Unprecedented Times Can Call for Precedented Measures: Exploring Effective Ways to Reduce Retirement Plan Expenses During Uncertain Times

By Allison Brecher, General Counsel, Vestwell

There is not much written about how retirement plan sponsors should weather situations like the one we’re facing now, mostly because these are unprecedented times. However, the virus that’s causing a meltdown on Wall Street shouldn’t create a meltdown in your office. Knee-jerk reactions like eliminating all equities or terminating a plan altogether can have far reaching consequences. While the ideal outlook is to stay the course, we recognize that not all companies are in the position to do so. So what are the most effective options for sponsors looking to their 401(k) or 403(b) plans as a way to manage costs?

Effective alternatives to plan termination.

While staying the course is often the best route in times like these, that’s not necessarily an option for all companies. In instances where short term cash flow is imperative to survival, there are a number of options as it relates to company retirement plans.

1. Consider placing employees on a leave of absence rather than laying them off.

Federal law recently gave states flexibility to provide unemployment benefits in multiple scenarios related to COVID-19. For example, states can now pay benefits where the employer temporarily ceases operations due to the virus, an employee is quarantined with the expectation of returning to work after the quarantine is over; and an employee leaves employment due to a risk of exposure or to care for a family member. Depending on your state, it may be possible and preferable to place an employee on a leave of absence, rather than terminating their employment. During this time, employees remain plan participants, but cannot make deferrals since they will not be receiving a paycheck. This may be an ideal solution for employers who intend to rehire these same employees after the crisis period ends. It also avoids the problem of the plan potentially becoming subject to partial termination rules, which would occur when a  significant number of employees are separated from employment. A partial termination would require immediate full vesting and distribution of  balances for all severed employees, and could otherwise be more expensive for the sponsor.

2. Deploy a partial plan termination.

A plan termination can seem simple at first glance, but it’s anything but. In order to shut down a plan entirely, all balances must be 100% immediately vested which means a sponsor is often paying out company matches earlier than anticipated. Because the plan must promptly distribute all assets, loans must be repaid immediately, potentially creating further hardship for participants. Additionally, sponsors must wait one year after fully terminating a plan before they can start a new one, opening up hiring, retention, and tax implications down the road. Lastly, it’s important to note that termination may not be an option for all plan sponsors (e.g.  when other retirement plans are held or are part of a controlled group of related employers) so it’s imperative to understand plan design.

Instead of a full termination, sponsors can consider a less expensive approach of a partial termination. This generally occurs when an employer terminates a significant percentage of employees, usually about 20% of headcount, or amends the plan to reduce benefits significantly. It’s a facts and circumstances approach and, while it would still require immediate full vesting and distributions to affected  participants, it can be less onerous on the sponsor than a full termination.

3. Explore billing changes.

Some sponsors pay for plan expenses out of the sponsor’s corporate assets. If a plan provider agrees to a bill delay, it could soften the impact during times of crisis. Alternatively, since the decision of whether to pay for plan expenses is a fiduciary decision made by the sponsor, the sponsor that is paying most of the plan-related expenses from corporate assets can shift that burden to the Plan.

4. Reduce or suspend employer contributions.

For some plans, employers may be able to suspend the employer match or profit sharing contribution for up to three years without terminating the plan. For most plans where the employer match is completely discretionary, this is a fairly simple solution that can quickly reduce costs, especially given that most employee matches are between three to six percent. There is no advance notice required and the employer is free to eliminate contributions immediately.  For safe harbor  plans, however, employers must provide eligible employees with notice, the plan must be amended, and the change takes effect 30 days after the notice is delivered or the plan is amended (whichever is later). The plan must also still satisfy certain compliance testing requirements and participants must be given an  opportunity to reduce their deferrals knowing they may not receive a previously expected employer match. With respect to the nonelective contribution, the employer may need to demonstrate a business hardship or economic loss to the IRS.

5. Amend the plan.

Subject to certain limitations, plans may be amended in the middle of the plan year to help sponsors reduce costs. For instance, a plan can be amended to extend the required service period for employees who are not already eligible to participate, thus saving costs. While not always legally required, notice should be provided as soon as possible in order to maintain good will between employees and the employer and to comply with fiduciary responsibility rules under ERISA. Employees may still be upset, but a timely, clearly written notice provided as far in advance as possible might help alleviate their disappointment.

6. Freeze the plan.

Defined contributions plans, such as cash balance plans, can be frozen, which can help reduce a sponsor’s financial obligations in the short-term. Profit sharing plans that do not have any employee deferrals can also be frozen. The frozen plan still remains subject to compliance and minimum funding requirements, but it gives sponsors flexibility regarding plan operations. A plan can either be fully frozen, where all benefit accruals for all participants cease, or sponsors can implement a so-called “soft freeze” option that stops benefit accruals for some employees based on age, tenure, or job classification.

Regardless of which approach makes the most sense, plan sponsors should remember that they’re still fiduciaries who need to act in the best interests of their plan and its participants. Therefore, plan terms must be reviewed carefully before any action is taken and employees should be made aware of any changes. By exploring options and selecting the least disruptive — yet effective — measure, we can try to maintain some sense of stability during a time that is anything but.

 

Vestwell is not a law firm or tax advisor and we do not offer legal, tax, or investment advice. You may wish to consult your own financial or legal advisor before making any decisions regarding your retirement plan or any distributions.

 

3 Ways Advisors Should be Using LinkedIn

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.

Professional Headline

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.”

Summary/About

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.

Media

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.

Boolean Searches

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

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 content

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

  1. Copy and paste the article URL to the “Start a post box at the top of the LinkedIn Home page.
  2. Add the first paragraph from the article to your post – or write your own thoughts on the piece!
  3. 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.

What’s next?

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 gaikin@hnwsocialmedia.com. And of course, follow Vestwell for shareable content and upcoming retirement-focused webinars.

 

 

 

Reshaping Retirement: 3 Trends that Should Influence Your 2020’s Sales Strategy

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.

Looking ahead

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.

 

 

Why Does the Plaid Acquisition by Visa Matter?

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.

About Vestwell.

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.

Cyber (In)Security: Why Retirement Plans Are at Risk and How to Protect Them

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:

  1. 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.
  2. 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.
  3. 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.

  1. 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.
  2. 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.
  3. 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:

  1. 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.
  2. Monitoring plan statements. Sponsors should review plan activities such as unusual and/or large withdrawals, and educate participants to do the same.
  3. 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.
  4. 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.
  5. 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.

Signed, Sealed, Delivered: What the Passing of the SECURE Act Means For Advisors

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.

ABOUT VESTWELL

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

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.

 

Putting MEPs on the Map

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. 

Maximize Savings with a Safe Harbor Plan…And Soon

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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 2019.

1. Safe harbor basics

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.

2. The trade-off may be worth it

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.

3. More good news

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).

4. There is still time to maximize the savings for 2019

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.

5. If you already have a plan, you can take advantage too!

If you offer a different plan, but would like to take advantage of Safe Harbor benefits, here are dates to know:

  • By or before November 30, 2019: Your provider can amend your plan or start a new plan with a safe harbor provision for the following year
  • December 1, 2019: Your employees receive a 30-day notice of plan revisions
  • January 1, 2020: Safe Harbor provision takes effect and exempts the plan from nondiscrimination testing

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 info@vestwell.com at any time.

How Small Businesses Benefit from the SECURE Act

 

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By Allison Brecher, General Counsel, Vestwell

Congress is close to passing legislation that will be a big win for small business owners thinking of offering retirement plans to their employees. The Setting Every Community Up for Retirement Enhancement (SECURE) Act has a number of provisions centered around improving the nation’s retirement system, but small businesses in particular stand to benefit in many ways. Most notably, the Act would:

  • Increase the business tax credit for plan startup costs to make setting up retirement plans more affordable for small businesses. The tax credit would increase from the current cap of $500 to up to $5,000 in certain circumstances.
  • Encourage small-business owners to adopt automatic enrollment by providing an additional $500 tax credit for three years for plans that add auto enrollment of new employees.
  • Simplify rules and notice requirements related to qualified nonelective contributions in safe harbor 401(k) plans, a particularly common plan design amongst small businesses because the plan automatically passes certain compliance tests.
  • Offer a consolidated Form 5500 for certain defined contribution plans to reduce costs.

Additionally, the SECURE Act allows unrelated small businesses to get together in an “open” 401(k) multiple employer plan (MEP), which could also reduce costs and administrative responsibilities. Currently, only so-called “closed” MEPs are permissible, which require employers participating in it to have some kind of connection between them, such as membership in the same industry or an established trade association, and each business bears liability in the event any employer in the plan fails to comply with legal or regulatory requirements.  “Open” MEPs eliminate those rules.

The SECURE Act would also increase plan flexibility, which is a big benefit for small plan sponsors. First off, it would permit employers to add a safe harbor feature to their existing 401(k) plans even after the plan year has started as long as they make at least a 4% of pay contribution to employees, instead of the regular 3%. Second, it would extend the period of time for companies to adopt new plans beyond the end of the year to the due date for filing the company tax return.

There are other benefits that focus on helping employees save more for retirement. For example, it’s been proven that automatic enrollment and automatic escalation features encourage long-term savings, and the SECURE Act permits safe harbor 401(k) plans to increase the auto enrollment cap from 10% to 15% of an employee’s paycheck.  And since employees are working and living longer, the bill also benefits older workers by letting them continue to contribute to their plan until age 72, up from the current age of 70 ½. Lastly, it would provide penalty-free withdrawals from retirement plans of up to $5,000 within a year of the birth or adoption of a child to cover associated expenses.

The SECURE Act’s companion bill, the Retirement Enhancement Savings Act (RESA), is now moving forward through the Senate. RESA includes many of these same beneficial provisions and also has bi-partisan support. Many industry experts expect a compromise version of the two bills to become law before the end of 2019, making it the perfect time for small businesses to take action. If an employer wants to offer a safe harbor plan, plan documents need to be signed by late summer. This way, they’ll meet the October deadline for distributing legally required notices, be able to go January, and take advantage of the full tax benefits for the year.