2022 Deadline Nears: Now is the Perfect Time to Review Your Retirement Plan Design

For the millions of business owners that offer a workplace retirement plan, the COVID-19 pandemic created many financial difficulties.

However, as the economic climate improves, there is an opportunity for employers to refresh their company’s retirement plan. With an important plan document restatement deadline happening in 2022, there’s never been a better time for employers to reevaluate their current plan design and, if necessary, add or update features that align with their business objectives and retirement plan goals.

Cycle 3 Deadline is Next Year

 Vanguard. “Revisiting the CARES Act and its impact on retirement savings.” January 2021.Every six years, the IRS requires business owners to restate their pre-approved qualified retirement plan documents to ensure they are up-to-date and compliant with current regulatory and/or legislative changes. A restatement means the plan document must be completely rewritten to reflect mandatory regulatory changes, as well as any voluntary changes made to the plan since the last update. But don’t worry, this is very normal and nothing to fear.

The latest restatement cycle for these plans began on August 1, 2020 and will close on July 31, 2022. It’s known as “Cycle 3,” since it’s the third restatement period required under the pre-approved retirement plan program.

Since the last restatement period that ended in April 2016, there have been several legislative and regulatory changes that impact retirement plans. However, this restatement period doesn’t include regulations introduced in the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. They must be addressed in separate, good faith amendments.

Restatement is mandatory. Plans that haven’t complied by the deadline could face penalties from the IRS. Even newly established or terminating plans need to restate their plan documents.

The restatement period provides employers with an opportunity to enhance their existing retirement plans — especially in light of the pandemic. Updating the plan’s design now could better position business owners, employees and companies for the future.

Plan Design Updates to Consider

 Like many employers, you may be looking for ways to prepare your employees more effectively for retirement by increasing focus on plan design, investment performance and financial wellness. With these motivations top of mind, here are some plan design features worthy of consideration:

1. Automatic savings features: Adding auto-features like auto-enrollment and auto- escalation may improve plan participation and increase savings rates.

Auto-enrollment enables employers to automatically enroll new hires into the retirement plan. To help maximize savings and improve outcomes, employers may want to consider enrolling new employees at a higher deferral rate, such as 6%, rather than the standard 3%. Under the SECURE Act, employers that implement auto- enrollment can also receive a tax credit. Additionally, employees can always opt out if they don’t want to participate.

With auto-escalation, employees’ contributions are automatically increased every year. For example, employers can increase deferral rates by 1% each year up to a maximum of 15% of pay.

2. Matching contributions: Employers experiencing budgetary constraints may consider altering the match rather than terminating it. Instead of matching 100% of a 3% employee contribution, the employer could stretch the match, such as 25% match on a 12% contribution. It costs the same but may encourage higher savings rates since employees must increase deferrals to get the full match.

 3.  The investment menu: After the market volatility that dominated 2020, employers might consider reassessing the plan’s fund lineup. Reviewing the investment menu and streamlining options may help to improve diversification and returns.

 4.  Personalized solutions: Workers value personalized, professional retirement planning education. With personalized income solutions and investment advice more widely available, these options may be worth a conversation.

 5.  Financial wellness and emergency savings programs: The pandemic was a harsh reminder that many Americans are unprepared for a financial emergency. Financial wellness and emergency savings account (ESA) benefits can support employees as they get their finances back on track and may encourage them to save so they can better weather the next inevitable storm.

 The pandemic presented unprecedented challenges for employers that offer retirement plan benefits. With the future looking brighter and the Cycle 3 restatement deadline around the corner, now is the optimal time for business owners to review, and if necessary, update their plan design to confirm it aligns with your company’s goals and cash flow obligations.

Contact Information:

CURTIS S. FARRELL, CFP®, AIF®
949.455.0300 x222
cfarrell@fmncc.com

ARAN SAHAGUN, CRPS®
949.455.0300 x210
asahagun@fmncc.com

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

CARES Act Aftermath: What Plan Sponsors Need to Do

Pandemic Relief May Bring Administrative Pain to Plan Administrators

The CARES Act gave plan participants quick access to funds during the COVID crisis, although only about 6% of participants took advantage of the options offered.1 However, as a plan sponsor you must understand your own obligations and how to keep your plan in good standing.

In most cases, the Coronavirus Aid, Relief, and Economic Security (CARES) Act did not change administrative procedures; however, it did raise a few compliance questions. With the subtle complexities involved, it is a best practice for plan sponsors to stay in close communication with their trusted administrator and, if necessary, ERISA counsel.

Coronavirus-Related Distributions

 The CARES Act allowed qualified individuals to receive a “coronavirus-related distribution” (“CRD”) in the year 2020. Generally speaking, to qualify, a person or their spouse must have been economically affected by, or diagnosed with, COVID-19.

What the CARES Act changed:

• Withdrawing up to $100,000 from their retirement plans and/or IRAs.

• Waiving the 10% excise tax for early distributions (pre-age 59 1/2).

• Allowing recipients to be taxed on the distribution over three years.

• Recontributing the amount received to the distributing plan or IRA or to another plan or IRA within three years after the date the distribution was received.

 A few questions raised:

1.       Is a plan required to accept a recontribution of a CRD?

No. While CRD repayments are considered rollovers, a plan is not required to accept them. If the plan does not accept rollovers, it does not have to be changed to accept rollovers or recontributions. A plan that does accept rollovers should review the recontribution of a CRD under the same procedures that apply to any other rollover contribution.

2.       Is a recontribution of a CRD a rollover?

Yes. A plan administrator accepting a recontribution of a CRD must reasonably conclude that the recontribution is eligible for rollover treatment.

Even if a plan did not make CRDs available, qualified individuals who received distributions under existing plan provisions, either as in-service withdrawals or termination distributions, can designate those distributions as CRDs. This could, for example, make a hardship withdrawal eligible for recontribution.

Participants who received distributions may be informed of their ability to repay CRDs if they find they didn’t need the entire amount they withdrew.

3.     How do recontributions of a CRD impact the amount already reported as taxable income?

Individuals may report one-third of the CRD amount as taxable income in each of three years, beginning with 2020. Alternatively, individuals may report the entire amount as taxable income on their 2020 tax returns and pay the associated taxes. However, the participant’s tax reporting is irrelevant from a plan perspective.

An individual may recontribute all or any portion of the CRD as a rollover to a plan or IRA within three years of receipt and avoid taxation on that amount. Any participant is responsible for obtaining his or her own tax advice.

Coronavirus-Related Loans

 What the CARES Act changed:

• Limits increased. The CARES Act increased the $50,000 limit on loans to $100,000 and the cap of 50% of the borrower’s vested balance to 100% for loans from defined contribution plans for qualified individuals made from March 27, 2020 through September 22, 2020.

• Repayments delayed. Qualified individuals could elect to defer repayments on their plan loans that would occur from March 27 through December 31, 2020 for up to one year. Repayments for such a loan are adjusted to reflect the delayed due date and any accrued interest during the delay when they resume. The delay period is ignored in determining the five-year maximum period for a plan loan.

A few questions raised:

1. Must plan administrators provide notice to current employees who have outstanding loans that changed?

   Qualified individuals who suspended loan repayments should have been notified that repayments resumed and that their loan was re-amortized for the remaining period of the loan to account for the accrued interest during the suspension period.

2. How will a loan “rolled in” from a prior employers’ plan by a new employee impact the plan?

   Nothing changes. If a plan accepts rollovers of loans from other plans, the plan’s existing procedural rules still apply.

3. What happens to the loans of newly exited employees?

   Nothing changes. Most plans do not permit former employees to take plan loans and require repayment of loans upon employment termination. These plans are not required to change. If a plan permits terminated employees to continue to repay outstanding loans, normal procedures apply.

4. Should special guidance be given to employees who took a CARES Act loan and are about to retire?

   No special notice is required, and normal loan procedures will apply. If a CARES Act loan has been taken, it is still a plan loan and normal disclosures will suffice.

 Minimum Required Distributions

 What the CARES Act changed:

• For 2020, all minimum required distributions were suspended.

A few questions raised:

1. Was this required?

Most administrators suspended these payments, but the plan sponsor had discretion as to whether to implement the suspension. Payments for 2021 are required to be paid by December 31, 2021 (or April 1, 2022 for initial required distributions for 2021).

 What Else Should I Know?

One other thing to keep in mind is to speak with your plan administrator because plan amendments for the CARES Act provisions implemented are required by the end of the 2022 plan year (the 2024 plan year for governmental plans).

 While we look towards recovery, a lot of has changed, but most has stayed the same. Hopefully, these detailed particulars were helpful as you oversee your company’s retirement plan. As you know, managing a retirement plan is no walk in the park, so when you have questions and would like to discuss in more detail, we are always here to help.

1 Vanguard. “Revisiting the CARES Act and its impact on retirement savings.” January 2021.1Vanguard. “Revisiting the CARES Act and its impact on retirement savings.” January 2021.

Contact Information:

CURTIS S. FARRELL, CFP®, AIF®
949.455.0300 x222
cfarrell@fmncc.com

ARAN SAHAGUN, CRPS®
949.455.0300 x210
asahagun@fmncc.com

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

Stop Retirement Savings Setbacks

The global pandemic has had a staggering effect on the economic lives of millions, driving them to actions that could have long-lasting effects on their retirement savings.

Facing unprecedented strain caused by the COVID-19 crisis, individuals who lack adequate emergency savings are turning to retirement plans to address their financial shortfalls.

Additionally, hardship withdrawals have been made easier by the passage of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act expanded distribution options, offered favorable tax treatment for coronavirus-related distributions from eligible retirement plans and relaxed payback options for those who met specific criteria.1

 A reported six percent of retirement plan holders took advantage of at least one CARES Act provision offered by the plan. Of these withdrawals, 21% took the maximum amount allowed under the Act ($100,000 or 100% of the vested balance).2

Plan leakage consequences

Overall, retirement plan leakage - which includes in-service withdrawals, cash-outs at job change and loans - can create savings repercussions and even a delay in retirement, even if the amounts are paid back.

 In a single year, Employee Benefit Research Institute (EBRI) reported that $92.4 billion was lost due to leakage from cash-outs.3 This is a serious problem as it can reduce aggregate 401(k)/IRA wealth at retirement. Essentially, money withdrawn early loses its potential for growth and interest accumulation, hindering its ability to produce adequate income replacement in retirement.

 For those who still consider tapping into their retirement plan savings, they may be doing so as a result of a lack of emergency savings, something that is increasingly prevalent, according to a recent Bankrate study.4

●       In 2020, about three times as many Americans report having less emergency savings now than before, compared to those reporting more savings.

●       Approximately 21% of Americans say they have no emergency savings, the lowest rate in the 10- year history of the Bankrate poll.

These staggering facts point to the importance of having a robust financial wellness program in the workplace and by placing special emphasis on maintaining an emergency savings account, which employers can offer via payroll deduction.

Curbing savings damage

Separating emergency or “rainy day” savings and retirement savings accounts can have a practical impact, too. It can reduce the urge to give in to short-term wants and separate long-run retirement savings needs.5

Participants should be aware of these financial factors when making retirement plan withdrawals:6

●      Repayments to a retirement plan are made with after-tax dollars that will, in turn, be taxed again when they eventually withdraw them from an account.

●      The fees paid to arrange a retirement plan loan may be higher than a conventional loan, depending on how they are calculated.

●      The interest is not tax deductible, even if you use the money to buy or renovate a home.

Benefits of financial education

Employers should work with retirement plan advisors to find ways to educate participants in today’s remote work environments; for example, an employer could host a virtual employee education meeting.

In these volatile economic times, it’s especially relevant to cover important topics that may help participants maintain a healthy retirement savings strategy including:

●       Maintaining retirement plan contributions and not being influenced by market activity.

●       Reviewing historical market trends on downturns and recoveries.

●       Resisting plan withdrawals by looking at alternative sources such as home-equity loans or refinancing to take advantage of low-interest mortgage rates, personal lines-of-credit or even borrowing from a family member.

Despite the uncertainty brought on by the pandemic, employers can utilize key resources and get help from their plan advisors toward ensuring employees make sound retirement savings decisions today, and in the future.

1 Internal Revenue Service “Coronavirus-related relief for retirement plans and IRAs questions and answers.” irs.gov. March 2020.

2 T. Rowe Price. “How the coronavirus is affecting retirement saving.” Sept. 2020.

3 Employee Benefit Research Institute. “The Impact of Auto Portability on Preserving Retirement Savings Currently Lost to 401(k) Cashout Leakage.” Aug 2019.

4 Bankrate. “Survey: Nearly 3 times as many Americans say they have less emergency savings versus more since pandemic.” Aug. 2020.

5Harvard Business School. “Building Emergency Savings Through Employer-Sponsored Rainy-Day Savings Accounts.” Nov. 2019

6 FINRA. “401(k) Loans, Hardship Withdrawals and Other Important Considerations.” 2020.

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

Normalizing Retirement Savings Habits

Many American workers struggled financially before the COVID-19 pandemic. Therefore, it isn’t surprising that this crisis could greatly hinder their ability to reach their retirement income goals.

Indeed, more than three-quarters of employees (77%) say they have been concerned about their financial well-being since the COVID-19 outbreak1 and 82% will rely on their workplace retirement plan as a primary income source in their post-working years. That is, if they can get there — four in five employees expect to continue working for pay after “retiring.”2

In addition, many simply can’t afford to retire; the median household retirement savings is just $50,000.3 That’s nowhere near the 60-80% replacement income financial experts say most people need to maintain their pre-retirement standard of living.

What does all this say about retirement readiness in America? More importantly, what does it indicate about the effectiveness of workplace retirement plans?

The data above clearly demonstrates that for far too long, and far too many Americans, reaching a successful replacement retirement income has been the exception, not the norm. So, it stands to reason that employers must reimagine the function of their company’s retirement plan to help “normalize” saving for the future.

 Employers should evaluate their plan’s value through the lens of helping more employees retire on time and with dignity. That means getting employees to recognize that saving for retirement isn't “optional” if they want to stop working someday. It also means providing them with the right tools to help them save enough to replace their income for 10, 20, 30 or more years.

The case for automatic features

How can employers more effectively help employees build adequate retirement savings? It isn’t complicated.

 Employers have a ready-made tool in their arsenal that vastly simplifies retirement savings: automatic plan design features. These include auto enrollment, auto escalation and auto- diversification through qualified default investments, such as target date funds.

Auto features have become a best practice in retirement plan design to help improve employee participation and savings rates. In fact, two-thirds of employers who have adopted auto features have experienced a direct benefit to plan outcomes.4

Is it better for employers to use auto features to help employees make sound financial decisions for the future? The short answer is yes. Let us show you how.

Help your employees start

With automatic enrollment, employees are enrolled into the plan without needing to take any action —unless they opt out. One obvious benefit of automatic enrollment is that it drives higher participation rates; in fact, plans with this feature have an average participation rate of 87%.5

 In most cases, employees are enrolled at a default deferral rate between 3-6%6, and their contributions are directed to a diversified qualified default investment alternative, such as a target date fund.

Help them save more

In addition, employers can use auto escalation, another plan design feature, to help improve employees’ savings rates over time. The typical default increase is 1% per year. While automatic enrollment improves savings rates, adding auto escalation boosts the impact.

 In plans with neither automatic enrollment nor auto escalation, only 44% have savings rates above 10% (including both employee deferrals and employer matching contributions). In plans that implement automatic enrollment only, the percentage of participants with savings rates above 10% increases to 67%. However, where plan sponsors have implemented both automatic enrollment and auto escalation, that percentage rises to 70%.7

Help them diversify

Finally, auto-diversification rounds out the auto feature trifecta. Often, this looks like automatically investing participant contributions into a qualified default investment alternative (QDIA) like a target date fund (TDF) or managed account.

 This typically occurs when a participant has not made an investment election on their own. Automatically directing contributions to a target date fund or similar investment that is appropriately diversified for a participants’ age and stage of life enables them to appropriately invest for retirement, even though they haven’t actively selected their own investments.

 Most TDFs also have an automatic rebalancing feature, so the participant’s portfolio remains properly invested based on their anticipated retirement date, regardless of market performance.

Plan effectiveness is measured by outcomes

Automatic features are a helpful plan design tool that employers can implement to assist employees in getting on track toward having the income they need to retire in comfort. In addition, it’s important for employers to evaluate their plan’s effectiveness based on retirement readiness — because outcomes are what truly matter.

Once auto features are in place, employers should also pay careful attention to plan health metrics, such as projected monthly income (PMI) - an illustration of a participant’s estimated monthly income stream in retirement based on their current savings. Participants with low PMIs may be at greater risk of not adequately replacing their income in retirement.

Another metric, the income replacement ratio (IRR), provides a glimpse of retirement readiness based on a specific income replacement percentage, such as 70%, using current and projected savings. Participants with low IRRs may be at greater risk of running out of money in retirement.

Understanding these metrics and the positive impact of auto features can help you evaluate your participants’ retirement readiness — and your plan’s effectiveness. With these insights, you can intelligently architect your plan to “normalize” retirement savings and help your employees work towards successfully achieving their retirement goals.

1 National Endowment for Financial Education (NEFE)/Harris Poll Survey. April 2020.

2 Employee Benefit Research Institute (EBRI). “2019 Retirement Confidence Survey.” April 2019.

3 Transamerica Center for Retirement Studies. “19th Annual Transamerica Retirement Survey: A Compendium of Findings About U.S. Workers.” December 2019.

4 DCIIA. Plan Sponsor Survey, 5th edition. April 2020.

5 Alight. 2020 Universe Benchmarks Report. June 2020.

6 Correia, Margarida. “PSCA: 401(k) participants hike deferral rates again.” Pensions & Investments. Dec. 18, 2019.

7 DCIIA Fourth Biennial Plan Sponsor Survey “Auto Features Continue to Grow in Popularity.” December 2017.

Disclosures:

 Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

5 Reasons to Rethink Financial Wellness

Employees are worried about their finances. They worry about them in the evenings, on weekends and during working hours. Plus, with the increased stress caused by the pandemic, it’s no secret your workforce could use some help.

More than meets the eye

Many employees struggle with cash for emergencies. In a recent 2020 study, they found that 47% of respondents had difficulty finding $250 for emergencies1 and had to resort to credit instead. While millennials are saddled with loan debt, members of the "sandwich generation" are burdened with dividing their limited resources between themselves, their children and their parents, while still trying to prepare for their own retirement.

Each employee demographic is struggling with their own financial challenges, which is why a dynamic financial wellness program needs to span the generations and provide potential solutions for each unique situation.

How can employers help?

Oftentimes, one of the major problems is a lack of access to financial literacy resources. It’s a problem that employers can help solve by providing financial wellness programs for their employees. Here are five advantages of a financial wellness program:

1.      Engagement. Are your employees going through the motions or are they creating and sticking to their financial plans? Financial worries can increase employee stress which leads to distraction at work. It has been shown that offering a financial wellness program breeds loyalty and focus. Six in 10 workers say they are more committed to their employer and more productive at work when they have a financial wellness program.2

2.      Lower health care costs. Financially unhealthy, stressed employees frequently have higher health care costs. Financially stressed employees may increase corporate health care budgets, as their health care costs run 46% higher than non-stressed employees.3 Lowering overall health care expenses tend to lead to lower employer costs.

3.      Fewer incidents of “presenteeism.” “Presenteeism” is a term that describes lost productivity by employees who are physically present, but not working. They are distracted by outside work stressors. This stagnant time costs employers in lost wages, lost productivity and reduced job performance.

4.      Retention and attraction. As stated, employees say financial wellness programs demonstrate that their employers care about them, encouraging commitment to the company. Losing employees costs money in recruitment efforts and the training of new hires. Turnover can cost employers 120-200% of the salary of the positions affected.4 The presence of this program in your employee benefits package may also help attract new talent.

 
5.      Retirement saving. Employees who have their budgets and debts under control are much more likely to save via their 401(k) plan and increase their contributions as their financial situation improves. These employees are also less likely to take a loan from their 401(k) plan.

Becoming an employer of choice

Joining the employers that offer a financial wellness program can help you demonstrate your understanding that happy, healthy employees are vital for a highly productive company. But keep in mind, helping your employees become financially healthy is a little more complex than it might seem at first glance.

Here are three tips for increasing employee financial literacy:

·        Choose resources relevant to your specific workforce. What works for the millennials may not work for baby boomers.

·        Ask your employees. Priorities often differ between genders, age groups, married, single, families, lifestyle, homeowners, renters and so on. Send out an anonymous poll with targeted questions to better understand your employees and what resources they need to confront their financial challenges.

·        Learn the boundaries. Employees want their employers to provide and facilitate the program but don’t want them to be overly involved in their personal lives. Set clear expectations and firm boundaries to help prevent overstepping from work life into personal space.

The ultimate goal is financial well-being. It’s not enough for employees to learn about what constitutes financial well-being; they must put it into action to achieve success.

Having a financial wellness program can benefit your employees in the form of improved employee morale and boost their productivity at the same time. It’s a win-win situation for all.

1 C. J. Marwitz. “Employee Financial Wellness: Looking Ahead to 2021.” BenefitsPro. December 4, 2020.

 2 Prudential. “Wellness Programs Earn Their Place in Human Capital Strategy.” June 2019.

3 Jane Clark. “Offering financial wellness education could improve employee productivity.” January 29, 2019.

 4 Umass Lowell. “Financial Costs of Job Stress.” 2019..

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

The Importance of a Retirement Plan Committee & Annual Reviews

Retirement plans are complex and have many moving parts; as such, many plan sponsors create retirement plan committees to help keep them running smoothly. They may be called “investment” or “administrative” committees and can range in size. Regardless of the name or number of people involved, the committee’s organization, process and documentation are key to success.

One important function of a retirement plan committee is regular, ongoing reviews of the plan’s performance with regard to investments, fees and company goals. Here is an overview of what a retirement plan committee does and the type of information it should review at least once a year.

What does a retirement plan committee do?

A retirement plan committee is responsible for making operational and investment decisions for the company’s retirement plan in the best interest of the plan, its participants and beneficiaries. Specifically, the committee’s duties typically include:

·        Evaluating the plan’s design and effectiveness

·        Selecting outside consultants and vendors, such as third party administrators, recordkeepers and plan advisors

·        Reviewing, monitoring and, when necessary, approving changes to the plan’s investment menu

·        Reviewing and approving plan expenses

As such, committee members’ fiduciary responsibility is significant.

Charter

The retirement plan committee should review the charter each year to ensure it remains relevant to the committee’s membership and how it functions. A retirement committee charter generally details:

·        How members are selected and defines their roles and responsibilities

·        The committee’s purpose

·        Membership requirements (such as term limits)

·        How often the committee meets

Committee members don’t have to be financial or investing experts. Keep in mind, however, that they are plan fiduciaries, with rare exception.

Investment Policy Statement (IPS)

A primary duty of the committee includes selecting, managing and monitoring of the plan’s investments. The committee should carry out this process according to a specific investment philosophy and strategy outlined in the plan’s Investment Policy Statement (IPS), which typically includes:

·        Guidelines and procedures for those assisting in the investment process, such as retirement plan
advisors

·        Criteria for fund and investment manager selection and procedures for replacements

·        Benchmarks for measuring investment performance, such as changes in management, investment
style, fees or expenses and assets under management

However, retirement plan committees must be cautious not to use the IPS as a “catch-all” for plan-related policies. This document is called an IPS because it should focus solely on the management and monitoring of the plan’s investments. Anything else potentially exposes the committee to unnecessary fiduciary risks and liabilities, because once included, fiduciaries must fulfill all the duties set forth in an IPS. Having to uphold those additional, unrelated promises could put the committee in worse shape than having no IPS at all.[1] The committee should review the IPS on an ongoing basis, at least once a year, and revise it as necessary.

Service Providers

The committee should also follow specific criteria for hiring plan service providers, and evaluate their fees and value each year. In short, the committee should determine if the fees are reasonable for the quality of service provided. In addition, the committee should carefully document its decision-making process regarding fee evaluations and the hiring and firing of service providers

__________________________________________

[1] Chalk, Steff. “Investment Policy Statement Must Stop Short of Promises.” 401kTV.com. September 23, 2020.

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

Title: Think Green: Have You Considered 401(k) e-Disclosures?

Anyone who has received stacks of mailed booklets, leaflets or other paper 401(k) disclosure materials might be cheering about the Department of Labor’s (DOL) recent rule that expands employer options for delivering retirement plan documents online.

 The Electronic Disclosure Safe Harbor for Retirement Plans went into effect July 27, 2020 as a voluntary safe harbor for retirement plan administrators who want to use electronic media, as a default, to furnish covered documents to covered individuals, rather than sending potentially large volumes of paper documents through the mail.[1]

 This has many employers “thinking green” and considering a transition to a fully electronic delivery of 401(k) plan disclosure materials, which is also welcome news for many plan participants who are often overwhelmed by the extensive tiny-print disclosures they currently receive as required by ERISA each year. [2]

 Going green could save some green

Companies making this transition could see a cost savings. According to the DOL, the move will save approximately $3.2 billion in net costs over the next decade for ERISA-covered retirement plans by eliminating significant materials, printing and mailing costs associated with furnishing printed disclosures. [3]

Electronic delivery may create cost savings that could ultimately be passed back to participants, translating to lower expenses – and higher net investment returns.

 Additionally, another research study notes that participants may be able to respond quicker to plan information when received electronically because by providing real-time information, it is more accessible, digestible and customizable. [4]

 Considerations and helpful information

Here’s what you need to know if you are considering a switch to fully online disclosures.

 ●       Covered individuals. Covered individuals are participants, beneficiaries and others who are entitled to receive covered documents.

●       Covered documents. Covered documents are any documents or information that the administrator is required to provide to plan participants and beneficiaries under Title I of ERISA, other than a document or information that needs to be furnished only upon request.

●       Eligible materials. Documents and disclosures covered under the new e-delivery rule include, but are not limited to:

○       Summary plan description

○       Summary of material modification

○       Summary annual reports

○       Participant-level fee disclosures

○       Blackout notices

●       Initial notification. Plan administrators must send an initial paper notification that they are
changing to the new electronic delivery method, provide the website address and offer the right to opt out if the participant prefers.

● Right to paper. Workers can choose paper copies of specific documents or globally opt out of electronic delivery entirely at any time, free of charge. However, the expectation is that most will likely stay enrolled in the e-disclosure option, especially since an estimated 99% of retirement plan participants have internet access. [5]

●       Notifications of Internet Availability (NOIA). Plan administrators must inform participants each time covered documents are posted on the website. Each NOIA must also provide an option for the participant to receive paper copies of notices. 

●       Website retention. Documents must be accessible online until a newer version is added, but in no event for less than one year.

●       System check for invalid electronic addresses. Plan administrators must keep track of the recipient’s email address; and if the address becomes invalid, they must correct the issue or treat the participant as opting out of electronic delivery.

●       Employment termination. If an employee leaves the company, the plan administrator must ensure the “continued accuracy and operability of the person’s employer-provided electronic address.” [6]

 Under the new rule, the two options for electronic delivery are website posting and email delivery. Plan participants can receive the required notices and disclosures as long as they have access to the information electronically and they are properly notified of any changes.

 The move towards an environmentally friendly, more efficient and cost-effective 401(k) disclosure process could be an opportunity for employers to enhance their retirement plan communication with plan participants.

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[1] “Default Electronic Disclosure by Employee Pension Benefit Plans Under ERISA.” Federal Register, Employee Benefits Security Administration, Department of Labor., 27 May 2020, www.federalregister.gov/documents/2020/05/27/2020-10951/default-electronic-disclosure-by-employee-pension-benefit-plans-under-erisa.

[2] “Default Electronic Disclosure by Employee Pension Benefit Plans Under ERISA.” Federal Register, Employee Benefits Security Administration, Department of Labor., 27 May 2020, www.federalregister.gov/documents/2020/05/27/2020-10951/default-electronic-disclosure-by-employee-pension-benefit-plans-under-erisa.

[3] “Default Electronic Disclosure by Employee Pension Benefit Plans Under ERISA.” Federal Register, Employee Benefits Security Administration, Department of Labor., 27 May 2020, www.federalregister.gov/documents/2020/05/27/2020-10951/default-electronic-disclosure-by-employee-pension-benefit-plans-under-erisa.

[4]  Spark Institute. “Improving Outcomes with Electronic Delivery of Retirement Plan Documents.” June 2015.

[5]  Spark Institute. “Improving Outcomes with Electronic Delivery of Retirement Plan Documents.” June 2015.

 [6] “Default Electronic Disclosure by Employee Pension Benefit Plans Under ERISA.” Federal Register, Employee Benefits Security Administration, Department of Labor., 27 May 2020, www.federalregister.gov/documents/2020/05/27/2020-10951/default-electronic-disclosure-by-employee-pension-benefit-plans-under-erisa.

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

Title: ERISA Update: 5 Big Changes Plan Sponsors Need to Know

If navigating a worldwide pandemic weren’t enough, the world of employee benefits continues to throw curve balls at employers and plan sponsors who must constantly keep up. Below are 5 big changes that retirement plan decision-makers should know about. 

1.  How far will retirement savings go

All defined contribution (DC) plan benefits to be expressed as lifetime income. The SECURE Act requires that participant account balances in DC plans be expressed as both a life annuity and a qualified joint and survivor annuity (“QJSA”). A new DOL regulation applies the rule to defined contribution plans, whether or not they in fact provide annuities as a form of distribution.

Each benefit statement issued after September of 2021 must contain the required disclosures. The new disclosures must be made once every 12 months. So long as they are fully in accordance with the new regulation, plan sponsors, fiduciaries and others are shielded from any liability arising from such disclosures.

2.  Pooled Employer Plans are coming

Is their strength in numbers or is it better to stay independent? One mission of the SECURE Act is to expand retirement savings. One of the ways in which that statutory purpose is achieved is through conditionally permitting groups of unrelated employers to form a new shared retirement plan called pooled employer plans (PEPs). 

Among other requirements, PEPs must designate a pooled plan provider (PPP) to serve as a named fiduciary and plan administrator. Additionally, the PPP must register with the Department of Labor and the Treasury Department before beginning operations. It is anticipated that those participating in a PEP will save on administrative costs as only one Form 5500 will be filed. This will be a developing topic for 2021, and we will keep you informed. 

3.  CARES Act follow up

What is one more long-haul impact of the pandemic? The CARES Act, passed in response to the COVID-19 crisis, created many new features for retirement plans including special COVID- related loans and distributions. These and other changes are allowed without formal amendments to plan documents. Plan sponsors must ensure that plans are properly amended per CARES Act rules. 

Additionally, a unique feature of COVID-related distributions presents a challenge to plan sponsors. Special attention may be required. Given the three-year window available to pay back COVID distributions to a qualified plan, it is possible that plan sponsors may be asked that COVID distributions from another plan be allowed into their plan, because the participant has a new employer (you) since taking the COVID related distribution. Plan sponsors should have a process in place to address this unique situation. 

4.  401(k) Cyber theft causes ongoing litigation

How should you digitally protect your retirement plan? In a recent court case, Bartnett v. Abbott Laboratories, et al., a plan participant who had assets stolen from their retirement account by a sophisticated cybercriminal, sued both the plan sponsor and the third-party administrator. The lawsuit raises important and unique questions about whether ERISA’s fiduciary duties can be breached under such circumstances and how applicable state laws interact with ERISA’s regime. 

Plan sponsors should pay close attention to such lawsuits to understand how the law develops and any new best practices. Plan sponsors should also be asking questions to their insurance brokers to find out whether insurance coverage is available to cover cybercrime, as it appears not to be slowing down. For more best practices on cybersecurity, contact us for a helpful checklist: Hacked, how protected is your company’s 401(k) plan? 

5.  Should Dunder Mifflin be worried?

E-disclosure regulation permits web posting and email delivery of retirement plan documents. Retirement plan administrators who want to use electronic media as a default to furnish covered documents to covered individuals now have a safe harbor via new DOL regulations.

There are two options for electronic delivery: website posting and email delivery. Previous safe harbor guidance on electronic disclosures remain available to plan sponsors who want to keep relying on it. For more information on e-disclosure, read our article, Think Green: Have you considered 401(k) e-disclosures? 

Plan sponsors are constantly bombarded with legislative and regulatory changes, as well as court opinions that affect how they run their benefit plans. To make sense of it all, plan sponsors should seek out qualified advisors to assist with their compliance needs. Contact us today to discuss how these changes may impact your plan.

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

Why it’s Important to Review, Refresh, and Revise Retirement Plan Documents

You likely recognize the importance of seeing your doctor for an annual physical to keep your health in tip-top shape, or taking your car in for routine maintenance to keep it running like new.

But what about checking the health of your retirement plan? When is the last time you reviewed your retirement committee charter, investment policy statement (IPS) and other key retirement plan documents to monitor your plan’s compliance with specific standards of conduct and fiduciary responsibilities under the law?

Ideally, you should meet with your plan’s advisor at least once a year to evaluate the overall health of your retirement plan, which includes reviewing plan documents and operations to help ensure they are up to date with current guidance and regulations.

Always a Fiduciary: An Ongoing Responsibility

As a retirement plan fiduciary, adhering to plan documents is one of your most important roles. As a plan sponsor, you are a fiduciary to the plan. This means you have an ongoing and continuous responsibility to monitor the plan, service providers, investment offerings and operations. It’s your job to ensure they are being managed in the sole interest of your participants and their beneficiaries, and for the exclusive purpose of providing benefits and paying plan expenses.¹ Not following these standards of conduct could subject you to personal liabilities. In addition, courts could take action against plan fiduciaries who breach their responsibilities. There has already been a plethora of lawsuits against plan fiduciaries in recent years.

Associate Supreme Court Justice, Stephen J. Breyer, famously submitted his verdict of the landmark Tibble v. Edison case, which set a precedent for fiduciary breach cases regarding the monitoring and selection of retirement plan investments. He stated that “… a trustee has a continuing duty — separate and apart from the duty to exercise prudence in selecting investments at the outset — to monitor, and remove imprudent, trust investments.” In short, monitoring and managing your retirement plan, its investments and operations are not responsibilities to be taken lightly.

Compliance Never Sleeps

Moreover, government and regulatory agencies such as the Department of Labor are continually monitoring plan fiduciaries to make sure they are following plan documents and procedures in accordance with the Employee Retirement Income Security Act (ERISA), the law that governs employer- sponsored retirement plans. Ultimately, this puts the onus of compliance and proper plan management on you. That said, it can be helpful to partner with your plan advisor to perform annual plan reviews for any common mistakes while managing your retirement plan and investments.

Addressing six common mistakes:

1. Poor investment oversight. Create an investment committee, led by a qualified financial professional and conduct periodic investment reviews and ongoing monitoring towards ensuring the plan’s investment options and fees are appropriate for all participants.
2. Failure to conduct periodic plan reviews. Regulations are constantly evolving and changing. Conducting a periodic plan review or benchmarking process, preferably with an independent third party, can help ensure that plan fees are reasonable and the plan is promoting positive outcomes for participants.
3. Failure to take timely action. Having knowledge of potential compliance, investment, plan fees or other significant issues, but failing to remedy them in a timely manner, can result in serious penalties or personal liability for plan fiduciaries..
4. Lack of an up-to-date Investment Policy Statement (IPS). Typically maintained by the retirement plan investment committee with help from the plan advisor, the IPS guidelines address how the plan’s investment options are selected, monitored and managed. The IPS should be periodically reviewed and updated to reflect the plan’s current goals. Many employers create an IPS but fail to follow or update it, putting them at risk for a breach of fiduciary duty.
5. Lack of a proactive participant education and communication plan. Three markers of retirement plan success are widespread participation, high savings rates and adequate investment diversification. An effective participant education and communication program can help increase deferrals and promote proper asset allocation for participants. It can also make a significant difference in your plan’s success.
6. Not following the terms of the plan document. It’s important to make sure employees are being enrolled as they become eligible, participants are receiving the correct employer matching contributions, and loans and distributions are being handled according to the policies and procedures in the plan documents.

If you identify operational or compliance errors during your annual review — don’t panic. The Internal Revenue Service (IRS) and Department of Labor (DOL) have programs to assist you in fixing mistakes. Your plan’s advisor and third-party administrator (TPA) can help with operational and compliance errors, too.

Keep in mind that once you’ve identified and corrected any plan errors, you should put processes in place to avoid future mistakes. In addition to conducting annual reviews, you should also perform regular maintenance to ensure your plan remains in good health — just like sticking to a healthy diet and exercise regimen prevent illness and performing routine tune-ups on your car keep it performing at its best.

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¹ U.S. Department of Labor. “Fiduciaury Responsibilities.”

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

Tracking Down Your Missing Participants

If you have terminated participants with balances in your 401(k) plan, some of whom you can’t locate, you’re not alone; missing participants are an industry-wide problem.

What is a missing participant? A missing participant is a former employee who has left funds in a qualified retirement plan (ex. 401(k) plan) at their former employer but has failed to keep their contact information current and is no longer actively managing their plan account.

A 2018 survey by Boston Research Technologies and the Retirement Clearinghouse estimates that 11% of terminated employees have stale addresses in their plans and one of five relocations results in a missing plan participant; their research also suggested an excess of three million missing participants. ¹

The Problem of Missing Participants

There are two main reasons why participants disappear. The first is frequent job-hopping, and the second is not keeping plan contact information up-to-date. Boston Research Technologies found another reason—one-third of their respondents didn’t know they had an account with a previous employer. ²

Missing participants have become a big enough problem that it has caught the attention of the Internal Revenue Service (IRS) and Department of Labor (DOL), who are stepping up plan audits to see if you’re making the requisite effort to find your plan’s missing participants.

It’s important to find your missing participants; they cost you money and increase your fiduciary liability. Plus, it’s much easier to administer a plan with clean data.

• It’s important to find your missing participants; they cost you money and increase your fiduciary liability. Plus, it’s much easier to administer a plan with clean data.

• TPAs and recordkeepers typically charge by the number of participants in the plan so terminated participants present an increased administrative cost.

• 401(k) plans are required to be audited when the number of participants, including the terminated ones, exceeds 100.

• Terminated employees with vested account balances who leave their accounts in the plan for more than a year must be reported to the IRS on Form 8955-SSA.

• Terminated participants with balances must be mailed benefit statements and other required plan notices, which increases administrative costs.

• Uncashed distribution checks increase your fiduciary liability, as does the failure to locate the missing participants to whom the money belongs.

• The DOL is stepping up its enforcement efforts, such as plan audits, to hold plan sponsors responsible for finding their missing participants.

• Your plan could be disqualified if you haven’t made a genuine effort to find your missing participants.

Plan Sponsor Responsibilities

As a plan fiduciary, you are required under the Employee Retirement Income and Security Act of 1974 (ERISA) to make every reasonable effort to find your plan’s missing participants. However, you have a couple of challenges facing you, says David Kaleda of the Groom Law Group: ³

• First, identifying who is missing, discovered chiefly through returned mail or emails, unanswered phone calls or uncashed checks.

• Secondly, if there are uncashed benefit checks, you and your financial institution/trustee should work together to find the missing participants. Uncashed checks are still plan assets and if unclaimed, represent a serious fiduciary liability.

But it’s not easy and there’s a lot of uncertainty around how to go about it. The most recent guidance is from the DOL, Field Assistance Bulletin (FAB 2014-01), but it only addresses the missing participants of terminated plans. The guidance can be useful to ongoing plans; however, some plan sponsors are using it as a roadmap to find their missing participants.

FAB 2014-01 recommends taking the following steps: ⁴

• Send a notice via certified mail to the participant’s last known address

• Check related plan and employer records

• Contact the designated plan beneficiary

• Use free electronic search tools

• Use additional methods if the above don’t produce a correct address:

oProprietary electronic search tools

o Commercial locator services

o Credit reporting agencies

Finally, document everything! It’s important to have a written policy in place detailing the steps to be taken to identify missing participants. Conduct an annual review to identify these participants. Document the methods used and the results of each search. The DOL will want to know this information if they ever audit your plan.

¹ Boston Research Technologies and Retirement Clearinghouse. “The Mobile Workforce’s Missing Participant Problem.” March 13, 2018.

² [Boston Research Technologies and Retirement Clearinghouse. “The Mobile Workforce’s Missing Participant Problem.” March 13, 2018.

³ David Kaleda. “Lost Participants: It is sponsors’ duty to locate their terminated ‘missing persons.’” PLANSPONSOR. January/February 2019.

⁴ U. S. Department of Labor. “Field Assistance Bulletin No. 2014-01.” EBSA. August 14, 2014.

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Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

Staying the Course through Volatile Markets

Turbulent times can bring turbulent markets. Many factors cause chaotic swings in the investing world including housing bubbles, political elections, international instability, and as we have seen recently, a global health pandemic.

Despite the financial queasiness this can have, experts consistently have one piece of advice for investors: stay calm and stay the course. Maintaining a long-term investment strategy can help weather the storm of a volatile stock market, whereas reacting irrationally, or panicking, is the last thing investors should do.

History Tends to Repeat

There are a few ways to keep nerves at bay amidst a sea of daunting headlines.

First, a historical review shows that market fluctuations are normal. This should serve as a comforting reminder during unstable conditions. According to Fidelity, “...while market downturns may be unsettling, history shows stocks have recovered and delivered long-term gains.” ¹

From 1995 to 2019 (a period that includes major drops due to the tech bubble burst, the 2008 market crash and the Great Recession), the average growth rate of the S&P 500 (which tracks the stock performance of 500 large companies on U.S. stock exchanges) was 11.9 percent (including dividends).²

While no one can predict the stock market with absolute certainty, the significant crashes of the last century all saw periods of recovery. For example, after the 2008 market crash, the recovery began almost immediately and achieved an eventual increase of 178% in 5-year returns.³

These past events reinforce the importance of focusing on long-term financial strategies and goals, not short-term fluctuations. The markets will have bull and bear runs which need time to play out without trying to anticipate short-term trends.

Don’t Try to Catch a Falling Knife

Another potential mistake that investors can make is to stop saving during a market downturn. On the heels of the 2008 crash, one study found that more than a quarter of respondents either stopped saving for retirement or stopped adding to their 401(k).⁴

However, had they stayed put, their returns would have likely had substantial gains.

Fidelity Investments reports that the average 401(k) retirement plan balance rose by 466% to $297,700 between 2009 and 2019. Furthermore, the average retirement savings of millennials, many of whom would have been at the early stages of their work career, would have experienced an upward portfolio shift of 1,762% from $7,000 in Q1 of 2009 to just under $130,000 in 2019.⁵ While past performance is no guarantee of future results, it’s important to point out in this example that when participants stay the course, it can really pay off.

A popular way to continue savings momentum when nerves are being tested is dollar-cost averaging, or in other words, investing a fixed amount on a regular schedule (e.g. per pay period) that generally results in buying more shares when prices are low and less shares when they are high.

Dollar-cost averaging is a stabilizing approach. It can take away some of the fear of timing risk and become less of a system shock than lump sum investing. Dollar-cost averaging does not ensure a profit and does not protect against loss in declining markets.

You Need Lemons to Make Lemonade

Downturns are a perfect time to consult with a financial professional to review different strategies and also rebalance your portfolio. It might be time to look at investments that have lost value. This can help to manage risk exposure and could be an opportunity to reposition the portfolio for a potential recovery.

Another possibility is to consider a Roth conversion. If your plan allows for a Roth conversion — moving money from a 401(k) to a Roth 401(k) account — then a downturn could help. A conversion in a downturn might result in a lower tax bill for the same number of shares sold, and then the participant can experience the benefits of a Roth account, allowing qualified distributions of future growth to be tax free.⁶

Market downturns are a part of any investing lifecycle so it’s best to keep a steady hand, consult with your advisor and consider all options so you can weather through this market cycle - and the next one.

Information provided herein is not, and should not be regarded as, investment advice or as a recommendation. Investing involves risk, including potential loss of principal.

¹ Fidelity Viewpoints. “6 Tips to Navigate Volatile Markets.” Fidelity. July 2020.

² Moneychimp. “Compound Annual Growth Rate (Annualized Return).” July 2020.

³ Fidelity Viewpoints. “6 Tips to Navigate Volatile Markets.” Fidelity. July 2020.

⁴ Betterment. “Betterment’s Consumer Financial Perspectives Report:10 Years After the Crash.” Sept 2018.

⁵ Fidelity. “Q1 2019 Retirement Analysis.” May 2019

⁶ Fidelity Viewpoints. “6 Tips to Navigate Volatile Markets.” Fidelity. July 2020.

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Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

4 Qualified Plan Tax Advantages for Employers

By choosing to offer your employees a 401(k) plan, you’re sending a powerful message — that you’re invested in their future and committed to helping them work towards financial security in their retirement. As a business owner, you can also benefit from setting up a retirement savings plan. Not only does it provide you with the opportunity to save money for your own retirement, it also enables you to take advantage of tax savings thanks to special deductions and tax credits. Here are four ways that a 401(k) can help you reduce taxes:

#1 Personal tax benefit

Depending on the type of plan you offer, you and your employees can save for retirement in two ways:

• P> re-tax> : Contributing pre-tax dollars to the 401(k) plan while working reduces your current taxable income and allows you to defer paying taxes until you withdraw the money at retirement.

• > After-tax (Roth)> : If you opt for a plan with a Roth feature, you and your employees can save on an after-tax basis. While it doesn’t reduce your current tax bill, generally you can take the money out tax-free at retirement. ¹ This includes your contributions, along with any investment growth.

If you are considered an employee of the business, you can take advantage of these pre- or after-tax savings, too. Moreover, having a 401(k) can provide additional savings opportunities for you.

For instance, if your income exceeds the Roth limits that would prohibit you from making contributions to a Roth Individual Retirement Account or taking deductions for traditional IRA contributions, a qualified plan could eliminate these issues because contributions to a pre-tax or Roth 401(k) do not have an income ceiling.

Keep in mind that participants can save up to $19,500 in a qualified retirement plan such as a 401(k) in 2020, per IRS limits. These contributions can be split between pre-tax and Roth deferrals — much higher than the $6,000 IRA contribution limits. In addition, employees age 50 and older can make additional catch-up contributions of $6,000 to a 401(k). These maximum limits exclude any employer matching or profit-sharing contributions. ²

2 Tax-deductible employer contributions

Many employers choose to make retirement plan matching contributions, although it isn’t required. Offering an employer match can help you attract top talent, making your retirement plan more competitive and improving employee retention.

Plus, company contributions are tax-deductible as a business expense — up to certain limits, including both matching and non-elective contributions (those made directly by the employer regardless of whether or not employees contribute to the plan).

#3 Business tax credits

A qualified retirement plan is an employee benefit. Therefore, any plan-related expenses you pay may be tax-deductible, including employer contributions and the administrative costs for running the plan. These could include fees paid to a Third Party Administrator (TPA), recordkeeper, auditor or other consultants you hire to help with your plan. All of these costs can potentially be written off.

In addition, the IRS has created tax credits to incentivize small business owners to offer 401(k) plans. Employers may claim a tax credit for some of the ordinary and necessary costs of starting a qualified plan. For 2020 and beyond, employers may qualify for a credit of at least $500. Additional credits may be available, and employers may be able to take the lesser of:

• $250 for each non-highly-compensated employee (NHCE) eligible to participate

• $5,000

The credit is available for the first three plan years. ³ Specific criteria apply, so talk to a tax professional to understand how the credit could impact your specific situation.

#4 Increased tax savings with profit-sharing

You can further customize your 401(k) plan by adding a profit-sharing component. Profit-sharing plans offer similar tax benefits to a traditional 401(k), but they have higher contribution limits, which allow employers to enjoy additional tax savings.

With profit-sharing plans, employers contribute to employees’ retirement savings based on the company’s profitability within a given year. These plans offer employers a lot of flexibility — you can choose how much you want to contribute and even skip contributions in less-profitable years.

Profit-sharing plans provide an opportunity for you and your employees to save beyond the annual limits. For instance, employees can make salary deferrals up to $19,500 (the annual limit in 2020). However, maximum employer contributions are even higher: up to 100% of an employee’s annual salary or $57,000 per year ($63,000 including catch-up contributions for employees age 50 and older), whichever is higher. Note, combined employer and employee contributions may not exceed the $57,000 limit.

The tax laws can be favorable for business owners who offer a 401(k) or similar qualified retirement plan. It’s a great way to help you and your employees save for the future while getting tax benefits for doing so. Now is a good time to take a closer look at the options available to your business and consider how providing a competitive benefit can help attract and retain talent, save on taxes and positively impact your bottom line.

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¹ A Roth 401(k) offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

² “Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits.” Internal Revenue Service, Jan 2020.

³ “Summary of The Setting Every Community Up for Retirement Enhancement Act Of 2019 (The Secure Act).” Ways and Means. Mar 2020.

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

 This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

Title: Pros and Cons of Taking Coronavirus-Related Distributions from Retirement Savings

The COVID-19 pandemic has undoubtedly shaken our economy to the core. Many businesses have struggled to keep their doors open which has caused unemployment claims to soar. Record unemployment, coupled with a U.S. society that has an average household savings account of about $8,800¹, has many people looking to their retirement savings as a “piggy bank” for necessary funds to keep their heads above water.

Withdrawing retirement savings should be carefully considered, even in view of the loosening of restrictions around withdrawals as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act because any withdrawal can have a multiplying impact on long-term retirement goals.

However, we are living in unknown times and if your participants need to access their retirement savings, the passage of the CARES Act makes it easier.

The CARES Act and new ways to access retirement savings

The CARES Act relaxed certain provisions around withdrawals and loans from 401(k) plans due to the economic severity brought on by the pandemic. Under the CARES Act, a person who meets certain criteria and has experienced hardship can qualify for a Coronavirus-Related Distribution (CRD) from their IRAs and eligible defined contribution retirement plans, such as 401(k).

To help navigate the new changes, the Wagner Law Group, experts in ERISA and employee benefits, have established a COVID-19 resources site to help employers better understand the various regulations, criteria and exceptions.²

If you are considering adding these provisions, remember that amending your plan is a fiduciary decisionand should be thoughtfully considered and your actions documented. Keep in mind that to provide for these expanded distribution and loan options, the plan needs to be formally amended; and it’s best to contact your plan administrator for the required steps.

From a high-level, CRDs from a qualified retirement plan:³

● are available to individuals who meet certain criteria.

● are not subject to the normal 10% early penalty up to $100,000 per person.

● unlike regular hardship withdrawals, CRDs may be repaid into the plan, or another qualified plan, within three years to avoid incurring taxes. The repayment is not subject to annual retirement plan contribution limits.

● if the individual does not recontribute the distribution within the three-year time period, taxation on the distribution can be spread over a 3-year period.

With regard to loans from qualified plans:⁴

● The limit on loans doubled from 50% of a participant’s vested account balance (up to $50,000) to 100% of the participant’s vested account balance (up to $100,000).

● The due date for any repayment by a qualified individual of a participant loan that would occur from the date of enactment through December 31, 2020, is delayed for up to one year. ● A qualified individual who could be eligible for these expanded loan limits and loan delays is one who could meet the same coronavirus-related criteria forwithdrawals.

● The coronavirus loan provisions are temporary and are in effect for 180 days from the March 27, 2020 date of enactment.

If possible, seek other options

Although the CARES Act makes 401(k) withdrawals and loans easier to access, participants should understand how these actions could affect the future of their retirement savings. As general guidance, participants should consider other financial reserves before removing funds from their retirement savings. These accounts could include emergency funds, refinancing current debt, HELOCs, CDs, brokerage accounts, cash value life insurance options, personal lines of credit or potentially a loan from a family member.

Importance of financial wellness

Many lessons will be learned from the COVID-19 crisis. One positive impact this pandemic may have within your workforce is the importance of financial wellness. A good program can help employees manage expenses, budget, set financial goals and priorities, while encouraging them to establish a 3 to 6 month emergency savings. Due to COVID-19, the vast majority of the workforce has been significantly affected. With tangible experience, the silver lining is that it can lead to better budgeting, financial oversight, and hopefully inspire more people to focus on the importance of a long-term retirement savings plan.

¹ Garcia, Adrian. “This is the average amount in savings accounts — how does your cash stack up?” Dec 3,2018.

²Wagner Law Group. “COVID-19 Resource Center.” April 20, 2020.

³ Wagner Law Group. “Retirement Plan Provisions of CARES Act.” March 27, 2020.

⁴ Wagner Law Group. “Retirement Plan Provisions of CARES Act.” March 27, 2020.

Disclosures:

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

 This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

5 Ways Total Rewards Can Help Recruit Top Talent

A good total rewards program helps you attract and retain the best possible talent for your organization. Add a great workplace culture and environment and you could be on your way to becoming an employer of choice among job-seekers.

What is a total rewards program?

A total rewards program is adopted by a company that provides benefits for its employees including:

1. Compensation -base pay, overtime, bonuses

2. Work/life balance - flexible scheduling, remote work opportunities

3. Benefits - health, life, dental and vision insurance, retirement plan, and voluntary benefits such as wellness

4. Recognition - feedback regarding performance and areas needing improvement, employee recognition programs

5. Growth and development - performance development planning, career paths, internal and external training, tuition reimbursement

However, the playing field has changed with the COVID-19 pandemic.

We’ve gone from record employment to record unemployment. That should make it easier to recruit

top talent, right? It might—but only if your benefits are up to the challenge.

First, confirm that your pay and benefits are competitive. Compensation is the first step in preparing a comprehensive total rewards program; however, it is not the whole picture when it comes to winning those all-star candidates.

According to Deloitte’s 2019 Global Human Capital Trends survey, perks and pay aren’t what matter most to many employees—it’s personalized rewards that help meet their needs. Furthermore, only 11% of companies in Deloitte’s survey felt their rewards strategy was highly aligned with their organization’s goals.¹

What does this mean for you? You might have some gaps to fill between the components of your total rewards program and employee needs. And since the survey was conducted in 2019 before COVID-19 appeared, your future employees’, and thus applicants’, needs are evolving.

WHAT ARE THE KEY BENEFITS TO CONSIDER?

Here are five important benefits you might want to include in your total rewards program during this work from home (WFH) new normal:²

1. Comprehensive healthcare. Your applicant needs to know they will be covered if they become ill. Without this type of coverage, they could face financial hardship in covering expenses. In addition, short and long-term disability benefits could kick in if the illness persists.
2. Paid sick leave. According to the Bureau of Labor Statistics, employees in private industry had an average of 7 days of sick leave for 1 year of service in 2018.³ Given recent events, this may not be enough because, with the new coronavirus, recovery often takes significantly longer than 7 days. Seven days, and only after 1 year of service, may not be adequate for your new hire.
3. Remote work. WFH has been encouraged—even required—because of social distancing and shelter-in-place policies to reduce the spread of COVID-19. What is your applicant’s attitude toward working alone?
4. Mental health assistance. WFH may be beneficial in many ways, but along with the accompanying isolation, it can be mentally exhausting. An Employee Assistance Program can help to alleviate the stress and distress caused by WFH isolation.
5. Financial wellness programs. Financial wellness programs seek to help employees with their #1 stressor – finances. The program can help them prepare for unexpected emergencies, student loan debt, future college savings, and/or retirement. With the pandemic, financial wellness has become even more important for employees facing additional challenges such as higher medical bills or the possibility of losing a job. Applicants and new hires may find it reassuring that such a program exists should they need it.

Does your total rewards program contain these benefits?

If there are opportunities for improvement, work with your HR and benefits teams to discuss ways to adjust benefits within the program. It will take some planning, but it could be worth the effort if it means being the employer of choice for top talent. In considering changes:

Top job seekers are not only looking for a good salary but also excellent benefits. To recruit the best, you have to be the best, and part of that is having an outstanding total rewards program.

To learn how your retirement plan compares to other similar firms, contact us to discuss a benchmarking report.

¹ Deloitte Insights, “Employee Rewards: What Do Employees Value Most?” 2019.

² Kathryn Mayer, Human Resource Executive, “8 benefits employers should zero in on during the COVID-19 pandemic,” March 24, 2020.

³ U.S. Bureau of Labor Statistics. “Private industry workers with sick leave benefits received 8 days per year at 20 years of service,” March 8, 2019.

Disclosures:

 Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

This information has been developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance regarding your specific situation.

© 401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

5 Things Employers Need to Know about CalSavers Plans

California recently launched the CalSavers Retirement Savings Program, which is mandated for all private employers in the state with more than five employees and don’t have a qualified retirement or IRA-based plan in place. 

As employers consider this program, or whether to implement a different retirement plan, here are five important things you need to know about CalSavers.

1. Why was CalSavers started?

According to the State Treasurer's Office, CalSavers was launched to provide an estimated 7.5 million private-sector workers in California with “access to a retirement savings program without the administrative complexity, fees, or fiduciary liability of existing options for employers”. The program offers participants “a completely voluntary, low cost, portable retirement savings vehicle with professionally managed investments and oversight from a public, transparent board of directors, chaired by the State Treasurer.” Employers subject to CalSavers are those with at least five full- or part-time employees who are over the age of 18, with at least one employee working in California.

 

2. When does CalSavers go into effect and what are employers required to do? 

CalSavers is being phased in annually, on June 30th, over the next three years based on employer size. The first deadline is 2020 for employers with more than 100 employees, 2021 for those with more than 50 employees, and 2022 for employers with five or more employees. Employers who choose to participate in CalSavers must do so by the above effective dates or risk fines of $250 per eligible employee if they aren’t compliant within 90 days of the noted deadline.  An additional fine of $500 is imposed if they are not compliant after 180 days, for a total of $750 per employee. While there is no cost to register for the program, there are a number of additional administrative tasks required of employers including management of employee enrollment and tracking of account details.  

3. How does CalSavers work?

CalSavers is structured as a Roth IRA. Employees will have tax free earnings and distributions in retirement. Employees are automatically enrolled with a default contribution rate of 5 percent of gross pay, which will automatically escalate by 1 percent a year, up to a maximum contribution of 8 percent. The maximum contribution is $6,000 per year, or $7,000 for ages 50 or older. CalSavers offers only six investment funds and if an employee does not choose an option, the default investment will be the CalSavers Money Market Fund for the first $1,000, and subsequent contributions will be invested in the CalSavers Target Retirement Fund. Employees can change their contributions at any point and can also opt out of CalSavers altogether. Employers participating in CalSavers are not eligible to contribute or match employee contributions.

4. What are the employer responsibilities under CalSavers?

Employers must register to set up their CalSavers account by a specific deadline based on company size (see #2 above). CalSavers employers must also take on additional responsibilities including creating a payroll list in order to enroll employees, selecting a payroll service provider, submitting participating employee contributions via payroll deduction (to be managed by a third-party administrator), updating contribution rates including auto-increases, adding new/eligible employees, and unenrolling employees if they opt out or leave the company.  

 

5. Is CalSavers the only retirement plan option for California employers?

No. There are several retirement plan options for employers that, unlike CalSavers, provide full administrative support as well as tax benefits. Working with a qualified 401(k) provider to offer a retirement plan that meets the needs of employers and employees provides significant benefits including:

• Higher Contribution Rates Help Employees Save Faster: In 2019, annual contribution rates for employees are up to $19,000 for a 401(k) or $13,000 for a Simple IRA -- significantly higher than CalSavers’ $6,000 annual contribution maximum. Rates for employees over 50 are also higher with 401(k)s and Simple IRAs ($25,000 and $16,000, respectively) compared to CalSavers’ maximum of $7,000.  

• Employer Tax Benefits: When an employer sets up a Simple IRA or 401(k) plan, they are eligible for a tax credit of up to $500 per year for the first three years. CalSavers’ employers receive no tax benefit for opting into the plan. Also, under CalSavers, employers cannot contribute to or match employee contributions and therefore receive no tax deductions accordingly. However, since Simple IRAs and 401(k)s allow for employers to contribute or match, they can claim tax deductions pursuant to IRS guidelines.

• Administrative support: When working with a Simple IRA or 401(k) plan provider, many administrative tasks are handled for you. With CalSavers, you are responsible for oversight of enrollment and ongoing participant management.

Is CalSavers best for you? Or should you consider a retirement plan that is designed for your company and employees? Don’t wait! Contact FMN today to learn about your options.  

Is Your Plan’s Investment Lineup As Good As It Could Be?

Is Your Plan’s Investment Lineup As Good As It Could Be?

CITs Can Deliver Considerable Cost Savings and Fiduciary Support

Minimizing retirement plan fees is critical to helping participants achieve their long-term savings goals. With a heightened focus on a lack of retirement readiness and fee litigation, it’s more important than ever for plan sponsors and fiduciaries to proactively look for ways to lower retirement plan costs, particularly when it comes to reducing investment fees.

But where to begin? Plan sponsors can start by assessing the plan’s existing investment lineup. Is it as good as it could be? Are there lower-cost share classes available? There may be alternative options that offer lower expenses and fees, but have the same investment objectives and underlying funds.

 In fact, plan sponsors may find that the lowest-cost share class may not be a mutual fund share class at all — it may actually be a collective investment trust (CIT). To that end, CITs may be an attractive solution for plan sponsors seeking to offer a lower-cost investment option for participants.

 What is a CIT?

Collective investment trusts (CITs), also known as commingled trusts or collective trust funds, are generally offered by banks and trust companies. CITs are similar to mutual funds in that investor money is pooled together and managed by professional money managers. Like mutual funds, CITs are also available in a wide variety of asset classes — both passively and actively managed — including stocks, bonds, stable value and alternatives. Additionally, CITs have become popular in target date funds (TDFs).[1]

 There are some noteworthy differences between CITs and mutual funds. Whereas mutual funds are available to all investors, CITs are typically offered to large pension plans that meet the minimum threshold.  Since CITs are designed exclusively for retirement plans, they aren’t subject to the same regulatory requirements as mutual funds.

A cost-effective investment solution

 With recent fee-related lawsuits shining a spotlight on retirement plan fees and fiduciary responsibility, the cost benefits alone make CITs worthy of consideration. Typically, CITs tend to be more cost-effective and may offer flexible pricing. These cost savings are due to a variety of factors[2],[3]:

1. CITs have low overhead costs, resulting in lower management fees from retail investments.

2. Combined assets are managed in a single fund, which creates scale and cost efficiencies. It also helps reduce reporting and administrative fees.

3. CITs are available only inside employer-sponsored retirement plans. As such, they are not allowed to advertise to the public, which minimizes marketing costs.

4. CITs aren’t regulated by the SEC and are not required to file prospectuses, shareholder reports or proxy statements, so compliance costs are lower.

5. Typically, CITs offer tiered pricing arrangements, allowing issuers the ability to deliver lower fees as invested assets grow. This allows retirement plans to leverage scale while capturing cost reductions. Conversely, institutional mutual fund shares, for example, may be available at the same cost regardless of plan size.

6. CITs also offer plan sponsors an opportunity to negotiate custom fee arrangements, mutual funds do not.

7. CITs are not publicly traded, therefore, they aren’t available to retail investors.

Clearly, the cost savings inherent to CITs are passed on to plan sponsors and participants in several ways. In fact, plans can reap tremendous savings benefits — an average of 39%[4] — simply by swapping the mutual fund share class out of the investment lineup and maintaining all of the underlying funds in the equivalent CIT. Another benefit: CITs provide investment flexibility. For example, they are designed to hold other CITs as underlying investments, whereas mutual funds cannot. Again, that results in additional savings opportunities.

 Another benefit of CITs is that their issuing banks and trust companies serve as fiduciaries to the plans that invest in them. As such, they fulfill similar fiduciary requirements as plan sponsors when it comes to acting solely in the best interests of plan participants and their beneficiaries.

Due to their cost savings and built-in flexibility, CITs have become a popular option for defined contribution (DC) plan sponsors of all sizes. Choosing cost-effective investment solutions like CITs can result in significant savings for plans and participants.   

Financial Management Network has helped hundreds of retirement plan sponsors review and assess the appropriateness of their plan investments. We can help you determine if the cost-savings and efficiencies of CITs are a good fit for your plan and participants, while building a stronger lineup of investment offerings designed to help you meet your fiduciary obligations and improve retirement readiness.

[1] The Coalition of Collective Investment Trusts. “CIT Myths and Facts.” April 2015.

[2] Investopedia. Entry for “Commingled Trust Fund.” February 2018.

[3] Iacurci, Greg. InvestmentNews. “Collective investment trusts getting more attention from 401(k) advisers.” June 2017.

[4] Wilshire Trust CITs available to RPAG member firms.

Don’t Panic: Stock Market Fluctuations are Normal

Don’t Panic: Stock Market Fluctuations are Normal

Nothing is more unsettling than a roller coaster stock market, which can send participants into panic mode as they nervously watch wild dips in their 401k plans.

Always remember the time-honored saying: it’s a marathon not a sprint. Simply put, long-term investing is meant to weather the storm of a volatile stock market and reacting irrationally is the last thing investors should do.

How do you keep calm amidst blaring headlines of financial fear and collapse? Here are a few simple tips that can keep nerves at bay.

This is Normal

We’ll say it again: market fluctuation is absolutely normal. According to Fidelity, “history shows that the US stock market has been able to recover from declines and can still provide investors with positive long-term returns.” They add that in the past 35 years, the market experienced an average drop of 14% from high to low during each calendar year, yet still produced positive annual returns in more than 80% of the calendar years in this period.[1]

Stay the Course

Having a plan —and sticking to it— is vital. Most 401k participants don’t need their investments right away so as long as they have a diversified asset mix that reflects “time horizon, financial situation, and risk tolerance,” they should ride it out. [2]

Also, what seems like a wild ride in the moment, is barely a blip in the long-run of investing.

When the 1987 market crash had “the S&P 500® Index careening down about 20% in 4½ days, sending shivers through investors’ veins,” a chart showing that exact time period makes the drop look intense.[3] However, when taken in a 40-year perspective, the same dip is barely noticeable.[4]

Markets Recover

The good news is that even with down months, or years, in the stock market, its rebound is just a matter of time.   

Historically, the major crashes of the last century saw predictable periods of recovery. Even the most recent 2008 market crash that lead to a 178% drop in 5-year returns began its recovery almost immediately.

By 2013, the stock market was seen as fully recovered and by February 2018, the Dow Jones Industrial Average had set more than 250 closing records.[5]

Keep Calm and Invest On

Besides staying calm, what else should investors do during a bear market? Here are three options that experts recommend investors consider:[6]

Buy when prices are low during a downturn. Invest a fixed amount on a regular schedule, which generally results in buying more shares when prices are low and less when they are high.

Review and rebalance your portfolio. Add some of the “beaten-down” investments, which can help manage risk level and position a portfolio for a potential recovery.

Assess your allocation. Based on your retirement date, you should be invested appropriately. If you have a longer time horizon you can stand to have more aggressive investments, but if you are nearing retirement, your investments should be a bit more secure. Think about it: if you’re driving down the highway and your exit is coming up in 100 ft, would you rather be going 85 in the left lane or preparing to merge into the exit lane with your blinker on?

We’ve Seen it Before

As investment advisors and retirement specialists, we’ve helped hundreds of clients weather market volatility.  We’re happy to discuss any of these tips or help develop a strategy for individual or institutional   retirement plan solutions.

Remember, the most important advice is to remember to breathe, don’t panic, and focus on the light at the end of the investment tunnel.

 CURTIS S. FARRELL, CFP® AIF®

949.455.0300 x222 | cfarrell@fmncc.com | fmncc.com

***

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

[1] Fidelity Viewpoints. “6 tips to manage volatile markets.” 20, Dec. 2018.

[2] Fidelity Viewpoints. “Beat market volatility fears.” 3, Dec. 2018.  

[3] Carlson, Mark, Board of Governors of the Federal Reserve, “A brief history of the 1987 stock market crash with a discussion of the Federal Reserve response.” 25, Nov. 2006.

[4] Fidelity Viewpoints. “Beat market volatility fears.” 3, Dec. 2018.  

[5] Amadeo, Kimberly. “Stock Market Crash of 2008.” The Balance. 6, Nov. 2018.  

[6] Fidelity Viewpoints.” The upside of a down market.” 29, Jan, 2019.

DELIVERING BENEFITS YOUR EMPLOYEES ACTUALLY WANT

DELIVERING BENEFITS YOUR EMPLOYEES ACTUALLY WANT
4 tips for forward thinking plan sponsors

As we sail past the holidays and into the new year, we look at ourselves and start putting together ideas for our New Year’s resolutions – goals we set for near-term improvement like shedding a few pounds or learning a new skill. But what about long-term goals like retirement? Compared to even the most ambitious resolutions, reaching a comfortable retirement on a timely schedule can seem overwhelming. However, as an employer, you have the power and opportunity to help your employees achieve that goal nonetheless. (They’ll be on their own with the rest of their resolutions, though!)

According to the 2018 Annual Plan Participant Survey from the American Century, employees want plan features that accelerate retirement savings, and they look to their employers for help. In fact, 8 in 10 participants want a nudge from employers, while 10% say they could use “a kick in the pants” to get their savings on track for retirement. [1]

To help you deliver the benefits your employees actually want, here are 4 forward-thinking tips employers can put into practice to give participants the push they so desperately need:  

Send Targeted Messages to Low Savers
At this point you’ve gotten the message: “saving for retirement is important,” the question is, have your employees? Some of them certainly have, but what about those who aren’t saving enough for retirement? You could always send out an email blast reminding everyone to up their deferrals, but wouldn’t that just irritate the ones who are already saving enough? What about a one-size-fits-all message…that would probably sail right past the people who need it and go straight into their spam folders. What’s an employer to do?

As it turns out, recordkeepers have made huge strides in their data-crunching abilities in recent years, to the point that it’s easy to drill down and identify specific groups of plan participants – like those who are saving less than a certain percentage of their pay. Nowadays, it’s easy to send out a custom email campaign targeted specifically to low savers, complete with a personalized message for each participant.

It is important that you choose an impactful message. Here is an example: savers credit available to low wage earners. Simply stated, people that make below $64,000 (married) and/or $48,000 (head of household) can get a tax deduction for a portion of their 401(k) or IRA contributions. Essentially, the Saver’s Credit is an incentive for low- to moderate-income taxpayers to save for retirement! To learn more about the program, we’ve provided a couple of helpful links:

INFO | FORM

Offer a Meaningful Match
A company match is a powerful tool. Whether your focus is on recruitment and retention or retirement readiness, a retirement plan match is an extremely well-regarded and cost-effective benefit to consider. Believe it or not, 3 out of 4 employees prefer a 3% match over a 3% raise in pay.[2]

Many employees interpret the employer match as a guideline for how much they should save for retirement. Match 100% of the first 3% of pay an employee defers, for instance, and most of your employees will take it as a suggestion that they can save exactly 3% each year and have enough for retirement. Unfortunately, in most cases they will need to save much more. So, it is important that you find a formula to incentivize participants to defer a meaningful amount and meets your budget. Actual cost will be lower depending on your vesting schedule.

 Implement Auto Features
Auto features have become more and more commonplace these days: nearly 6 out of 10 plans have already adopted auto-enrollment, and three-fourths of those plans automatically increase default deferral rates over time.[3] When discussing these powerful features with plan sponsors, we are often met with resistance, mainly because they fear pushback from their employees. It may rest your worried mind to know that 2 out of 3 of participants feel positive about a company that offers auto enrollment and automatic increases.[4]

What if you had the ability to automatically get new employees on track toward retirement? Employers that implement auto enrollment have seen participation rates increase from 47% to 93%.[5]

According to T. Rowe Price, the average default rate has reached an all-time high! For the first time ever, more plans have a default deferral rate of 6% than the previous industry standard of 3%.[6] While this is a great start, many experts believe that Americans need to save 12-15% per year in order to achieve a comfortable retirement. We believe this is achievable by adding an auto increase feature to your plan; this plan design feature makes accelerated saving simple by slowing ramping up deferral rates each year, generally by 1-2% annually. The illustration shows a couple saving scenarios and how long it would take to get employees the recommended savings rate.

Roll Out Re-enrollment
Even if you implement auto-enrollment, it is possible that not all eligible employees are reaping the benefits. Most employers implement auto-enrollment only for new hires, so employees who were already with the company when auto-enrollment was first implemented got passed over. Also, some new hires may have opted out of enrollment when they first joined, or reduced their deferral sometime after being hired due to financial concerns; even if their financial state has improved since, most won’t take the initiative to sign up for participation on their own.

Consider re-enrollment for all eligible employees either not currently participating in the plan or contributing less than the initial default deferral rate. If your initial default deferral rate is 6%, for example, re-enrollment would include non-participating employees as well as active participants, who are saving less than 6%. Some employers do re-enrollment as a one-time event; others do it every year. Which way makes the most sense depends on the company.

Partner with us and we can help you implement these and other ideas to get your employees on track to a well-earned comfortable retirement. We can work with your recordkeeper to target campaigns to specific participants, help you choose the right deferral rate for your employees and budget constraints, figure out a match formula that optimizes employee contributions, and decide whether re-enrollment is right for your plan.

[1],2 American Century Investments. “5th Annual National Survey of DC Plan Participants.” Dec 2017.    

[3] Greenan, Hattie.” PSCA Releases Results of 60th Annual Survey of Profit Sharing and 401(k) Plans.” 12 Feb. 2018.

[4] American Century Investments. “5th Annual National Survey of DC Plan Participants.” Dec 2017.  

[5] Clark, Jeffrey W., and Jean A. Young. “Automatic Enrollment: The Power of the Default.” Vanguard Institutional, Feb. 2018.

[6] T. Rowe Price. “Reference Point Annual Survey.” Dec. 2017.

PLAN ADMINISTRATION IS A HASSLE....but does it have to be?

PLAN ADMINISTRATION IS A HASSLE
…but does it have to be?
3 Tips for Managing 401(k) Plan Administration Headaches

As an HR professional, you have mastered the art of juggling and hopefully you look good in hats, because you’re likely to find yourself wearing a number of them in varying situations. Being the administrator of your 401(k) plan adds a few extra hats to the rack. Your role changes from accountant for payroll, to attorney when reviewing plan documents or a teacher for the plan participants.

In this article we hope to lend some helpful information, tools and ideas that may help you manage your responsibilities as a plan sponsor and hopefully make your life a bit easier.

Payroll
Every payroll period, administrators are required to submit payroll and 401(k) contributions in a timely manner. If you are still taking a manual entry approach, you understand how arduous that process can be. Many administrators may feel like the middleman stuck between your payroll provider and recordkeeper, or a rock and a hard place.  Fortunately, payroll is a process that can be automated and integrated to reduce potential data input errors and give you back valuable time.   

Partnership with a quality provider that can bear this burden or a seamless payroll integration may ease the pain of this ongoing task. The solution that’s best for you will depend on a few different factors, however, here are the three most common approaches:

180° integration — Your payroll provider and 401(k) recordkeeper are integrated to share critical information on participant contributions. Data flows automatically from payroll to the recordkeeper, but only in one direction. Think of this like a 1-way street.

360° integration — Similar set up as 180° integration, but data flows in both directions between the payroll firm and the 401(k) recordkeeper, like a 2-way street.

Third Party Services — You could alternatively choose to delegate the responsibility to a Third Party. This would be similar to calling an Uber to get you where you need to go, you don’t have to worry about which streets go which direction.

Following Plan Documents
Failure to follow plan documents has been cited as one of the top 3 ERISA violations.[i] In the landmark case of Tussey v. ABB, Inc., some pretty steep penalties were paid: $36.9 million in damages was awarded to plan participants.  Among the fiduciary violations was failure to follow the terms of plan documents.[ii]

Fortunately, you can learn from this case and with a bit of guidance, you may be able to avoid that same fate. If it has been a while, consider dusting off and reviewing theses governing documents:

• plan document
• trust agreement
• service provider agreements
• committee by laws or charter
• investment policy statement (IPS)
• summary plan description (SPD)

If this important fiduciary step seems daunting, you are not alone. Documents can be difficult to decipher as they are often written in tedious legal language and can be hundreds of pages long. (Your advisor can help with this process.)

One of the most heavily utilized and referenced items on that list is a condensed version of your plan document, a “Summary Plan Description”. An SPD is a summary of the key features of your 401(k) plan and eases understanding, allowing its use for participant education and administrative reminders as needed.

We have developed an abridged version that outlines some of the most referenced items such as eligibility timeline, enrollment periods, and distributions. Download our free template by clicking the button below.

Employee Education
How often are you approached with technical questions about your company’s retirement plan? Did you know that the simple act of discussing certain aspects of the company retirement plan with your employees could open you up to fiduciary risk? This a job for your advisor, not a burden you should have to bear. We understand that vesting schedules, risk tolerance, retirement income replacement ratios, social security integration, and non-qualified deferred compensation contributions are not your full-time job.  As Retirement Specialists, this is what we do! We are licensed and available to answer the complex questions your employees may have. 

Many of the tasks involved in plan administration can seem time consuming, tedious or just an outright pain in the neck at times. However, we like to look at these responsibilities as a safeguard and believe that, if done right, they may help you dodge fiduciary nightmares. For more information on how Financial Management Network can help relieve some of your administrative stress, contact us today!

[i] Donaldson, David. “Plan Management: Through the Eyes of a Former DOL Senior Investigator.” ERISA Smart. 2015.
[ii] Wagner, Marcia. “Legal Update: Tussey vs. ABB, Inc.” Jan. 2015.

Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.

The Top DC Advisor Firms is an independent listing produced annually (September 2017) by The National Association of Plan Advisors(NAPA). The NAPA Top DC Advisor Firms is a compilation of leading individual advisor Firms, or teams, ranked by DC assets under advisement. This award does not evaluate the quality of services provided to clients and is not indicative of this advisor’s future performance. Neither the advisors nor their parent firms pay a fee to NAPA in exchange for inclusion on this list.

The “Top 100 Retirement Plan Advisers 2016” list by PLANADVISER Magazine recognizes individuals, teams, and multi-office teams according to quantitative measures, including the dollar value of qualified plan assets under advisement as well as the number of plans under advisement. Nominations were solicited online from retirement plan advisers, their employers and/or broker/dealers, and plan sponsors, as well as from working partners of these advisers, including investment vendors, accountants and attorneys, and pension administrators.

The Financial Times 401 Top Retirement Plan Advisors is an independent listing produced by the Financial Times (September 2016). The FT 401 is based on data gathered from financial advisors, regulatory disclosures, and the FT’s research. The listing reflects each advisor’s status in seven primary areas, including DC plan assets under management, growth in DC plan business, specialization in DC plan business, and other factors. This award does not evaluate the quality of services provided to clients and is not indicative of this advisor’s future performance. Neither the advisors nor their parent firms pay a fee to Financial Times in exchange for inclusion in the FT 401.

Debunking 401(K) Myths

DEBUNKING 401(K) MYTHS

Myth #1: “We’re all set”

Over our years working with business owners and employers, we’ve encountered a number of common myths that plan sponsors hold on to despite proof to the contrary. These myths can be harmful to plan sponsors and employees alike, and here we aim to debunk some of the most frequently occurring offenders.

 Myth #1: “We’re all set.” Plan sponsors use this phrase often to describe their level of satisfaction with their plan. It also serves as a roadblock to any discussion regarding potential improvements to their retirement plan offerings. “We’re all set” – “everything is fine; nothing needs to be changed.” Unfortunately, this is generally anything but the case. There are two key elements that demand careful examination: fiduciary awareness and retirement readiness.

 FIDUCIARY AWARENESS
Nearly half (49%) of plan sponsors don’t recognize their status as fiduciaries.[1] Unawareness of your position and/or responsibilities is a good way to get hit with unexpected complications down the road. Here’s a quick guide to help you determine whether you are a fiduciary, and if so, what your responsibilities are:

Am I a fiduciary?

1.      Are you named in plan documents as a fiduciary?
2.      Do you exercise control over the management or administration of the plan or its assets?
3.      Do you provide ongoing investment management or advice to the plan or plan participants?
4.      Do you select or supervise other plan fiduciaries?
5.      Do you sit on a committee that manages the plan?

 What are my responsibilities as a fiduciary?[2]

1.      Act solely in the interest of plan participants and their beneficiaries.
2.      Prudently carry out your duties.
3.      Follow plan documents (unless inconsistent with ERISA).
4.      Diversify plan investments.
5.      Pay only reasonable plan expenses  .

 RETIREMENT READINESS
How prepared are your employees to retire? According to BlackRock’s annual DC Survey, plan participants are almost universally confident about their overall financial situation, but over half of plan sponsors are concerned:

This startling gap in confidence might stem from many factors. Many employees might simply not know enough to accurately evaluate their financial situation; 81% of Americans say they aren’t sure how much money they'll actually need in retirement. [4]  Alternately, they might believe that plan sponsors are solely responsible for their retirement: during a recent employee education meeting, we were approached by an employee who asked, “isn’t the company required to pay for everything?” After addressing the employees’ misconceptions, we worked with the plan sponsor to implement automatic plan design features and rolled out a more robust employee education program to help motivate savings.

 Plan Design

As a plan sponsor, you control one of the most powerful savings vehicles available to your employees. To help your employees harness that power, you might consider enhancing your plan with Auto-Increase, or an enhanced employer matching formula.

 Auto-Increase allows participants to automatically increase contributions little by little each year– typically by 1%. One percent per year may not seem like much, but it adds up over time!

*This illustration uses a hypothetical 7% rate of return. It is not representative of any specific situation and your results will vary. The hypothetical rate of return used does not reflect the deduction of fees and charges inherent to investing.

If your plan uses a typical match formula of dollar-for-dollar up to 3% of pay, you might want to consider Stretching the Match. For example, you could match fifty cents on the dollar up to 6% of pay. This simple scenario would increase employee savings while keeping employer contributions the same (3% of pay).

Employee Education
Employee education sessions can be effective! The secret is to make them relevant to your employees: use the time to get them excited about financial wellness programs and incentives, incorporate retirement readiness concepts, discuss auto-features and match formulas, and even debunk some common 401(k) myths (e.g. “isn’t the company required to pay for everything?”)

 Understanding and fulfilling your fiduciary duties and moving your employees toward retirement readiness are two ways to help ensure that your plan truly is “all set.” But these aren’t “one-and-done” tasks. We work closely with employers to help them meet their fiduciary duties and keep their employees educated and engaged. For more information on how Financial Management Network can help you build a prudent fiduciary process and dynamic employee education, contact us today!

 [1] AllianceBernstein L.P. " Inside the Minds of Plan Sponsors" A/B Research. Dec 2017.

[2] Department of Labor. “Meeting Your Fiduciary Responsibilities.” DOL.gov. Sept. 2017.

[3] BlackRock. “2018 DC Pulse Survey.” March 2018.

[4] Age Wave/Merrill Lynch, "Finances in Retirement: New Challenges, New Solutions," 2017.

[i] Donaldson, David. “Plan Management: Through the Eyes of a Former DOL Senior Investigator.” ERISA Smart. 2015. 

[ii] Wagner, Marcia. “Legal Update: Tussey vs. ABB, Inc.” Jan. 2015.

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Investment advisory services are offered by Financial Management Network, Inc. (“FMN”) and securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC.
The Top DC Advisor Firms is an independent listing produced annually (September 2017) by The National Association of Plan Advisors(NAPA). The NAPA Top DC Advisor Firms is a compilation of leading individual advisor Firms, or teams, ranked by DC assets under advisement. This award does not evaluate the quality of services provided to clients and is not indicative of this advisor’s future performance. Neither the advisors nor their parent firms pay a fee to NAPA in exchange for inclusion on this list.
The “Top 100 Retirement Plan Advisers 2016” list by PLANADVISER Magazine recognizes individuals, teams, and multi-office teams according to quantitative measures, including the dollar value of qualified plan assets under advisement as well as the number of plans under advisement. Nominations were solicited online from retirement plan advisers, their employers and/or broker/dealers, and plan sponsors, as well as from working partners of these advisers, including investment vendors, accountants and attorneys, and pension administrators.
The Financial Times 401 Top Retirement Plan Advisors is an independent listing produced by the Financial Times (September 2016). The FT 401 is based on data gathered from financial advisors, regulatory disclosures, and the FT’s research. The listing reflects each advisor’s status in seven primary areas, including DC plan assets under management, growth in DC plan business, specialization in DC plan business, and other factors. This award does not evaluate the quality of services provided to clients and is not indicative of this advisor’s future performance. Neither the advisors nor their parent firms pay a fee to Financial Times in exchange for inclusion in the FT 401.

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