As part of the 2020 Excel 401(k) Digital Series, industry experts Aaron Schumm (Vestwell), Troy Hammond (Pensionmark), and Tony Fiore (PGIM) discussed how technology is revolutionizing the defined contribution space. Their 40-minute session highlighted hot topics such as industry consolidation and trends to follow over the next decade.
We may all be living on the edge of uncertainty as we navigate the COVID-19 climate, but the one thing we can all be sure of is that Americans need a healthy nest egg in order to retire comfortably. So at a time when health and money are top of mind for most, if you don’t already offer your employees a tax-deductible way to save, this marks a great opportunity to start a company-sponsored retirement plan. Not only does a 401(k) help you do right by your employees, but it also offers many benefits for the company as well.
1. The SECURE Act Offers Meaningful Tax Credits
One of the most compelling incentives for starting a retirement plan is the significant tax credits afforded by the SECURE Act. Small businesses that sponsor a retirement plan for the first time are eligible for a tax credit of up to $5,000 per year for three years. Additionally, any small plan that implements automatic enrollment in 2020 or later is eligible for a $500 credit for three years. This applies to both existing and new plans and can be combined with the start-up tax credit for additional savings. Thanks to these credits, starting a 401(k) has become incredibly affordable. In instances where you pass some expenses onto participants, you might not end up paying any fees for recordkeeping or other services for up to three years.
By way of example, the cost of starting a standard Vestwell 401(k) could look like this in Year 1:
2. There are Company Tax Deductions Too
While employers are not required to match employee contributions – unless they’ve opted into a Safe Harbor Plan, which has many incentives – many chose to do so as a way to reward employees and help them save faster and more successfully. That said, the contributions help the employer as well. Not only are they tax-deductible, but they’re not subject to Social Security or Medicare taxes.
3. It can also reduce individual Taxes — Especially for owners
At a time when financial stress is at an all time high, reducing taxes now while at the same time saving for a financial future can be a big incentive. Annual pre-tax contribution limits are $19,500 a year as of 2020, with an extra $6,500 in catch-up contributions for those over 50 years of age, which means you can reduce your taxable income by up to $26,000 a year. Business owners can save even more. With certain plan types, like profit sharing, business owners can save as much as $57,000 a year before taxes or $63,500 with catch-up contributions.
4. you want your employees to retire…eventually
In June 2020, 72% of employees said they plan on working after they claim Social Security retirement benefits. This is up from 67% this May, a trend closely tied to the current economic climate. While this is an issue for individuals, it can also be an even bigger issue for businesses, specifically when it comes to rising payroll costs. A recent survey showed that 49% of employers are concerned that delaying retirement will raise benefits costs, 41% worried it would force up overall wage and salary expenses, and 37% feared it would block younger employees from promotions. Offering a 401(k) plan not only helps your employees become retirement ready, but it could also help with the long term view of your business.
5. employees want your support
52% of U.S. employees state that finances are their biggest concern, more than all other aspects of their wellbeing including physical, mental, and social health. Not only that, but 47% believe their employers have a responsibility to address their financial wellbeing (up from 40% pre-COVID). Offering a company-sponsored retirement plan allows you to educate and support employees when it comes to their financial future.
if you’re interested in implementing a plan on or before January 1, 2021, here are some deadlines to consider:
- August 15, 2020: Deadline for deciding to implement a Safe Harbor 401(k) plan in 2020. This type of plan is incredibly popular with small businesses because they allow companies to bypass certain compliance testing requirements. There is still time to reap the benefits for the 2020 calendar year if you act quickly.
- November 1, 2020: Deadline for agreeing to move an existing 401(k) plan to Vestwell for a January 1, 2021 start date as well as the deadline for terminating a SIMPLE IRA and moving it to a 401(k) plan structure for 2021.
- November 15, 2020: Deadline for deciding to start a new, non-Safe Harbor 401(k) plan for a January 1, 2021 start date. This maximizes your tax benefits for the 2021 calendar year.
It’s times like this when many take stock of what’s important. As a business, one can argue the financial health of the company and the people within it are paramount. Offering a company-sponsored retirement plan is not only surprisingly affordable, but can benefit the company and its employees for years to come.
By Financial Advisor Magazine
Aaron Schumm, who has spent almost two decades in the fintech and wealth space, is CEO of Vestwell, a digital recordkeeping platform for 401(k) and 403(b) plans.
How did you personally become involved in fintech?
There’s a long and short version of this story, so I’ll leave you with the cliff notes. But essentially, I knew at a very young age that I was going to go into finance. My dad is a retired carpenter, but he always had an affinity for the markets, so we started talking shop early. That set my course in undergrad to go into finance.
NEW YORK, NY, July 7, 2020. Pensionmark Financial Group, a premier network of retirement plan specialists and financial advisors, has partnered with Vestwell, an advisor friendly digital recordkeeper, to provide a more effective way to scale in the 401(k) and 403(b) markets. Together, the companies will bring a unique approach to corporate retirement plans by solving the historical challenges faced by plans in the small-to-midsize space while giving clients the customized experience they deserve.
Marrying a tech-forward solution with retirement plan specialists and back office support means advisors can spend more time providing valuable services and driving better outcomes. The offering can be white-labeled to further define an advisor’s value-proposition by putting their brand and reputation at the forefront, while relying on the platform for the rest.
“Technology plays a vital role in helping advisors efficiently deliver better financial solutions,” says Troy Hammond, CEO of Pensionmark Financial Group. “Partnering with Vestwell means advisors have access to advanced reporting, integration, and servicing capabilities so they can more effectively bring clients the experience they demand and deserve.”
Through a bundled or unbundled approach, the partnership can also deliver institutional pricing, premier funds, and 3(38) or 3(21) fiduciary oversight through Cota St, Pensionmark’s investment management arm. This means companies that once lacked access to certain proprietary funds or competitive pricing can now engage in the same investments and cost benefits traditionally enjoyed only by the large plan market.
“Like most in the industry, we’ve always been impressed by Pensionmark’s reputation amongst the advisor community and the clients they serve. After being fortunate enough to dive into their business model, we all quickly recognized the clear alignment of our missions, making this partnership all the more exciting,” says Aaron Schumm, CEO at Vestwell. “Pensionmark knows exactly what advisors need and what plan sponsors want. Leading with technology while prioritizing service, they can more effectively grow, scale, and retain clients, and we’re delighted to be there alongside them.”
About Vestwell Holdings, Inc.
Vestwell is the digital recordkeeping platform bringing the 401(k) and 403(b) industry into the modern Fintech era. We have rearchitected the workplace retirement offering from the ground up and built an engine to power the $30T industry. Our customizable, open architecture, and white-labeled platform becomes a natural extension of financial services and payroll partners, while removing traditional friction points plaguing legacy recordkeeping. The result is an easier, more efficient, and all-around better experience for everyone, delivered at a fraction of the cost. Learn more at Vestwell.com and on Twitter @Vestwell.
The Pensionmark Financial Group network represents over 275 advisors and staff across 67 locations across the country with approximately 3,700 retirement plan clients. The Pensionmark network of retirement specialists include defined contribution, defined benefit and terminal funding, not-for-profit, wealth management, and executive/deferred compensation specialists.
By Aaron Schumm, Founder & CEO, Vestwell
Across every aspect of the retirement industry, from corporate offices, to advisory firms, to small businesses, to the average American worker, it is clear that a myriad of systemic racial issues has put BIPOC (black, indigenous, and people of color) at a disadvantage. I’ve spent the past twenty years in the financial services industry and the past handful building Vestwell, which focuses specifically on bringing retirement savings & investing plans to small and mid-sized businesses. As a company that has the privilege of leveraging the platform on which we stand, it is our moral obligation to do our part to amplify minority voices and break down racial barriers within the industry.
Acknowledging the Problem
There is much written about the overall lack of long-term savings, with 45% of Baby Boomers having nothing put away for retirement. But when you begin to break down the average retirement savings by race, it becomes clear that BIPOC are deeply and disproportionately affected. In 2016, the median white family had almost $80,000 in retirement savings, while the median black family only had about $30,000 saved. The median retirement savings for hispanic families was even lower, at only $23,000. Furthermore, in 2018, the median black household earned just 59 cents for every dollar of income the median white household earned.
So while there are several factors that lead to this discrepancy in retirement savings, including the extreme disparity in average income, there is also the issue of accessibility. Minorities are notably less likely to work for an employer that offers a plan. In fact, “Blacks, Asians, and Latinos are respectively 15, 13, and 42 percent less likely than whites to have access to a job based retirement plan in the private sector.” People of color are also less likely to have access to a defined benefit plan, with 24% of white households having a pension through a current job versus only 16% of households of people of color.
What Vestwell is Doing
Vestwell was founded to make quality retirement plans more accessible to everyone. This means not only making plans easier to implement and manage but also making sure that more – if not all – Americans have one. Knowing that BIPOC often work lower-income jobs and are less likely to have a company-sponsored retirement plan, creates both an opportunity and a responsibility for Vestwell. And we plan to do something about it.
Given Vestwell’s position as a 401(k) provider, we feel compelled not only to continue current conversations around racial disparity, but also to do more to close the retirement gap, especially for people of color. This starts with education as well as access. If you are a minority-owned business, or an advisor to a minority-owned business, we want to make it easier for you to implement a 401(k) including discounts for the plan.
The struggles that are currently being conveyed in the media are not new. But today, this moment has to become a movement…one that does not fade with a news cycle. We ask our industry colleagues and friends to continue to challenge us, educate us, and remind us to do what we can to create true racial equality within the financial services industry and within every fiber of working America.
By Christopher Robbins, Financial Advisor Magazine
New York-based Vestwell, a digital retirement plan recordkeeper, announced the launch of a service offering all-ETF target-date portfolios for the small plan market.
ETFVest, which Vestwell announced on Thursday, combines 3(38) investment management fiduciary lineup services from LeafHouse Financial, which already acts as a plan fiduciary for private and public retirement plans around the U.S., with an all-ETF target-date portfolio model from Stadion, which specializes in offering customized investment options to the retirement plan market, using Vestwell’s API-driven recordkeeping solution.
New offering gives advisors a scalable, tech-forward program with smart investment strategies to effectively support the needs of plan sponsors
NEW YORK, NY, May 27, 2020 – Vestwell, a digital recordkeeper, announced today the launch of ETFVest, a new retirement plan solution that combines 3(38) investment management fiduciary line-up services from LeafHouse Financial with an all-ETF target date portfolio model from Stadion. ETFVest leverages Vestwell’s API-driven tech-forward solution to offer advisors a scalable, cost-effective, managed account solution in the small plan market.
The diverse, multi-manager line-up gives advisors exclusive access to an all ETF custom glide-path leveraging funds from Franklin Templeton, State Street Global Advisors, and Fidelity Investments. These ETF-based model portfolios built by Stadion, with fiduciary investment oversight from LeafHouse Financial, will be delivered through Vestwell’s modernized retirement platform and white-labeled as ETFVest.
“The small plan market is fraught with inefficiencies, so we’re always looking for innovative strategies to more effectively service it in a tech-forward, cost-effective way,” says Ben Thomason, EVP of Revenue at Vestwell. “With no revenue sharing, intra-day trading, low-cost yet highly effective funds, all built into a modern-day solution, we’re excited to bring ETFVest to market alongside some of the industry’s best advisory and asset management complexes.”
Featuring only ETFs with intra-day trading is unique to 401(k)s, but coupling that with funds from three of the industry’s most highly regarded asset managers makes it particularly appealing. In addition to their distinct portfolio construction, which offers the availability of specific beta exposure by factor, asset class, etc., ETFs offer price transparency with no revenue sharing. Additionally, using Vestwell’s intra-day trading capabilities may remove time out of the market as well as implicit trading costs.
“We’re excited to be a part of this innovative, tech-forward workplace retirement solution featuring several of our Franklin LibertySharesETFs, said Kevin Murphy, SVP, Head of Strategic Accounts for Franklin Templeton’s Defined Contribution Division – US. Innovation must be diverse and adaptive, and we feel this solution really checks those boxes with its inclusion of ETFs and transparent pricing delivered through a modernized technology platform.”
“In everything we do, we believe participants come first,” said Todd Kading, President of LeafHouse Financial. “ETFVest is designed to provide participants a low cost, diversified strategy for their retirement plan.”
Vestwell is the digital recordkeeping platform bringing the 401(k) and 403(b) industry into the modern Fintech era. We have rearchitected the workplace retirement offering from the ground up and built an engine to power the $30T industry. Our customizable, open architecture, and white-labeled platform becomes a natural extension of financial services and payroll partners, while removing traditional friction points plaguing legacy recordkeeping. The result is an easier, more efficient, and all-around better experience for everyone, delivered at a fraction of the cost.
About LeafHouse Financial
LeafHouse Financial is an experienced, national discretionary investment manager and consultant for all types of retirement plans. LeafHouse acts in both a 3(21) and 3(38) fiduciary capacity for a multitude of private and public retirement plans that range from start-up to large institutions across the U.S. LeafHouse developed proprietary technology that is designed to prudently select, evaluate, and monitor investments that are solely in the best interests of plan participants and their beneficiaries. LeafHouse is a registered investment advisor. Registration does not imply a certain level of skills or training. More information about the firm, including its investment strategies and objectives, can be found in our ADV Part 2, which is available, without charge, upon request. Our Form ADV contains information regarding LeafHouse’s business practices and the backgrounds of our key personnel.
These are uncertain times, at best. And for those of you diligent enough to be saving for your retirement, the volatile stock market has become particularly unsettling. History has shown the best course of action is to take no action at all, so if that’s a viable option, you may want to forget your password for a few months, focus on staying healthy, and revisit your retirement plan assets at a less humbling time. However, we recognize that isn’t a realistic option for everyone. Should you find yourself in a more dire situation, here are the options as they pertain to your 401(k) as well as the various points to consider before making any short-term decisions.
Temporarily discontinue or reduce deferrals:
If immediate cash flow is more important to you than long-term savings, you should have an easy way to change the amount you contribute each pay period to your retirement plan.
If your plan allows it, you may borrow from your own account balance and pay yourself back through loan repayments via a payroll deduction. If your employment terminates, most plans permit loans to be taken soon after separation of employment.
- Funds can become available in as little as seven business days.
- Loan amounts are not subject to taxation and interest rates are likely lower than credit cards.
- You will be double taxed on the loan repayments. While loan amounts aren’t taxable, loan repayments are made on an after-tax basis and therefore, you are paying taxes on this money before you have the chance to pay it down. Additionally, if you’re using a traditional 401(k), you will be taxed on this money again when you take your distribution from the plan.
- If you take out a loan while you’re still employer and then terminate employment, your plan may require you to pay back the loan quickly and that may cause a financial hardship.
If you find yourself in a time of financial hardship (defined as an immediate and heavy financial need – medical expenses, burial expenses, to avoid foreclosure on the primary residence), you may be able to withdraw funds from your plan without facing tax penalties. We are closely watching whether the government will permit hardship withdrawals to be made more easily in today’s unique environment. In the meantime, hardships are only available if the plan allows it – or your employer amends the plan to allow them – and an application with proof of hardship must be approved by the plan administrator.
- Funds can be available to the participant within ten business days once your provider receives all supporting documentation in good order.
- Once the hardship is taken, there is no option to contribute it back into the plan and, therefore, any losses are locked in.
- You may be required to take a loan before you can receive a hardship distribution.
- Taking any money out will reduce the amount you will have at retirement, not to mention that you lose any interest and dividends you earned on the amount withdrawn.
Some plans offer an opportunity for participants to withdraw from their retirement plan even if they cannot satisfy the hardship standard and while they’re still employed by the plan sponsor. There may be an age requirement to access funds from a safe harbor plan, so be sure to check your plan to confirm whether you qualify for this type of withdrawal.
- Participants can generally receive funds from their account within ten days of the provider receiving the request.
- As with a hardship distribution, there is no option to contribute this withdrawal back to your plan so you are locking in market losses.
- Withdrawals reduce the amount you will have at retirement, not to mention that you lose any interest and dividends earned on the amount withdrawn.
- Some in-service withdrawals may be taxed, especially for participants younger than age 59 1/2.
Please note that there is some talk of forgiving certain penalties in light of the current situation. We will keep you updated on any relevant changes.
Vestwell is not a law firm or tax advisor. Participants may wish to consider hiring their own professional before making any changes to their retirement plan, as there could be tax consequences and other adverse impacts on their retirement plan.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) offers new rules for loans and distributions made during the 2020 calendar year:
- In order to be eligible for any of these new distribution rules, participants must be “qualified,” meaning they are diagnosed with COVID-19 by a CDC-approved test; have a spouse or dependent who is diagnosed; or experience “adverse financial circumstances” by being quarantined, furloughed, laid off, given reduced hours, or unable to work by a lack of child care due to the virus or disease. Plan administrators can rely on a participant’s statement that s/he meets these requirements.
- Participants can take loans from their retirement plan for the lesser of up to $100,000 or the vested present value of their account; in other words, the maximum permissible loan amount has been doubled. Repayment can be delayed for up to one year with repayments and interest adjusted accordingly. Participants who currently have an outstanding loan with a repayment due after enactment of the CARES Act can also delay their loan repayment(s) for up to one year.
- Distributions to qualified participants can be made for up to $100,000 with the 10% early withdrawal penalty tax waived. Additionally, the distribution amount can be included in gross income over three years. Participants can repay any distribution back into their retirement plan so that they are not locking in their losses and those repayments would not be subject to the retirement plan contribution limits.
- Required Minimum Distributions (RMDs) for defined contribution plans can be temporarily waived, allowing participants to keep funds in their plans.
- Cash balance plans have more time to meet their funding obligations by delaying the due date for contributions during 2020 until January 1, 2021. At that time, contributions will be due with interest. Plans that have not been fully funded as of December 31, 2019, and therefore have benefit restrictions, can continue to apply those restrictions throughout 2020.
- Plans can adopt these rules immediately even if the plan does not currently allow for hardship distributions or loans, as long as the plan is amended on or before the last day of the first plan year after January 1, 2020. We can assist you in making any plan amendments.
The CARES Act gives the Department of Labor expanded power to postpone certain deadlines, and we can likely expect more guidance soon. There is a chance the 5500 filing deadline will be extended as well.
Vestwell is not a law firm or tax advisor. Participants may wish to consider hiring their own professional before making any changes to their retirement plan, as there could be tax consequences and other adverse impacts on their retirement plan.
Even with CARES Act and other relief, many companies are still experiencing financial stress and may wonder if they can transfer some of the costs of operating their retirement plan to participants. As is typical of regulatory questions, the answer is no for some and yes for others as long as certain requirements are satisfied.
Retirement plan expenses that can not be paid by the participant include so-called “settlor expenses.” These are the costs for services that provide a benefit to the plan sponsor, as opposed to plan participants, and generally relate to decisions regarding the amendment, establishment, or termination of a plan. A good example would be the cost for an evaluation of options to reduce the plan sponsor’s contributions to the plan. Sometimes the difference between settlor and other plan expenses is unclear so the Department of Labor (DOL) has published a set of fact patterns that may be helpful.
If the expenses that the sponsor wishes to shift are “settlor” expenses, then the next step is to check the plan documents for a definition of eligible expenses that can be paid by plan assets. This would be a good opportunity to make sure that these are the expenses actually being paid by the sponsor as a way to confirm that the plan documents align with how the plan has been operating. If the plan document does not expressly permit expenses to be paid by the plan, it can be amended to do so. The plan sponsor should also review the plan’s forfeiture account, which may also be used to pay certain plan expenses.
Once the sponsor identifies which retirement plan expenses can be paid for by the plan participants, s/he needs to decide how to allocate the expenses. The easiest option is a “per capita” option to simply divide the expense equally across all participants. For small plans, however, that method could quickly erode the balances for younger workers or participants with low balances. Another approach is “pro rata” where expenses are spread proportionately among participants based on account balances. This method may impact company owners the most since they often have the larger balances in the plan. Whatever approach you take should be disclosed to participants so that they can make informed decisions about their plan. A clearly worded, transparent communication can help soften the blow.
A company sponsored retirement plan is a valuable benefit, and while plan sponsors may need to reevaluate expenses in times like these, providing employees with a dependable way to save for retirement remains important. There are many aspects of a plan that can be assessed to make times of financial pressure a little more palatable, so be sure to reach out to your financial advisor or recordkeeper to explore options.