Risk #1: Missed Opportunity for Custodial Maximization

The financial institutions who hold onto, or keep “custody” of assets, are referred to as custodians. They are responsible for safeguarding securities and other assets on behalf of the client. Because of the enormous responsibility to keep these assets safe and well documented, custodians tend to be very large, reputable firms. (See below for examples.)

In our experience, there are only a handful of major custodians available to university employees through their university retirement plan. Each custodian has a unique industry background, their own inventory of investment products, and inherent strengths and weaknesses. No one company can be the best at everything, but with the right combination they can complement each other well.

If all assets are rolled into one type of custodian, the investor will miss the opportunity to harness the strengths of the other options available.

Ideally, an individual would set their target asset allocation, investigate which custodians are available to them, and select the “best of the best” investment options within each.

We call this method custodial maximization.

Three Main Types of Custodians

• Insurance Companies (Examples: TIAA, Valic, Voya, Securian). Insurance companies provide strong solutions for fixed income options, real estate funds, and annuities. For example, TIAA offers a unique guaranteed account exclusively to university plan participants. The TIAA Traditional account guarantees the safety of principal with the goal of providinge a healthy rate of return over time. Similar products are offered to university professionals at other reputable insurance company custodians; examples include the Valic Fixed Account and the Voya Fixed Plus Account. The guarantee of principal is backed by the full faith and credit of the insurance company itself; thus, this type of product is only available from an insurance company custodian.

• Mutual Fund Companies (Examples: Fidelity, Vanguard). Mutual fund companies produce a vast selection of low-cost equity and fixed income options which can help clients build a well-diversified stock and bond portfolio. Fidelity and Vanguard are the most common mutual fund custodians available to university professionals. When under the university umbrella, these custodians offer lower institutional rates, thanks to the purchasing power of the university. This provides tremendous savings for university professionals when compared to higher retail rates they would pay outside the university plan.

• Brokerage Firms (Examples: Merrill Lynch, Edward Jones, Charles Schwab). Brokerage firms are robust financial institutions that act as a liaison to buy and sell just about any stock, bond, or other financial product (except for the unique guaranteed accounts offered by insurance companies to university retirement plan participants). Most typically, brokerage accounts are utilized by university professionals for after-tax investments, outside the scope of their university retirement plan. The vast selection of investment options available can be attractive to university professionals who may feel limited by the list of investment choices offered in their university plans.

Risk #2: Irreversible Loss of Benefits

In addition to preventing you from maximizing the strengths of multiple accounts and vendors, a consolidation may also cause you to forfeit grandfathered benefits – and in some cases, this change is irreversible.

We’ve seen a growing trend in custodial changes at major universities. Either a new custodian will replace an existing custodian, or the university will transition from offering multiple custodians to only offering one. The important thing to remember during custodial changes is once you leave a custodian, you may not be able to go back.

For example, if during a transition between custodians you were to roll your TIAA assets into the new plan, and TIAA is no longer a provider under the new plan, you will have severed access to TIAA products, including the TIAA Traditional guaranteed account previously described.

Once retired, university employees may experience limited ability to move assets back into the university retirement plans. In fact, if the accounts are rolled outside of the university and the professor has retired, they are no longer eligible to roll money back into the university plans – severing all future access to the lower institutional rates and guaranteed accounts provided by the university plans.

There are even unique situations in some states that provide savings on state income taxes, or continued employee health insurance for university retirees if assets are maintained within the university plans. All states and institutions have their own unique laws and regulations, so it is important to investigate all possible benefits you may be forfeiting before consolidating any of your accounts.

Risk #3: Premature Distributions

Once an individual turns age 73, they need to begin taking required minimum distributions (RMDs) from pre-tax retirement accounts and pay the income taxes on the distributed amount.

If the individual’s retirement accounts are still custodied at the university from which they are collecting a paycheck, they can typically continue to defer RMDs until they retire from that university.

However, if the university retirement account was consolidated into an outside account, the individual may be required to take RMDs earlier than they otherwise would have.

If an individual is still working or has significant assets in the bank, they may not want or need the additional income. In fact, it can be quite costly from a tax perspective to collect a regular paycheck and required minimum distributions.

Alternative Approach: Consolidated Reporting

Instead of consolidating your retirement accounts to one custodian, we suggest considering he consolidation of your reporting. A consolidated statement showing all investments in one document, regardless of where they are custodied, can potentially help you benefit from the strengths of your different custodians, take advantage of grandfathered benefits, and help provide you with the simplification you’re looking for. Within one document, you will be able to see exactly what investments you have, where they are custodied, how much money you have added or withdrawn, how much your university has contributed, and a clear return on your investments as a whole.

The benefits of consolidated reporting expand beyond the scope of this report. Once your different accounts are viewed together on a consolidated statement, often-missed planning opportunities can become more apparent. Opportunities to save on taxes and/or administrative fees are also a possibility.

Similarly, a consolidated report can reveal unintended risks in your portfolio. You may have too much or too little market exposure in your overall portfolio even though your individual accounts may seem well balanced.

We believe the most valuable benefit of consolidated reporting is often seeing the “big picture” view of your portfolio so you can assess how everything is (or isn’t) working together for your benefit. This view is absolutely vital to an effective retirement income distribution plan.

Where to Start

While important, consolidated reporting is not typically feasible for the average university professor to do themselves. They typically do not have the time or interest in managing their portfolio to this standard. Furthermore, it is not typically possible for the advisors employed at insurance companies, mutual fund companies, and brokerage firms to provide this level of consolidated reporting and independent management to their participants due to the obvious conflict of interest.

We believe university professionals should seek an independent, fiduciary advisor who can provide objective advice on all accounts and the capacity to produce regular, consolidated reports to their clients.

Savant clients have access to an online portal to view account information in real time. They are provided the simplification of one consolidated statement while helping maximize different companies’ strengths, utilizing the funds available within each, and best of all: they don’t have to do the work themselves.

This is intended for informational purposes only and should not be construed as personalized financial advice. Savant is not affiliated with nor endorses any custodian, insurance company, or mutual fund company.