Noble Mustachians,
My dad is absolutely clueless about money and I'm trying to make sure he's not getting screwed, so I would deeply appreciate your expertise. He's a small business owner and has a defined benefit pension plan managed by a pension/financial services company. He's turning 67 and will likely have to retire in 2020 (when the lease ends). He made the mistake of never really saving in the past, so he's been trying to catch up in recent years. His current dollar value in the pension plan is about $450,000, and I believe his monthly calculated benefit right now is around $2,800 (the employees have negligible benefits at around $80 monthly benefits). Other than his house and store, he has no other assets. I spoke to his investment officer recently, and I'd love your objective feedback. The portfolio summary he sent me shows a 0.54 expense ratio, and the fee schedule of the company is 1.5% for up to 499K and 1% for 500K to 999K.
The defined benefit pension plan is new to me, but my understanding is it would be used to buy a life annuity. My concerns are 1. the long-term costs and 2. making sure my mom is taken care of, as she's 8 years younger than him and my understanding is joint annuities pay much less, so my dad would probably take a single annuity.
How does the transition work when the pension plan is used to buy an annuity at retirement? Will this company continue involvement after that (and continue collecting fees) or is it passed off entirely to the annuity seller?
Like a proper Mustachian, I'm personally all in low cost investments that I manage myself (with Vanguard) and my dad using financial services with high costs makes me very nervous. I'm not totally sold on annuities yet, but I understand that it may make sense for someone like my dad who is close to retirement and playing catch up. Feel free to share your thoughts.
Generally, is this just a bad investment plan? Does he need to continue with this company? Are the costs unreasonably high? Is there even a way to back out and switch gears this far in? I assume not because of the tax benefits for a pension plan, but I would love some insight from your far superior financial brains. As always, thank you in advance!