When it comes to selecting a retirement plan, you can’t depend on a “one size fits all” approach. Leverage this guide to help sponsors get the right type of plan based on their unique goals and business structure.
When it comes to selecting a retirement plan, you can’t depend on a “one size fits all” approach. Leverage this guide to help sponsors get the right type of plan based on their unique goals and business structure.
By Allison Brecher, General Counsel, Vestwell
With so much attention lately on fiduciary duty, as well as the surge of fiduciary litigation this past year, plan sponsors would be wise to explore their insurance options. While the ERISA fidelity bond (also referred to as a “fidelity bond” or “ERISA bond”), is required for all plans, there are other options as well. By understanding the difference – and the scenarios in which different types of insurance are used – you can help ensure your plan sponsors are properly protected.
The fidelity bond, required by ERISA, protects the plan against losses due to theft and embezzlement. Here’s an easy example: if someone steals money from the 401(k) plan, the ERISA bond compensates the plan for the damages. However, this provides no protection to the plan sponsor because the plan, not the sponsor, is the named insured. Not to mention how limited the application of this bond might be, given the unlikely scenario.
Still, the bond is legally required for anyone who “handles plan assets” (whether a fiduciary or not), and not having one can delay your plan’s Form 5500 filing and potentially result in disqualification, penalties, and personal liability for fiduciaries. Investment managers must have one, but advisors are not required to be bonded unless they make financial decisions about the plan assets or property.
An ERISA bond is easy and relatively inexpensive to obtain; sponsors using Vestwell can apply for one directly from our platform. However, it’s worth noting that the bond must be in an amount of at least 10% of the plan’s assets, and, since it’s been a good year for investment performance, sponsors should make sure their bond amount has kept pace with the plan’s growth in assets.
Some sponsors mistakenly believe they are protected on all fronts by the ERISA fidelity bond, but further protection may be needed. Fiduciary insurance, unlike an ERISA bond, is not included in a typical errors and omissions or directors and officers policy. Fiduciary insurance, as the name suggests, protects the fiduciary from damages that result from a fiduciary breach. Read the fine print on the insurance before moving forward because a fiduciary policy can cover litigation costs, foreign plans that are subject to laws similar to ERISA, and the cost of correcting plan compliance errors resulting from a fiduciary breach. Although fiduciary insurance is technically “optional,” we don’t believe a sponsor should leave anything to chance in the current litigation climate.
Mostly, it’s important for plan sponsors to know the coverage that exists to protect them and their participants, understand the liability they’re taking on, and be comfortable with the decisions they’re making. They’ll be looking to you for help.
By Allison Brecher, General Counsel, Vestwell
As speculation mounts over President Trump’s planned appearance in Charlotte tomorrow, the expectation is that the Retirement Enhancement and Savings Act of 2018 (RESA) will soon be signed into law. While Vestwell believes strongly in the spirit of the bill and what it’s trying to accomplish – making good retirement plans affordable and accessible to companies of all sizes – the bill fails to solve many retirement plan challenges.
Small businesses haven’t historically embraced 401(k)’s out of concerns for fiduciary liability exposure, litigation, fees, and administrative burdens, amongst others. RESA turns to Multiple Employer Plans (MEPs) as a solution because MEPs allow small employers to pool together to share expenses. The belief is that small businesses will be more likely to offer retirement plans once they can offload some fiduciary responsibility and enjoy traditionally “large plan” costs.
Unfortunately, there are still some shortcomings in the bill that lead to missed opportunities and confusion. The main ones we’ve identified are around:
Fiduciary responsibility. While the bill states that fiduciary responsibility can be offloaded, some would argue that is already the case today with a 3(38) offering. It is unclear whether the new bill would offload liability of all responsibilities – such as the responsibility of the plan sponsor to select an un-conflicted provider – but doing so would require a re-write of ERISA laws rather than just a notation in a new provision. In addition, it is not clear who – if not the plan sponsor – is responsible for protecting the plan against conflicts of interest, prohibited transactions, and other such obligations.
Lead participant employer role. What exactly is the role of the lead participant employer? How do they get selected and evaluated? Are they compensated and, if so, how much and who decides? And how does insurance account for this unique role? Without a clear outline of the lead participant role, it is hard to envision the way companies decide to – and continue to – work together.
General retirement plan shortcomings. Unfortunately, a more “fair” cost doesn’t give plan sponsors a better understanding of what they’re getting with a retirement plan. In many cases, fees are buried, service offerings unclear, and administrative burdens cumbersome. The bill does not address any of these challenges.
The good news is, options exist to better support small plan sponsors even without RESA. The advent of tech-forward retirement platforms (like Vestwell) bring solutions to the issues of cost, fiduciary responsibility, administrative burden, and transparency. They also address many of the challenges of RESA. Because a modern-day retirement platform doesn’t require the pooling of resources, a plan sponsor can enjoy custom plan designs and pricing, tailored to its workforce, rather than having to compromise based off the collective needs of the MEP. And since technology automates many expensive processes, plan sponsors are afforded economies of scale comparable to (if not better than) what an MEP would bring. As a result, a company can benefit from the personalization, strong customer service, competitive pricing, fiduciary oversight, and transparency that all plan sponsors and participants deserve.
So, while it is our mission to support the healthy retirement of all Americans, we want to ensure they don’t just have access to a plan… but that they have access to the right one.
Safe harbor 401(k) plans can be a win-win for employers who want to maximize tax savings and retain employees. There is still time to reap the benefits for 2018.
A safe harbor is like a traditional 401(k), but the employer must contribute, and contributions become fully vested when made. Contributions can either be limited to employees who make deferrals or offered to all eligible employees.
Unlike traditional 401(k) plans, safe harbor plans automatically pass a number of required tests in order to keep your plan tax qualified and avoid other penalties and costs. These plans can be a great choice for small businesses that may have trouble passing nondiscrimination testing. For example, a family-owned or small business with more highly compensated employees relative to “rank and file” or non-highly compensated employees may otherwise have difficulty passing compliance tests.
The business owner can contribute the maximum annual deferral amount to his/her own 401(k) plan ($18,500 plus any catch up contributions), receive additional savings from the company’s matching contributions (they’re an “employee” too) and, come tax time, the business can deduct all matching contributions (up to the $55,000 IRS limit).
Safe harbor plans must be in effect three months prior to the plan year-end date, which means eligible employees must be able to make salary deferrals starting no later than the payroll period that ends on or after October 1 of the plan’s first year. This means plan sponsors must make decision and sign necessary documentation by September 1.
If you offer a different plan, but would like to take advantage of Safe Harbor benefits, here are dates to know:
Overall, there are benefits to any type of retirement offering, but a safe harbor plan can be a smart decision for many companies, particularly for small business owners. If you have any questions about whether a safe harbor plan is right for you, reach out to firstname.lastname@example.org at any time.
In order to receive the benefits of ERISA §404(c), plan fiduciaries must comply with certain requirements. The following recommendations will help advisors and plan sponsors evaluate their efforts.
Fiduciaries should follow an objective process to evaluate TDFs, understand the TDFs’ investments and fees, and periodically review them. Key areas of focus and questions to consider include:
Selecting an ESG-themed investment option without regard to possibly different or competing views of plan participants or the returns of comparable non-ESG options would raise questions about the fiduciary’s compliance with ERISA. For example, selecting as ESG target date fund as a QDIA would not be prudent if the fund would provide a lower expected rate of return than available non-ESG alternative target date funds with similar degrees of risk.
Most of those options are only offered to older employees and they cannot include certain employer securities that are not readily tradeable on an established securities market, as well as other regulatory requirements.
If the plan provides default investment options for participants who fail to make affirmative selections, make sure participants receive a QDIA notice that complies with legal requirements. Participants must be provided with the notice 30 days in advance of the effective date and each year. They should also be given the prospectus, any material relating to voting, tender or similar rights provided to the plan, a fee disclosure statement, and information about the plan’s other investment alternatives. The investments comprising the QDIA should also be reviewed to make sure they satisfy DOL Reg § 2550.404c-5(e).
Plan fiduciaries should check the plan’s investment policy statement, investment management agreement, investment guidelines and related plan documentation to ensure that any investment option is permitted by the plan.
While you’re at it, calendar future review dates so that they don’t get overlooked. Some questions to ask:
Employees should understand the investment options available to them and communications should be written with a style and content appropriate for the workforce. If they do not understand a TDF’s glidepath when they invest, for example, they may be surprised later if it turns out not to be a good fit for them. Consider surveying employees or a sample of them to make sure they understand.
Cohen & Buckmann
Cohen & Buckmann
2018 is shaping up to be a record setting year for mergers and acquisition activity with plenty of opportunities for advisors to help clients evaluate some key issues related to their retirement plans. Whether your client is entering into a corporate merger, acquisition, liquidation, consolidation, or spin-off, there can be significant impacts on the retirement plans involved, and you can help your client avoid problems that are often overlooked. Flagging these issues for your clients now will help them avoid headaches and potential tax and other penalties later.
Here are some things consider:
1. Transaction Transaction structure
M&A transactions have a big impact on the parties’ retirement plans that can be easily overlooked. In an asset purchase, the buyer purchases assets of the target company and generally wants to limit or eliminate its liability for any issues associated with the seller’s plan. That can usually be accomplished by terminating the target company’s retirement plan and starting a new plan to avoid becoming a successor plan sponsor. In a stock sale, the buyer purchases assets and liabilities and the purchased company becomes a subsidiary of the buyer and part of its controlled group. In a merger, the buyer and seller form a surviving entity and any obligations owned or owed by either company are now owned and owed by the survivor.
The buyer should know that the target company has been operating its plan in compliance with legal and regulatory requirements and can learn that through a document review of the plan documents and all amendments, nondiscrimination test results, group annuity contracts, most recent determination letter (which will verify that the plan has been qualified, thereby avoiding the potential consequences of mixing non-qualified assets with qualified assets), and most recent SPD and SMM to verify what information has been communicated to participants and could become binding on the sponsor. One often overlooked area is the review of existing contracts with record keepers, custodians, and collective bargaining agreements to determine whether there are any advance notice requirements before terminating those relationships, any required contribution increases or termination fees, or any other restrictions.
The plans involved in a transaction will rarely have the same investment options as the buying/merging company. Review the lineup carefully to evaluate any fees or other restrictions.
Plans from different companies will also likely have different plan features. The plans’ provisions must be analyzed to ensure that the transaction does not violate the anti-cutback rule.
A transaction may result in the seller becoming a subsidiary and part of the controlled group of the buyer. That means that the buyer’s compliance testing must include the subsidiary’s employees unless they are excludible. Employees of the purchased organization may need to be given meaningful benefits in order for the plan to satisfy compliance testing.
A new organization must consider whether – and to what extent – an employee’s service with the prior organization counts for eligibility and vesting in a new plan.
A plan may have a limited period of time before coverage testing is required if three conditions are met: the transaction causes a company to become or cease to be part of a controlled group, the plan passed coverage tests before the transaction, and if there weren’t any significant changes in the plan features or coverage of the plan. If those conditions are satisfied, then the plan will be deemed to meet coverage requirements until the end of the plan year after the year of the transaction. Plan amendments made after the transaction could end that transition relief period.
The seller’s plan might be unable to terminate if the new entity is a continuation of the old one. Where the employee performs the same work in the same location, even if there has been a formal change in the employer name, the same desk rule applies and the seller’s plan may have to retain the accounts and continue operating the plan. Additionally, the buyer may be unable to offer a new plan right away if it is considered to really be a successor to the seller.
If a plan is terminating, the participant’s retirement plan balance must be distributed with an offset taken for the amount of the outstanding loan amount. The participant needs to roll that distribution to an IRA or other qualified retirement plan in order to avoid penalties for an early withdrawal. The buyer may consider making alternative arrangements to ease the burden on participants with outstanding loans.
All plan assets must be distributed following a plan termination. Sponsors should build in additional time and resources to locate terminated participants whose addresses may have changed. The IRS recently issued guidance about how to deal with these missing participants.
Issues can arise when a transaction involves different plan types (eg: defined benefit plans, defined contribution plans, safe harbor and non-safe harbor plans), especially if one of them is a Qualified Automatic Contribution Arrangement (QACA) safe harbor plan. By design, those plans require automatic enrollment of all eligible employees who have not made an affirmative election. If the surviving plan is a QACA plan, the sponsor must make sure all requirements are met in enrolling the acquired employee population.
The acquired plan may have a balance in a forfeiture account, which may need to be depleted before the transaction closes. The plan may also address what happens to funds remaining in the account, whether they become assets of the new plan, or can be used to offset plan expenses or other permissible purposes.
Transactions may cause one of the plans to have a short plan year and the sponsor or participants of the acquired plan may have overfunded the plan. Buyers should be on the lookout for participants who are approaching the IRS annual contribution limits.
Communicating with participants plays a critical role in creating a smooth experience. In addition to distributing legally required notices, sponsors should send participant-friendly communications to educate participants about the plan and their overall benefits.
Going through M&A activity can be overwhelming enough. It’s important for your clients to have a trusted source who can walk them through the implications for their retirement plans, and proactively addressing these potential pitfalls can go a long way.
Today’s advisors must meet the ever-changing demands of regulations and technology, while facing growing competition from traditional firms and start-ups.
But in recent years, a new breed of 401(k) “aggregators” have emerged in the retirement space, attracting 401(k) plan advisors to partner up, refer, or sell their entire book of business.
Known for their expertise, aggregators primarily offer economies of scale to small-to medium-sized registered investment advisor (RIA) firms. However, if you’ve been curious about, or considered working with such entities, consider the the pros and cons of doing so.
Aggregator firms work one of two ways: They either purchase RIA firms outright, or offer an affiliation model where they compensate firms with referral fees or equity in the holding company. Acquisition typically occurs for firms with more than $1 million in revenues, while those with less than $1 million tend to become affiliates.
For solo advisors and small- to medium-sized firms, there are benefits to working with aggregators:
You may enjoy the credibility and brand recognition that come with partnering with a larger or well-known entity.
As aggregator firms grow and gather assets, they may offer expertise that small RIA firms perhaps couldn’t access or afford to develop in-house. For example, most aggregators offer support in the form of lead generation, practice management, technology, client onboarding, marketing, and other areas that are perhaps beyond the scope of a small advisory firm’s capabilities.
Aggregators may allow advisors to offer more competitive pricing and a greater menu of plan funds to prospective plan sponsor clients. These advantages are often due to not only an aggregator’s larger asset base, but also from distribution deals they are often able to negotiate with asset managers. Additionally, you may be able to expand your product and service offerings.
Before joining forces with an aggregator, consider that your firm’s smaller size may actually be to your benefit. After all, partnering with an aggregator means that you will likely be held to their rules and approach to 401(k) plan management. It’s important to assess your firm’s strengths and weaknesses,. If you go the aggregator route, make sure the sum is greater than its parts for you and your partners.
If part of your motivation for becoming an RIA was entrepreneurial drive and the freedom to manage your clientele and plans your way, this may not work well within the bounds of the aggregator’s rules and procedures. However, this isn’t to say that your talents and drive won’t fit with an aggregator environment; some aggregators want RIAs who will continue to diligently oversee and build their book.
Consider your branding and investment philosophies and whether you’re willing to compromise, especially if you will soon be identified as being part of, or belonging to, the aggregator firm.
Also, understand that by allowing aggregators to control your book, you are contributing to the “institutionalization” of the industry, where a home office takes the lead role in determining what investments 401(k) advisors can use.
Firms may be able to address many of the reasons to sell or partner up with aggregators by embracing a robust 401(k) technology plan management platform. Today, 401(k) platforms exist that enable firms to scale more adeptly when it comes to everything from lead management to 401(k) plan management.
If you decide to go the aggregator route, do your homework. As in any business arrangement, consider the best route: selling your firm outright, accepting an affiliate arrangement, or continue growing the business that you’ve already built.
Mid-year is a great time to review your company’s retirement plan to make sure it complies with all legal and operational requirements. This is especially true given the Tax Cuts and Jobs Act (TCJA) that was signed into law in late 2017, which changed the tax code in several ways that may impact your plan. We’ve identified a few key areas we believe deserve a second look.
Ensure you’re complying with new fringe benefit provisions
Usually plan sponsors have a generous remedial period in which to make any necessary plan amendments to comply with changes to the tax code, but not so in the case of employer-provided transportation fringe benefits and loans. Several of TCJA’s changes took effect January 1, 2018.
* Employees must include moving expenses paid for by the employer in gross income unless the employee is a member of the Armed Forces on active duty or needs to move pursuant to military order.
* Employer-sponsored commuting benefits must now be included in gross income, except for some “de minimis” fringe benefits like transit pass or parking benefits of $21 or less. This may be an especially important issue for employers in Washington, DC, New York, or other states that require employers to offer these benefits. Employees can exclude from gross income occasional overtime transportation and some transportation costs for safety concerns that are paid by the employer.
* The TCJA also expands the time period for an employee who terminates employment or separates from service with an outstanding loan to repay the loan or roll over any distribution to the due date for filing the employee’s tax return for that year (including extensions).
* For employers based in Puerto Rico and other hurricane-affected areas, the TCJA also includes disaster relief on plan distributions.
Make necessary plan amendments now to avoid operational errors in the future
The TCJA changes may necessitate plan amendments so that plans align with current legal requirements. For instance, if your plan defines compensation to exclude employer provided transportation benefits in gross income, those provisions need to be changed to comply with the TCJA. Retirement plans that do not provide hurricane relief will also need to be amended by December 31st. You may need to make similar changes to any loan provisions of your plan.
Once you’ve made the necessary changes, it’s important to ensure your payroll system is coded consistently with the plan document. If not, the result is an operational error that could be very expensive and time consuming for the employer to fix. It is also a common finding in a DOL or IRS audit, which could have other implications for your plan.
Consider reviewing plan design to best support employees
With the TCJA bringing corporate tax rates to unprecedented low levels, some employers are using their windfalls to reward employees with salary increases, matches, and bonuses. This is great news for retirement plans since these benefits translate into more efficient retirement savings.
Now that the TCJA has been in effect for about six months, it may be a good time for sponsors to review their plan designs to make sure the plan serves your goals such as helping employees boost their retirement savings, attracting and retaining talent, or maximizing tax savings. Now may be the right time to implement automatic enrollment or escalation features, start or increase the default savings rate, or allow Roth contributions. Sponsors should also consider revising the plan’s eligibility rules to encourage employees to start saving sooner. Employers can also reduce turnover through an attractive employer match programs. You can benchmark your matching program against peers and evaluate whether the match or the scope of employee deferrals matched needs to be changed to meet your financial or cash flow needs.
There will be more legislative activity in the coming year that could affect your retirement plan, with everything from requiring after-tax contributions to expanding availability of multiple employer plans. It is a good idea to get into the habit now of making sure your plan is ready for even more changes ahead.
As Environmental, Social, and Governance (ESG) investing becomes more popular, the wealth management and 401(k) industry is taking notice.
In fact, more than $1 of every $5 invested in the U.S., a total of $8.72 trillion, goes to socially-responsible investing (SRI). And in 2017, 75% of investors — and a whopping 86% of millennials — were interested in sustainable investing.
While the opportunity to invest in companies that align with an investor’s ethical standards, beliefs, and values sounds appealing, the ultimate question is whether ESG is good for the investors and funds involved.
We believe it is, and here’s why.
Good for investors: ESG investments perform competitively
ESG-screened investments perform as well as their non-screened peers 90% of the time, according to more than 2,000 academic studies of ESG performance.
These investments can reflect the values of those who are passionate toward issues such as environmental conservation, gender equality, gun control, and social justice.
A 2015 study also found that over a 10-year period, companies with the highest ESG scores (those that focused on ESG issues most important to their businesses) more than doubled the performance of those with lower ESG scores.
With results such as these, investors can be optimistic about the positive impact such investments may have not only toward their supported causes and companies, but also toward their financial portfolios.
Source: Khan, Mozaffer, and Serafeim. “The Accounting Review.”
Good for the industry: Attract more investors and business
SRI funds may also offer advisors and plan sponsors an advantage in competitive markets.
In fact, advisors in a 2017 study reported a 32% increase in interest in ESG investing than in the prior year.
Fifty-three percent of millennials, 42% of Gen Xers, 41% of baby boomers, and 39% of seniors also made investment decisions based on social responsibility factors.
A survey of Fortune 1,000 employees revealed that 74% of 401(k) plan participants would like their companies to offer socially-responsible funds in their plan investment menus.
Plan sponsors who offer such options can appeal to an increasing number of socially-engaged employees.
The DOL looks well upon SRI in retirement portfolios
In its latest Field Assistance Bulletin, the Department of Labor (DOL) confirmed that defined contribution plans can include SRI options, as long as they perform as well as and cost no more than traditional unscreened investment options.
Plans can even include ESG-screened target date funds as qualified default investment assets (QDIAs), as long as they don’t have lower-return or higher-risk potential than comparable non-ESG alternatives.
The tipping point
Increasing demand, competitive performance, and the DOL support combine to make SRI funds more attractive than ever for plan sponsors and participants. It’s time for fund managers to consider offering ESG target date funds and ESG exclusive retirement plan options and platforms.
Written by Allison Brecher, Vestwell’s General Counsel
The recent barrage of litigation and emerging regulations about retirement plan fees have put plan sponsors on heightened alert to make sure the fees incurred by the plan are reasonable and that they are paid properly. It’s a difficult assessment to make, complicated by the broad array of administrative expenses, with confusing terms like back-end load fees, revenue sharing, and 12b-1 fees. It’s hard enough for plan sponsors to understand what fees service providers are charging, much less whether the plan or plan sponsor should pay for them. However, it doesn’t have to be and there are plenty of opportunities for advisors to assist in making things more clear.
Depending on the plan sponsor client’s philosophy, sponsors may want to shift as much of the plan’s costs, like recordkeeping expenses, legal fees, and mutual fund expenses, to the plan and participants. Unfortunately, a plan sponsor can significantly harm the plan, and itself, by doing so without careful analysis.
Where to start?
The plan document may specify whether administrative expenses can be paid by the retirement plan assets. If the document says only the plan sponsor can pay, then the plan must reflect that. Some plans require the plan sponsor to advance the payment and get reimbursed by the plan later, in which case the payment and reimbursement should be made within 60 days in order to avoid a Department of Labor requirement for a loan agreement between the plan and sponsor. If the plan is silent, then analyze DOL regulations to determine if payment by the plan is permissible. Costs relating to plan formation, termination, and design are typically paid by the plan sponsor whereas recordkeeping and investment consulting expenses can be paid by the plan.
The plan can only pay for reasonable expenses – but what is “reasonable”?
This is the central issue in dozens of lawsuits. Participants rely on their plan sponsor to negotiate the best deal with service providers and it therefore becomes the sponsor’s fiduciary duty to make sure the plan is only paying reasonable fees.
Unfortunately, it can be hard to understand all of the direct and indirect compensation paid to plan providers. Sponsors need advisors’ help to ask the right questions. Some expenses, like sales commissions and back-end load fees on mutual funds, are paid out of the assets’ investment returns and therefore charged indirectly to participants. Those charges may not be apparent on participants’ benefit statements. Worse yet, there is no single benchmark for retirement plans to use as a baseline comparison. For this reason, some sponsors prefer to pay for expenses themselves since only plan assets, not corporate assets, are within a regulator’s purview.
Advisors can help sponsors by reviewing the expenses paid by similar plans. All ERISA plans file Form 5500s annually, which are public and should disclose all fees paid by the plan. Making an apples-to-apples comparison can be difficult because some sponsors do not know, and therefore cannot disclose, all indirect compensation. Advisors can also help clients prepare requests for proposals to understand available pricing options, such as flat fees or per participant fees that are more transparent and easier to understand. They can also help evaluate the quality of services, since the DOL acknowledges that cost alone should not be the only determinative factor.
Monitor, monitor, monitor
Sponsors should periodically reevaluate the plan’s fees. Even though a sponsor hires consultants to assist, they remain a fiduciary and must regularly evaluate the changing marketplace. As always, documenting their decision making process is critical. Sponsors must also remember to check whether services are being provided by a party-in-interest and satisfy the prohibited transactions rules.