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 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.
We all know that lead generation can be one of the more challenging – and time-consuming – parts of anyone’s job so it’s important to equip yourself with the right tools to effectively grow your business. When used correctly, LinkedIn can be one such powerful tool. Taking the time to polish your LinkedIn profile and understand how the features work means you’re more likely to find the right clients – and they’re more likely to find you. When creating your LinkedIn strategy, we recommend focusing on these three basic, but critical, tactics.
1. Give Your Profile a Facelift
Profile Picture & Banner Image
Your profile picture is like a handshake; it’s massively important but should in no way be memorable. Include a photo that shows you in a professional, friendly light. Clients like to know who they are dealing with. You can also upload a banner image to the top of your profile. If you decide to add one, we recommend selecting an image that represents your city/region or your firm’s logo.
LinkedIn gives you 120 characters to write your headline so make it as concise (but informative!) as possible. Think of the people you want to engage with and write a very short statement that will directly appeal to them. For example, rather than writing “Retirement Plan Advisor, CFP,” try something more engaging such as “Helping small businesses select and implement the right retirement plans| Financial Advisor, CFA | NYC.”
In addition to your headline, you have an option to include a summary. Think of this as a cover letter, not a resume. This is your chance to elaborate upon the value you lay out in your headline and reflect your personality. It is important to give a clear, consistent message as most people will not read your summary word for word. We recommend laying it out as follows:
- Section 1 – Opening
- Section 2 – Your value to your market (Summarize in three bullet points)
- Section 3 – Who you’re looking to help and how
- Section 4 – Outside-of-work interests
Pro Tip: Ensure your summary is written in the first person (‘I’ or ‘We’) to prevent it from looking like something you copied and pasted from a resume.
A great feature of your LinkedIn profile is the ability to add multimedia to it, such as PDFs, PowerPoint slides, videos, links, and more. This gives you the opportunity to include content that is specific to your clientele and position yourself as an expert.
2. Find Your Ideal Contacts
To start a conversation with a prospect you have to find them first. Fortunately, the search features available on the free version of LinkedIn turn it into an impressive database of filtered business professionals. The parameters allow you to create highly-focused prospecting lists that provide you with real-time information on your leads. Using this information to personalize your message is extremely valuable when it comes to engaging with people – and makes gatekeepers a thing of the past.
Primary Search Features
All LinkedIn searches can be started by typing a search parameter into the main search bar. By way of example, let’s say you want to find accountants in New York (you can no longer search by zip code radius; it has to be by town or city). To begin your search, simply type “accountant” into the search bar. On the next page will be the result of the search – click on “People.”
You can now narrow down these results by using the 3 primary filters at the top of the screen: Connections, Locations, and Current Companies. As you select each filter, the search result will automatically refine itself. You can also click “All Filters” if you want to narrow down results by industry, past companies, etc.
The other thing to keep in mind is that you can now perform “Boolean” searches, whereby you enter “NOT,” “AND,” or “OR” between terms. For example, if you want to find company directors who like golf, you would enter into the search field ‘ “director” AND “golf”.
3. Leverage the News Feed
The main feature of the Home Page is a tailored news feed which contains updates from all of your 1st line of connections, such as articles they shared, new job announcements, profile updates, etc. The news feed is a simple, free, and effective way to:
- Stay top of mind for clients
- Position yourself as an expert
- Inform and educate your contacts
- Drive traffic to your site
Sharing an update is a very straightforward process and it only takes a few seconds. There are 2 primary ways to post content – either by “liking” content on your feed or by taking content directly from a website. Here’s how each of these works:
Liking Content – Simply follow a company on LinkedIn – anything this page posts will then automatically appear on your own news feed. All you then have to do is “like” the article and it will then be shared with all of your 1st line contacts on LinkedIn.
Posting Content – Navigate to a blog or news site. Once you see a link you’d like to share
- Copy and paste the article URL to the “Start a post” box at the top of the LinkedIn Home page.
- Add the first paragraph from the article to your post – or write your own thoughts on the piece!
- Add three professional hashtags that are relevant and that people who are looking for that piece of content may search.
Pro Tip: When it comes to news feed etiquette, it’s important not to come across as always trying to sell so don’t just post updates about your latest product or service. People want content that is informative and educational in nature.
Pro Tip Bonus: When posting, it’s important to always include hashtags. While LinkedIn is continually updating their algorithms, three is currently the best number to increase visibility.
If you’ve mastered these steps and want to take your social strategy to the next level, contact Graham Aikin to explore LinkedIn workshops for advisors and wealth managers by emailing him directly at email@example.com. And of course, follow Vestwell for shareable content and upcoming retirement-focused webinars.
By Ben Thomason and Fred Barstein
As legislation and technology drive change in the retirement plan market, we are seeing record-breaking rates of consolidation, impactful new regulation such as the SECURE Act, and shifting strategies including the growth of managed accounts. Moving into 2020, Fred Barstein and Ben Thomason are breaking down why these trends have taken flight and what they should mean for your retirement plan business strategy.
Trend #1 Changing Regulation Around Open MEPs/PEPs
There are 5.8 million businesses in the US with100 or fewer employees, and of those, 90% do not have a retirement plan. The SECURE Act was passed in an effort to close this retirement gap, with significant changes made to Open Multiple Employer Plans (Open MEPs), now referred to as Pooled Employer Plans (PEPs). Previously, “open” MEPs could cover multiple, unrelated employers, but all plans needed to file their own 5500s and were subject to the “one bad apple” rule which made them highly risky to sponsors. The SECURE Act introduced PEPs, which are essentially Open MEPs, but they can be offered to unrelated companies with only one 5500 filing and without the one bad apple rule. They must be serviced by a pooled plan provider (PPP). The PPP takes on the role of named fiduciary, plan administrator, and the organization responsible for performing all administrative duties.
PEPs also greatly reduce the plan administration lift through a single plan document, a single Form 5500 filing, and a single independent plan audit, all led by the PPP. They also have streamlined fiduciary oversight, minimizing the legal responsibilities a plan sponsor would need to manage. Finally, PEPs will likely appeal to those small employers who believe plans are too expensive and difficult to administer, and allow them to band with others to access an institutional quality infrastructure they’d otherwise have to build – and pay for – on their own.
What this means for advisors
Retirement plans are sold, not bought, so while new legislation was meant to address accessibility, that wasn’t necessarily the problem. Instead, the problem was around the complexity of plans and misinformation around the cost and time investment for small employers. That being said, just because the SECURE Act passed, does not mean companies are running to the gates – they need to be made aware of the improvements that were made. PEPs create an opportunity for advisors to market small plans in an entirely new way and alleviate concerns smaller companies have around the investment it takes to run a plan.
It’s also worth thinking about the opportunities PEPs create for those around you. This structure makes it easier for financial institutions outside of retirement – such as insurance and benefits providers, among others – to enter the market and cross-sell their existing services while gaining low priced access to the participant. To get a leg up, you may feel inclined to create your own offering, but standing up your own PEP is no small feat. It comes with significant expense and time. Partnering with a broker-dealer or recordkeeper, rather than trying to form your own, can be a more effective way to enter the market.
We also recommend thinking about other partnerships (payroll companies, associations, etc.) that offer marketing access to small businesses and still offer effective ways to scale through not only PEPs, but also traditional MEPs and even your own non-MEP solution. Check out our previous Vestwell U webinar on associations for help on how to tap into this market or our session on traditional MEPs if you’re looking for more information on how they operate.
That being said, just because PEPs are now easier, doesn’t mean they’re always the right option. You can often replicate the same benefits around price and administrative lift elsewhere. There are already a number of recordkeepers offering similar low cost, institutional pricing, and in some senses, you can provide the same value without waiting for 2021 or putting in the investment of standing up a new initiative.
Trend #2: Continued Industry Consolidation
It’s no secret there has been major consolidation across the retirement industry, from recordkeepers, to TPAs, to advisory firms and beyond. Just last year the RIA industry underwent record M&A activity for the 7th year straight and recordkeepers have consolidated from more than 400 just a decade ago to about 160 in 2018. We anticipate this continuing since recordkeeping is a relatively undifferentiated product in an industry with high barriers of entry. Consolidation also helps providers combat the significant drop in participant fees over the past 10-15 years. As recordkeepers take advantage of economies of scale, they can invest in better technology, cut costs, and drive additional revenue through other products such as managed accounts.
What this means for advisors
Consolidation is helping RIAs and recordkeepers not only build out their offerings, but it’s also putting them in more direct competition with one another. For example, large RIAs such as Pensionmark now have participant call centers, among other services, that were traditionally only offered by the recordkeeper. Recordkeepers, on the other hand, are encroaching upon core competencies of the advisor by becoming more participant focused, often in the hopes of competing for the wealth business on the back end.
To combat the heightened competition, advisors should consider the long term nature of their recordkeeper partnerships. There is already a growing fear among advisors that occurs when they move clients to a recordkeeper whose competencies overlap with their own or who is competing with them for wealth business on the back end. There is also increasing frustration around recordkeepers refusing access to participant level data, so it’s important to take your own business plan into consideration when determining where to place your clients’ plans.
Trend # 3: Increased Attention on Managed Accounts
401(k) managed accounts have become more and more popular over the past 5-10 years with the amount of money in these accounts increasing from about $100 billion in 2012 to over $270 billion in 2017. The trend of managed accounts is likely driven by two currents: 1) Fee compression, as these products are a way for advisors to charge (and justify) higher fees and 2) Growing frustration around the stagnant nature, and ongoing conflicts, in current offerings including target date funds.
What this means for advisors
If you don’t have a point-of-view or an articulated solution for a more customized investment structure for participants (ie. a managed account), it’s important to start thinking about one. Aside from fiduciary risk, which leaves you and your plan sponsor vulnerable, it creates a real opportunity to get closer to the participant. That being said, while managed accounts give advisors a better tool to assess appropriate risk for clients, that doesn’t mean they are right for everyone. Target dates funds (TDFs) will likely suffice for most participants under the age of 50 unless they have a lot of investable assets. For those over the age of 50, we recommend implementing a “QDIA 2.0,” to auto-enroll clients into managed accounts which will offer them a more customized approach as they near retirement. Without making managed accounts a QDIA, adoption will be tough.
For a notoriously slow-moving industry, these trends signal that changes are underway. Better yet, several of the trends are aimed at improving things for sponsors and participants. With PEPs, reduced administration and liability make balancing a plan while running a business more manageable. When it comes to industry consolidation, lower fees and better technology mean participants have more money going into their accounts while gaining access to a better experience. As for managed accounts, greater access to a customized approach can help those nearing retirement feel more comfortable with their investments. In turn, these trends help advisors to more strategically align with their client’s needs and market around them. As you build your 2020 plan, it’s important to maintain a pulse on the direction of the market and continue to flex your strategy in a way that best aligns your vision to the needs of your clients.
By Aaron Schumm, Founder & CEO, Vestwell
Old meets new: How Visa’s acquisition of Plaid validates high demand for modern infrastructure across financial services
The financial services industry has been hindered by years of precedent – antiquated technology, safeguarded data, and closed systems. Yet Visa’s recent acquisition of Plaid sheds light on what’s to come. Visa didn’t acquire Plaid for its revenue (estimated at around $150 million and having contributed only 30-40bps of net revenue growth in 2020), but for its access within a modern infrastructure. Some might say that Plaid is purely defined by access. Its central offering is the ability to connect different applications in a way that makes the flow of everything from data to money a seamless experience. Through an infrastructure that can flexibly work with financial institutions in a modernized fashion, Plaid sets the stage for bringing Visa’s tools and services to life across the customer journey.
You don’t have to go out with the old to come in with the new.
Today’s modern tech stacks allow for more flexible, configurable, and efficient systems, which is why we saw over $128 billion in fintech acquisitions in 2019. Being the engine is a powerful way to build a business that scales, especially in the aging financial services market. In a world where consumers are taking a more holistic view of their financial wellness, connectivity becomes a critical factor across the thousands of providers in the ecosystem. Providers hoping to service these consumers, especially those built on older systems, must look outside their institutions and think strategically about how to best support the end-user.
So why is this important? Because having the right infrastructure in place has significant downstream implications. Traditional financial institutions cannot merely scrap their infrastructure and start fresh. Working within a legacy ecosystem, while modernizing the core of data movement and connectivity, is powerful.
Just as Visa is leveraging the Plaid acquisition to gain better connectivity, data, and access, so can these same benefits be realized in other markets. We see it happening on the payments side with Stripe as well as in the retirement space. In each, traditional providers are working off antiquated technology that wasn’t built to talk to anything else, yet the provider and the consumer can’t make proper, big financial decisions without modern structures in place.
Engines scale, vanity wanes.
Building a B2C business is always attractive… at first. It’s the idea of “what if we created and became the next [fill in the industry-leading brand name here]?”. But in financial services – an industry touching the 2nd-most sensitive thing in someone’s life, behind family – building a brand that one can truly trust is expensive.
There will not be one winner in a free market Finserv/Fintech industry, but there will be clear leaders. And those leaders will not be dethroned easily. This creates an even more attractive case to power the established leaders, enhancing areas of weakness, and emphasizing those of strength through modernization.
Better data yields, better experiences.
The banking, wealth, and retirement worlds have been reticent about providing data across partners. This is partly a business play, and partially a gap in capability. However, in a day and age where information is often readily available and where AI facilitates smart decisions, opening up clean data can be powerful in helping users make better decisions and, ultimately, enjoy a better user experience. Visa, for example, will now know not only transaction patterns and cash flow, but also a consumer’s assets and liabilities, so they can better offset risk and cash flow. They’ll also be able to tie in any applications and services that align to specific user needs.
Allow others to do what they do best and connect the rest.
It’s difficult to be all things to all people. Leveraging open architecture will drive efficiency. While M&A gives companies the ability to grow or streamline capabilities, there are always going to be competencies best left to someone else. Putting the infrastructure in place to take advantage of user synergies can significantly enhance the user experience. For example, eliminating multiple logins, ensuring consistency of data, and reducing bottlenecks, will save time and, ultimately, money, while a customized user experience will create retention.
Everyone wants to own the (extensive) participant journey.
Many in financial services find themselves embroiled in a space race to own the participant journey. In retirement, there’s an appetite for managing everything from benefits and wellness to managed accounts and lifetime income. In payments, it’s purchases and cash flow to assets and liabilities. Yet legacy technology inhibits integration, scale, and data. Plaid is an enabler for greater access, and this recent acquisition highlights how today’s modern mainstream will power financial services into the next chapter.
Vestwell is a digital retirement platform that makes it easier to offer and administer plans. By combining advanced technology with a human approach, we remove traditional friction points related to onboarding, management, administration, pricing, and compliance. The result is an unconflicted and customizable offering that provides a modern experience for all involved. Read more at www.vestwell.com.
With 401(k) plans holding trillions of dollars in assets — along with personal information such as social security numbers, bank account information, and more — it’s no wonder they’ve been subject to recent cyberattacks. As fiduciaries, advisors and plan sponsors are wondering what exactly they are liable for and how to protect their plans. Vestwell’s December 18 panel, featuring cybersecurity expert Joe Pampel and retirement law expert Jason C. Roberts, explored this very topic.
What are fiduciaries liable for?
As of now, ERISA and relevant case law are silent about the extent to which fiduciaries are liable for data security violations, though there are numerous state and federal law theories that may hold them liable for a variety of monetary damages. As the law in this area evolves, the following legal principles are becoming well-settled:
- Protect plan data. Plan fiduciaries are required to protect all plan assets. Although it is unclear whether participant data is considered a “plan asset,” fiduciaries should be cautious and take reasonable steps to keep sensitive plan data out of criminals’ hands.
- Vet service providers. Fiduciaries must prudently select service providers, such as their payroll vendor and recordkeeper. Part of selecting these vendors is asking about how they protect participants’ personal information and understanding their overall security procedures.
- Ensure other fiduciaries don’t breach their duties and take steps to remedy any known breach. This is a mouthful, but it simply means that advisors and plan sponsors should make sure other fiduciaries fulfill their duties and, if there is a security breach, take the necessary remediation actions, which may include replacing the service provider.
Selecting the right providers
We’ve already addressed how plan fiduciaries are responsible for vetting their service providers, and since cybersecurity is a critical part of the selection process, it’s important to ask the right questions.
- How do they manage data? This can be as simple as asking providers how information flows into and out of the recordkeeping system and who has access to personal information. Ask if the data is stored in the United States or abroad and how they back data up, such as whether it’s stored on backup tapes or in the cloud. Ask about the vendor’s background screening of its employees and how often those checks are updated.
- Do they offer contractual protections? Plan fiduciaries should include contractual protections to hold third parties liable for security breaches. This can include things such as requiring the provider to notify you within a few days of discovering a data incident as well as verifying sufficient cybersecurity insurance coverage.
- Have they had any historical breaches? In addition to asking providers what steps they are currently taking to prevent attacks, ask them about any breaches they have had in the past, how they were resolved, and how often they undergo security audits. Also ask these questions of any subcontractors they use, as those are often overlooked in the vetting process.
Protecting your own business
In addition to selecting secure vendors, plan sponsors should also make sure they are taking necessary steps to protect their own plans by:
- Getting insurance. Just like third party vendors, sponsors can and should obtain cybersecurity insurance to help protect assets in case of a breach of its own security systems.
- Monitoring plan statements. Sponsors should review plan activities such as unusual and/or large withdrawals, and educate participants to do the same.
- Ensuring data security. Just as one would ask a service provider about its processes, it’s important to understand how sensitive data is shared internally. Sponsors should restrict access to only those employees who need it.
- Reviewing providers (at least) annually. Sponsors should use the steps above to analyze providers’ security practices at least once per year, if not more often.
- Educating employees. Employees should receive training at least annually on ways to mitigate the risk of a cyberattack. This includes things such as picking complicated passwords, implementing multi-factor authentication, monitoring account activity, and only accessing their plan on secure devices.
Although ERISA does not include any specific rules when it comes to cybersecurity, fiduciaries are responsible for protecting their retirement plans. From restricting access to plan data to properly vetting service providers, there are practical steps advisors, plan sponsors, and even participants can take to mitigate the risk of a cyberattack.
The “will they, won’t they” surrounding the SECURE Act has finally come to an end and the most impactful retirement plan security legislation in decades has been signed into law. This will not only make retirement plans more accessible and affordable for the 500,000+ small to mid-sized businesses currently sitting on the sidelines, but it should also result in more Americans saving for retirement, thus starting to bridge the huge savings gap. For advisors, this opens up a significant opportunity, especially for those who have already recognized the potential in the emerging corporate market.
If, as an advisor, you’re wondering which of the 124 pages of legislation to pay most attention to, here are some of our thoughts:
Allowing for open Multiple Employer Plans (“MEPs”)
MEPs have perhaps been the most heavily talked about part of the SECURE Act. While closed MEPs – in which companies with clear commonalities can offer pooled plans – already exist, allowing unrelated businesses to pool resources has a lot of advisors, PEOs, payroll providers, and others excited. This should conceivably help smaller plan clients gain access to provisions and investments that were traditionally available mostly to larger plan clients. That being said, it’s important to be aware of certain restrictions of MEPs including the standardization of investment options, fiduciary oversight of service providers, plan features like matches and contributions that some sponsors might not be prepared to handle, and other operational hurdles. Employers can be liable for significant damages for jumping in too quickly. It’s worth comparing whether a MEP-like experience, in which one creates their own pooled offering without the confines of a MEP, could be an even better option. Either way, the passage of the SECURE Act opens up the door for you to be having these important conversations.
Access to annuities in retirement plans
More relaxed rules around lifetime income products means better access to more offerings for participants. This is a good thing considering there is no one-size-fits-all when it comes to a participant’s investment strategies and annuities could be a great option for the right investor. However, there is still a lot here to figure out. Because of the complexity of annuities, it can be challenging to incorporate them into a retirement plan without full plan portability or properly disclosing costs and other features. Expect a lot of big annuity players to try to simplify this complex challenge sooner rather than later.
Tax incentives for small business owners to offer a 401(k)
Since much of this provision is centered around making retirement plans more accessible for small business owners, a tax credit of up to $5,000 should serve as a great catalyst. Not to mention that it can help offset any upfront costs that often serve as a deterrent in setting up a plan. Be sure to lay out the numbers for prospective clients, as most of them aren’t following the SECURE Act nearly as closely as we are.
Looser restrictions on eligibility
For example, there will no longer be a heavy penalization on those taking parental leave or working part-time. According to the bill, employees who work 500 or more hours during any consecutive three-year period can participate in their plan and there are other protections in the Act for part-time employees. This is meant to protect participants who may take a leave of absence for parental leave or otherwise, and to generally support more balanced life decisions. This is a shift from the current eligibility rules so it’s important to alert clients to ensure compliance.
New age requirements for Required Minimum Distributions (RMDs)
People are living longer (and often working longer!), so the Act has raised the age from 70 ½ to 72 for employees to begin cashing out their retirement plans. For wealth advisors in particular, this is an important number to (re)factor into long-term planning.
With all of these employer and employee benefits, how is this Act being paid for? Well, there are a few provisions where the revenue stream can help offset the cost.
Eliminating the Stretch IRA
By removing the so-called “Stretch IRA,” certain beneficiaries of a 401(k) plan can no longer hold off paying the tax penalties on withdrawals in perpetuity. This means taxes may now need to be paid within ten years, depending on who the beneficiary is at the time. Again, advisors should make clients aware of this change as needed.
Increasing fees for late or missing Form 5500s
While there have always been hefty penalties for mishandling of 5500s, the fee has increased significantly from a maximum of $50,000 to $150,000. This is an important note for sponsors, but also for the named Plan Administrator who may be ultimately responsible for timely filing the Form 5500.
With the exception of the long-term, part-time employee provisions which are effective in 2021, most of these other changes are effective for plan years beginning on or after December 31, 2019. Yes – – just two weeks from now. Of course there is much more to the SECURE Act including changes to 529 college savings plans, penalty-free withdrawals for the birth or adoption of a child, and others, but by better understanding the imminent changes affecting retirement plans, the impact of the law becomes more clear. While it’s important to lay out a thoughtful strategy for incorporating the Act into your business plan, it’s equally important to think about the downstream implications – good and bad – to your clients. Regardless of how you shift your strategy, the passing of the SECURE Act will undoubtedly change the conversation you’re able to have with clients and that, in and of itself, is impactful.
Vestwell is a digital platform that makes it easier to offer and administer retirement plans. Vestwell removes traditional friction points through flexible investment strategies, fiduciary oversight, and streamlined administration, all at competitive pricing. By acting as a single point of contact, Vestwell has modernized the retirement offering while keeping the advisor’s, employer’s, and plan participant’s best interests in mind. Learn more at Vestwell.com and on Twitter @Vestwell.
Ryan Anderson recently joined Vestwell as the Senior Vice President of Product & Design. In 2010, Anderson founded New York City based Alchemy50, an award winning product design studio which was later acquired in 2017. During his time there, his clients included DataMinr, Artivest, FolioDynamix (now part of Envestnet ($ENV), United Healthcare, Thomson Reuters and 1 Second Everyday. Anderson also spent time as the Chief Product Officer for Advizr before it was acquired by Orion Advisor Services.
Ryan, you joined the company this August to lead product. What drew you to Vestwell?
Let me back up a few years to give you the whole story. I led a product design studio in NYC called Alchemy50 for many years, and along the way we worked with a whole host of financial firms – hedge funds, portfolio managers, fintech startups – all different types of people and products. And what started to become important to me, rather than focusing on the institutional stuff, was thinking about how I could better apply my experience to help everyday people. One of the things that came up in the course of my research was how poorly Americans do with their retirement savings and financial planning in general. So when a former client, Advizr, approached me about becoming their full-time product officer, I jumped at the chance. Through their financial planning and ultimately their wellness platform, I could take my expertise and apply it to people in need.
When Advizr got acquired, I thought, ‘Okay, what do I want to do next?’ That’s when Aaron and Jonathan approached me about joining Vestwell. I knew Aaron and Jonathan from FolioDynamix, another former client of Alchemy’s, and Vestwell’s mission was closely aligned with why I went to Advizr in the first place – helping people make better financial decisions. On top of that, I now had access to recordkeeping and payroll information, which is powerful data to have when creating tech that supports financial services.
What opportunities and challenges do you see for Vestwell as they build a recordkeeping platform for the modern day?
I think the big challenge is that retirement plans can have a lot of variables. You have different investment vehicles, enrollment requirements, plan designs, and compliance rules to keep track of. That means there are a lot of levers that need to be set up and maintained to give sponsors and advisors the flexibility they need. Furthermore, a big benefit of our offering is that it’s highly automated and digital. Traditional recordkeepers have outdated, manual processes that don’t make things easy for sponsors and participants. Simple is hard, but we’re 100% focused on making retirement easy.
When working with larger enterprises, it’s important that our service can be white-labeled so that everything coming out of the system appears to be coming directly from them. This is also a challenge, as the devil’s in the details. The more you expose, the more complex it gets and the longer it takes to bring that kind of stuff to market.
So I think the biggest challenge is improving on what today’s recordkeeping systems do in a way that is much more flexible and automated – particularly for smaller plans, which is our focus. If we get this right – and we will – then this becomes an extraordinary opportunity.
Tell us about your product roadmap. You’ve only had a few months to dive in, but what do you see as your immediate and long-term goals for Vestwell’s platform?
The first thing that stood out to me was how much more we could do with the user experience. This encompasses a lot of things, like the amount of reporting we give to advisors, improving platform navigation, and increasing platform communications. As part of that, a primary focus of mine will be how we better onboard sponsors and participants onto the platform. We’ve done a solid job here thus far, but I do think we can further improve this area via automation, getting smarter about using data, and working with our operations team to better understand their challenges and how best to address them.
Longer term, it’s all about integrations. So if you think about what makes Vestwell unique, it’s that we’re creating a system with a modern technology stack which allows us to be more flexible and better positioned to integrate with many different providers and services.
How do you plan to approach building a product that supports advisors while also ensuring a great product for the end-user?
If you think about what a product does, it solves a problem for a user. And what we’re trying to solve touches all of our users: sponsors, participants, and advisors. Their problems are all a little bit different while sharing a common thread. As an advisor, there’s a trust element; advisors want to know our platform is reliable and accurate and that it can provide what they need to run their business effectively. And in much of the same way, there’s a trust that we have to build with sponsors, too. If you think about how sponsors and advisors interact, it’s not super frequently and when they do interact it is often to solve a problem. So the better we can create a system for the sponsor that does what they need it to do – like taking care of enrollment, engaging their employees, and submitting contributions – the better it is for the advisor. That stuff has to be rock solid.
With participants, the problem for them is simply saving for retirement. Whether it’s registering for an account, making a contribution change, or taking out a loan against their savings, it needs to be incredibly straightforward – and accessible (mobile). Outside of that, they don’t care about much else.
So while I really look at it as three separate problems, and we treat the experience separately for each, there are common elements. The portals for each should be easy to navigate and do what it’s intended for which means information has to flow across all three seamlessly.
What do you believe gives Vestwell a leg up over others in the space?
The big problem is – and it’s the reason why I think Vestwell has such a great business model – there’s a lot of old technology in the industry. The incumbents started in the early 80’s and they haven’t evolved much since. You’re now seeing some kernels of new tech, but the pace at which it’s being built just isn’t fast enough, and the cost to do it is prohibitive in many cases. When trying to meld old technology with new systems, it can be expensive and time consuming. So, I think the approach we’re taking where we’ve started from scratch means we get to look at the problems in the industry today and solve those with a better solution through a modern tech stack. If you look across our team, we are all seasoned, enterprise fintech professionals. This is what we do, and all we do. In that, we are allowing retirement plan providers to get back to their core, focusing on their clients, instead of trying to be a technology recordkeeper provider.
You’re still the new kid on the block, but let’s fast forward 5, even 10 years from now. What’s your biggest contribution to Vestwell going to be?
I want to help create the modern framework that this 40-year old industry rebuilds its foundation from. Ultimately, I hope that translates into a greater sense of empathy to the problems our users face. I want to help create a system that solves those problems for them.
By Benjamin Thomason, Vestwell
As we all know, the Department of Labor recently unveiled a new final rule that will make it easier to form and manage Multiple Employer Plans (MEPs). So it’s no wonder that many advisors in the industry are thinking about the best ways to incorporate them into their business strategies.
For retirement plan advisors, in particular, new MEP rules are changing the game—especially in the small plan market. Thanks to recent regulations, employers that have little or no business-related connection to each other are now able to join a closed MEP, creating an opportunity for advisors to service smaller clients as a 3(38) fiduciary in a way that’s both scalable and cost-effective.
Where should an advisor start? Although advisors cannot sponsor closed MEPs, they can leverage relationships to put the right MEPs in place. Most advisors have spent their careers developing centers of influence. A MEP allows them to turn those relationships into partnerships by working together to create really efficient offerings.
While the MEP would be sponsored by a lead employer that takes on the bulk of the fiduciary responsibility and administrative oversight, advisors and partners can make it easier to craft and manage, while also delivering superior brand and value.
Two relationships, in particular, that bring significant opportunities are employer groups and associations, both of which can act as the “lead employer” of a closed MEP.
Since recent regulation now allows for unrelated employers with at least some commonality to create cost-effective group retirement plans, employer groups and associations are a perfect place to start. Both have access to a significant base of employers with common denominators such as a common geographic location, which the Department of Labor said is a sufficient nexus to join a closed MEP.
By sponsoring a MEP, association or employer groups can enhance their benefits, better support their members, increase engagement, and even boost membership.
The value in one payroll provider
Another relationship that’s highly relevant in the MEP universe is payroll providers. Having a number of disparate payroll providers in a MEP can be an administrative nightmare.
Since accurate payroll files are critical to administering the plan, some MEPs engage a separate data aggregator to process those files, which adds time and cost while making the plan more vulnerable to mistakes just by virtue of having another third-party provider involved in plan administration.
Therefore, having one central payroll system in a closed MEP is a huge value-add, and triangulating the payroll relationship with an employer group or association is an even stronger offering. Forward-thinking advisors will try to connect associations and payroll providers in a MEP structure for maximum efficiency with optimal cost designs.
Start the MEP discussion
Overall, advisors should be thinking about MEPs not just as they relate to their clients, but as they relate to their own business models as well. And while the future of MEPs may currently be in limbo, they are still a worthwhile discussion point for advisors in the small plan market.
If nothing else, conversations about MEPs give us all an opportunity to have transparent discussions around the future of retirement for companies of all sizes. And once the passage of open MEPs comes into play, advisors who take steps now to make changes to their business strategy will already be ahead of the game.
Ben Thomason is the Executive Vice President, Revenue at Vestwell, a digital platform that makes it easier to offer and administer retirement plans. Thompson leads the sales and service operations with a focus on expanding the firm’s current advisor relationships, building new strategic institutional partnerships, and overseeing plan sponsor support.