyderdoc]

Keep in mind that nearly everyone has beat the S&P 500 over the last 7 years because large cap growth stocks have been somewhat out of favor since 2000. Also note that 1.25%/year is outrageous. I know an excellent investment manager who uses 0.25/year for the first $5 Million
http://www.portfoliosolutions.com/v2/main.aspx?id=about_us/fees

I hear you. I was looking at this company that you linked, and they primarily invest your money into mutual funds, which I know also have varying fees, so I guess somehow you end up paying in the end....

I will look around and keep my eyes open, and thanks for the advice.

I do like the people at Golub, and feel that I am getting a good service...At least so far...

Quote from the Portfolio Solutions link that you gave:

Our Investment Approach and Style


Wise investors know that costs matter. The more an investor pays a professional portfolio manager for services and the more they pay a mutual fund company in fund fees the less he or she will earn in return over the long-term. Portfolio Solutions designs, implements and maintains tailored portfolios of index funds, exchange-traded funds (ETFs) and other low-cost asset class funds. This strategy is ideal for knowledgeable people who know that lowering investment cost is key to increasing long-term portfolio returns.
Through hard experience and years of academic study, we learned that financial markets do a much better job of valuing the worth of a company than a large majority of professional money managers. Therefore, our clients are not invested in individual stocks or in mutual funds where the managers are trying to beat the markets. Instead, client portfolios are concentrated in very-low fee index mutual funds and other "passive" investments that track the return of the global stock and bond markets. Strict attention is given to tax management because taxes can be a client's largest expense.

Portfolio Solutions will manage a single account or manage multiple accounts as one investment policy. In multiple account portfolios, individual investments are separated into different account types based on their tax efficiency

 

[The White Coat Investor]

I was looking at this company that you linked, and they primarily invest your money into mutual funds, which I know also have varying fees, so I guess somehow you end up paying in the end....

Yes, there is an additional expense there, but keep in mind that the mutual funds recommended by an advisor such as this are usually very low cost index funds, with an ER of 0.09-0.5. Even assuming no transaction fees or bid-ask spreads on the stocks your manager is trading, your costs would still be on the order of 0.75 cheaper.

I'm not saying no one should use an advisor, but most people using advisors don't realize just how much that advice costs. You want to be sure you're getting your money's worth of advice. Another way to think about it is this:

In retirement, you can generally withdraw about 4% of your portfolio per year. If you are paying 1.25% to an advisor, he is getting about 1/3 of your retirement income. That's a lot of dough for not having to take any investment risk.

 

[spyderdoc]

Very true, and I really do appreciate that advice/thought. I will def keep my eyes open and see what's out there....

 

[etf]

\I was looking at this company that you linked, and they primarily invest your money into mutual funds

herein lies the difference between the 0.25% and the 1.25% - the people charging 1.25% are doing actual work. to me, the idea of paying someone ANYTHING to put my money into index funds is ridiculous, because they're not really adding any value. if i'm going to pay any type of management fee, it better be to someone who at least invests it into individual securities.

that said, i'd say that the majority of investors out there, whether you have $100 or $10M could build an entire portfolio consisting of vanguard total stock market, vanguard total international, and vanguard total bond (or inflation protected securities) funds, held in an age-appropriate ratio.

 

[The White Coat Investor]

the idea of paying someone ANYTHING to put my money into index funds is ridiculous, because they're not really adding any value. if i'm going to pay any type of management fee, it better be to someone who at least invests it into individual securities.

While I'll be the last to advocate paying somebody to do something you can do yourself, your comment brings up the question of whether a "professional manager" is likely to beat the simple returns of a combination of equivalent index funds (i.e. the same amount of international stocks, small stocks, value stocks, REITs etc). I would submit the answer is no.

An investment manager is useful for those who #1 can't put a reasonable investment plan into place themselves or #2 can't stay the course for whatever reason (hand-holding factor.) These guys charging 1.25% like to make investing look complicated so you don't think you can do it yourself. In my experience, they rarely add sufficient value to overcome their fees. Most of their clients simply don't know how to determine how much value they're adding. Over the last few years they have usually been able to claim "they're beating the S&P 500" yet they were doing it with small value stocks, REITs, and international stocks. If their returns were actually compared to an appropriate combination of index funds, they were underperforming. I had to rescue my dad from a financial adviser (who incidentally used Schwab and charged 0.75%/year to buy and sell individual stocks). He showed my dad every year that he outperformed the S&P 500 (from 2000-2005), yet I had to point out he wasn't outperforming the inflation rate!

Most docs spent literally a decade learning how to earn money, but aren't willing to read a single book learning how to take care of it.