Why Business Owners Should Consider Cash Balance Plans

 

 

Cash balance pension plans aren’t new, but they are gaining in popularity.

Companies that offer their employees a cash balance plan may benefit from cost-savings over a traditional pension plan, as well as significant tax savings versus a 401(k) or other defined contribution plan.

What is a cash balance plan?

A cash balance plan is a type of pension plan where an employer credits an employee participant’s account with a set percentage of his or her annual salary, plus an interest credit. This interest credit is typically tied to the interest rate of an outside index, such as the one-year U.S. Treasury Bill rate.

Cash balance plans are defined benefit (DB) plans, which means that employees are guaranteed a specific “defined” amount upon retirement.

Like any DB plan, a cash balance plan is subject to pension funding requirements and the company is ultimately responsible for ensuring the plan is funded.

These pensions typically start paying out around age 65, but could be as early as 55 depending on the company. Note that employees don’t invest any of their own money in the plan, and they typically have no input into the investing choices.

But unlike DB plans, cash balance plans do offer transparency; participants can actually keep track of their account balances.

Cash balance plans also differ from traditional pension plans because they offer the benefit of portability. If an employee leaves the company prior to retiring, the balance is portable and can be rolled over to an IRA, if desired.

Why a cash balance plan?

Each year, a company makes contributions of a specified amount of earnings to each employee participant’s account. Employers who offer cash balance plans typically contribute 5-8% annually, which is generally higher than DB plan contributions.

These levels increase for older workers: The annual contribution limit for a 55-year-old is more than $160,000, and more than $220,000 for a 65-year-old.

Contributions are made by the company, and are a tax-deductible business expense. This means that business owners, professionals, and partners who themselves want to contribute amounts in excess of $50,000 annually, say for their own retirement, can do so easily.

Good candidates for cash balance plans

As with any pension plan, companies with stable cash flow and decent earnings are good candidates for offering cash balance plans. These organizations will generally be in a better position to fund plans over the long-term.

Companies that have regularly contributed annually to employee plans should also consider offering such plans.

As mentioned, business owners and professionals who got a later start on retirement savings can use cash balance plans as a means to rapidly accelerate savings, making up the time to eventually reach the lifetime maximum of $2.6 million per account.

Keep in mind that the large contribution limits for older business owners and professionals offer the reciprocal benefit of a potentially significant tax deduction.

Finally, a cash balance plan can also be used in combination with a 401(k) plan to help maximize their retirement savings.

Converting to a cash balance plan

For all of the advantages of a cash balance plan, note that companies converting their traditional DB plan to a cash balance plan usually leave their employees with a lower benefit than before, due to the higher contribution requirements.

Contributing to such accounts each year instead of a fixed payout based on employees’ years of service is a potentially big cost savings to the employer.

Cash balance plans may be the perfect client solution

A cash balance plan is a great option to add to your toolkit of retirement solutions offerings; such plans may offer significant tax and cost savings when compared to other employee retirement benefit plans.

Be sure to discuss the pros and cons on this type of plan with any business owner or professional clients who are looking to ramp up their retirement plan contributions.

 

All contribution limits discussed herein are believed to be current at the time of writing, however, Vestwell Holdings, Inc. and its affiliates do not offer tax advice and this information is offered for educational purposes only.

Giving a Plan Checkup Now Can Mean Big Savings Later for Clients

Many plan sponsors are (or should be) starting to think about their Form 5500 filing and annual compliance testing. That means it is also a great time for advisors to help clients conduct a “plan checkup.” A good checkup can reduce future costs, administrative headaches, and fiduciary liability. Here are some steps to help you start the process with your plan sponsors.

  1. Make sure Their current plans are compliant

Ensure your sponsors have reviewed all plan documents and communications with their participants within the past 12 months. Changes in a business may produce unexpected and unnoticed changes in a plan’s operation, so it’s important to review plan language and features. Consider including the service providers who regularly work with each plan to help spot issues that may have been overlooked. Some questions to ask when meeting with your client for a review include:

Have you had any mergers, acquisitions, or changes in ownership in the past plan year? Structural changes to their organization will warrant updated plan documents and need to be communicated to your retirement service providers.

Are you a part of a Control Group or an Affiliated Service Organization? A controlled group and affiliated service organization are categories used to describe businesses that are related in some way, usually by family ownership. Knowing whether your client falls into one of these groups or if the employer owns multiple business with different retirement plans can have an important effect on the way a sponsor’s plan is set up for their employees.

Do you have a Fidelity Bond? ERISA requires that every fiduciary of an employee benefit plan and every person who handles plan funds be bonded, so ensure your client’s plan is compliant to avoid penalties. These bonds cover the plan from loss of assets due to fraud or dishonesty. The fidelity bond is required to protect the participants and beneficiaries from dishonest acts of a fiduciary who handles the plan assets. The fidelity bond must be at no less than 10% of plan assets with a minimum of $1,000 and a maximum of $500,000.

How are you tracking the accuracy of administrative tasks? Administrative mistakes are common and easy to make, but the sooner the plan sponsor finds them, the easier and less costly they are to fix.  Some common errors are late payrolls, loan issues, and improperly communicating with terminated  employees who have account balances.

  1. Consider plan changes that will better suit your clients

Your clients are the experts on their businesses—but you’re the expert on their plans. As your check in with your plan sponsors, revisit the features of their plans to see what needs to be changed to better suit their goals.

How is enrollment set up? A retirement plan isn’t doing employees any good if they aren’t participating in it. If auto-enroll isn’t set up, speak with your client about its benefits. Without this feature, plan participation averages  63% for 401(k) plans yet jumps to 90% when auto enroll is enacted. Another way to potentially increase employee contributions? Consider adding auto escalation to automatically increase their contributions year over year.

Do the investment offerings still suit the company? Revisit the investment options the plan currently has and how they are being used. Employees’ goals and risk tolerance may have changed over time.

Have you compared costs? Your service provider’s fees should be reasonable. Consider conducting a benchmarking exercise or issuing a request for proposal from multiple service providers to compare their fees. If you’re looking to dig into a 408b(2) disclosure and don’t know where to begin, we can help.

3. Stay in contactyour clients will appreciate it

After checking in with your plan sponsors, take the next step and meet with their employees as well.  Schedule a time each year to educate participants on the basics of a 401(k) and how they can take advantage of this important savings tool. Here are some key points to cover:

What is the difference between a 401(k) and an IRA?

  • What is the impact of investing now?
  • Should I change my investment selections year over year?
  • How do I navigate my account?
  • How do rollovers works?
  • How do beneficiaries work?

All it takes is a few simple questions to ensure that your plans are correct, your platform includes the best features, and your participants are getting properly educated. Your clients will be impressed with the thoughtfulness you put into their plan and thankful that they have an expert to lean on.

Newly Proposed Bills May Help Your Plan Sponsors

 

Tax reform isn’t the only newsworthy event affecting the benefits industry–several bills were introduced in Congress at the end of 2017 that could dramatically impact certain kinds of retirement plans. While these new proposals have an uncertain future, they all signal Congressional interest in improving retirement security. Here are some common trends news that you may see affecting your retirement plans soon.

Increase access to multiple employer plans (MEPs)

The Small Businesses Add Value for Employees Act (SAVE Act, HR 4637) removes the “common bond” requirement, thereby making it easier for small businesses to pool together, regardless of industry, and offer retirement plans to their employees while alleviating some burdens of plan administration.

The Retirement Security Act of 2017 (SB 1383) offers employers a tax credit and protects employees from losing their tax benefiits if one employer in a MEP fails to meet the participation criteria. Similarly, the Auto401k Act (HR 4523) provides relief from the “one bad apple” rule of MEPs so that all participating employers are not penalized when one employer violates the qualification rules.

Incentivize small businesses to offer retirement benefits

Through tax credits and other incentives, Congress is attempting to make retirement plans more accessible and promoting lifetime income solutions.The Retirement Plan Simplification and Enhancement Act (RPSEA; HR 4524) would increase the current automatic enrollment safe harbor cap and encourage employers to defer more than the automatic deferral floor of 3% of salary in the first year. It would also exempt retirement savings below $250,000 from complicated required minimum distribution rules and make it easier to take advantage of the saver’s credit. The SAVE Act increases the limit on elective deferrals under a simple IRA and permitting employers to make non-elective contributions for their employees of up to 10% of pay.

Reduce administrative burdens for plan sponsors

Congress is also addressing some of the lesser-known, but equally painful administrative burdens of sponsoring retirement plans. Access to a Secure Retirement Act (HR 4604) corrects some of the confusing regulations that often stop employers from including a guaranteed lifetime income product in their benefits package.

The Receiving Electronic Statements to Improve Retiree Earnings Act (RETIRE Act HR 4610) allows plan sponsors to use electronic delivery as the default distribution method for retirement plan notices and documents. A companion Senate bill is expected soon and the timing coincides with an effort by the Employee Benefits Security Administration’s project to address electronic delivery.

Staying on top of these bills can help eliminate the often confusing world of government. As Congress continues to takes steps to help plan sponsors, we will keep you updated on the way new legislation is affecting your clients. That way, as client questions come about surrounding what they hear in the news – their trusted advisor has the answers.

The (Often) Hidden Costs Behind Retirement Plans

 

The number one reason for DC plan sponsors to change their investment manager or recordkeeper is high fees.1 Unfortunately, it is very difficult for sponsors to accurately assess fees because they are typically confusing, hidden, and convoluted (often intentionally). This provides a great opportunity for Advisors to add additional value by guiding their plan sponsors through fee comparisons.

While fees have different names throughout the industry, there are standard services that will typically fall into one of three categories: (1) plan administration and recordkeeping, (2) fund expenses, and (3) ancillary transactional fees. This simple framework will help us compare fees and assist clients with making better decisions about plan vendors.2

1. Plan Administration Fees

There are a LOT of players when it comes to managing a 401(k) plan. As a result, they can account for a heifty portion of retirement plan fees. Here are some service provider fees to look for:

Non-Fiduciary

  • Recordkeeper The recordkeeper tracks basic plan information. They record who can participate in the plan, the flow of money, and the investments participants make.
  • Third Party Administrator (TPA) This service provider serves as a balance between the plan sponsor and the compliance guidelines set forth by the DOL and IRS. They do this by running compliance testing, produce the 5500, preparing plan documents and benefits statements, and tracking general activities carried out by participants.
  • Custodian The Custodian is the institution that holds the retirement assets.

Fiduciary

  • 3(38)/3(21) Investment Advisor  These services are for the investment fiduciary liability that a plan may outsource to or share with an advisor or service provider.
  • 3(16) Plan Administrator This is a fiduciary that helps execute the day to day tasks of plan administration, including distributing participant notices and disclosures and filling year end compliance documents. They have an added fiduciary responsibility to keep the plan compliant.
  • Advisor  This includes plan sponsor consulting, participant education and investment expertise.
  • Trustee This service provider directs movement of assets in a plan.

2. Fund Expenses

Fund Expenses are costs associated with the underlying investment products offered by a plan; there may be any combination of Mutual Funds, Exchange Traded Funds (ETFs), or Collective Investment Trusts (CITs) found in a retirement plan. Fund expenses may like the most obvious fees, yet funds can hide fees charged by other services providers to a plan sponsor and participants. Here are some common expenses you may find wrapped inside a tradition fund expense:

  • Trading Fees charged by fund management company to buy or sell an investment instrument.
  • Fund Management Fees charged to manage a fund; usually paid periodically as percentage of assets under management.
  • Fund Administration Cost for day-to-day administration of a fund.
  • Revenue Sharing A charge that may be included as a  portion of overall fund expenses, paid out to a service provider, typically disclosed as 12b-1, or Sub-TA fees
  • Guaranteed Income Products Similar to an annuity, guaranteed income products offer a minimum level of income for life.  However, these products can charge additional fees that are not required to be disclosed on the participant fee disclosure and early redemption fees if the participant exits the program early.

3. Ancillary Fees

These are one-time fees for individual transactions that a participant may or may not choose to carry out. Below are some common activities that may result in a  charge to the participant.

  • Loans These are fees related to taking a loan against the assets in a 401(k).  They are often substantial and may be ongoing for the maintenance of loan repayments.
  • Rollover Some plans may charge participants to move assets out of a previous 401(k) and into a new one.
  • Domestic Retirement Order (QDRO) A QDRO fee pertains to the allocation of assets in a retirement or pension following a divorce or legal separation.
  • Distribution A participant may request a distribution from certain plans due to termination of service or an applicable in-service provision in the plan document.

The complexity of retirement plans requires a lot of services – and they can add up. That’s why it is so important to help plan sponsors understand what they are paying for and why. Staying on top of fees helps keep participants from over paying and gives plan sponsors an extra level of trust with their trusted advisor.

 

1 Moore, Rebecca. “Investment Manager and Recordkeeper Changes Driven by Fees.”PLANSPONSOR, 26 July 2017, www.plansponsor.com/investment-manager-and-recordkeeper-changes-driven-by-fees/.

2 Does not include all possible fees; Fees listed may or may not be included based on individual plans.

3 Reasons Your Firm Should Delegate Plan Management

Written by Ezra Group

For some advisors, being successful means being busy. If you’re not working on five tasks at once and putting in 10-12 hour days, it means you’re not working hard enough.

When it comes to developing a great practice, many financial advisors eventually realize that a bigger to-do list does not lead to the improvements they were seeking.

In fact, top advisors perform a regular assessment of their internal processes and prune what they do not absolutely need. That’s what has allowed them to provide the highest quality service to their clients, even as their assets grow. In the process, these professionals discover that delivering more value can come from doing less.

In a professional practice, investment management is just one component that can be outsourced with great success. However, misconceptions about outsourcing exist, which can discourage progress and expose advisors to costly professional liability. Below, three myths about outsourcing, debunked.

Myth# 1: Your value as an advisor comes from picking the perfect investments.

Investment selection has become increasingly commoditized. From Vanguard to Betterment to Morningstar, new consumer-direct tools are available, which also allow professional investment selection at a fraction of the standard advisor fee.

Fee compression is just one side-effect of this development. Today’s advisors must prove that they are better than an algorithm that charges less, never sleeps and does not make human mistakes.

As a result, top advisors are re-framing their value proposition around helping clients get organized, define priorities, and stay accountable. This requires a shift in the workflows of the professional practice.

In order to create the space and time to have deeper client conversations, advisors must let go of the idea that they are uniquely qualified to select every client investment.

This point is equally valid for high net worth clients and 401(k) plans. The lesson of the last decade is that advisors create success through client relationships, ongoing education and proactive counseling, not through hand-selecting the “perfect” mix of mutual funds.

Myth #2: You must pick investments yourself.

Some advisors might feel that they offer no value if they are not doing the investment selection. In reality, picking investments for a plan is only a small part of what must be done. If the ultimate goal is to create optimal retirement outcomes for the plan participants and to maximize the value of the plan offering as an employment benefit for the plan sponsor, the advisor has his/her work cut out..

That includes helping plan sponsors select the right service providers, designing dozens of features to shape the plan offering and educating employees on their retirement readiness. None of those are one-time tasks that can be done at the launch of the plan and then put on a shelf for a decade!

The plan will need to morph with the changing needs of the plan sponsor. Employee education and outreach is an ongoing and labor-intensive commitment. In short, there is no risk that the advisor will run out of things to do, even if he chooses to outsource investment management!

Myth #3: A 401(k) plan is not that different from selecting investments.

Many advisors have fallen into an erroneous belief that the fiduciary standard for 401(k) account management is the same as the fiduciary standard for wealth management clients. They feel comfortable offering 401(k) management services because they think that their standard procedures address all requirements.

In reality, the decision to provide 401(k) plan management places a higher standard on the advisor. Creating, documenting and following a prudent investment process to meet the ERISA fiduciary standard is complicated. Advisors often find themselves unprepared for the amount of time and effort they must dedicate to ongoing maintenance, monitoring, and management of associated documentation. That commitment doesn’t go away as long as they remain an ERISA fiduciary, which is a tough lesson to learn after they have made a costly investment in developing the internal logistics to set up a separate workflow.

It’s not all about the time commitment. Although as long as nothing goes wrong, the advisor’s exposure is limited to the ongoing resource allocation. Should the process ever fail at any stage, the entire firm is exposed to risk and fines.

When a 401(k) plan participant or a sponsor client raises a complaint, the investment manager could be held professionally (and in some cases personally) liable. Few advisors have considered this possibility and taken the proactive step of boosting their balance sheet and reserves to the level that can handle the potential expense of a lawsuit, investigation and fines.

Time to outsource investment management

Investment management for a 401(k) plan is a necessary but time-consuming part of your practice. It does not yield high premiums, nor does it help you stand out when competing for new plan clients. Therefore, it makes sense to opt into the convenience and savings that come from buying a fully automated bundled solution for a low basis point fee.

In exchange, you receive a professional investment manager who will follow a documented prudent process, provide all plan communications and provide a layer of liability protection.

Some advisors are apprehensive about the “black box effect” of outsourcing and the possibility of giving up control over a core function of their business. Contrary to the common belief, outsourcing the day-to-day aspects of 401(k) plan management can have the effect of putting you back in control of your practice.

Most importantly, outsourcing can allow you to concentrate on developing deeper relationships with your clients and creating more impact. Whether your goal is growing your practice or maintaining it at a comfortable “lifestyle” level, finding the right partner for investment management outsourcing can improve your efficiency, focus and risk management.

With a modern all-in-one solution from Vestwell, you will have the right tools to create optimal outcomes for your plan sponsor clients and their employees, no matter what your vision for your practice is.

 

 

2017 Year in Review

Last year saw plenty of activity concerning Americans’ personal finances and investments. A new president and his administration initiated sweeping changes—not just to Obama-era proposed legislation but also to longtime rules.

While this year portends possible interest rates rises, cryptocurrency controversy, and the potential rebound of global markets (particularly in China), it’s important to understand the most pertinent issues from 2017, which will impact your clients and advisory businesses not just this year but also in the years ahead.

New tax laws

Among the bigger financial developments of 2017 was the recent passage of the Tax Cuts and Jobs Act, which will result in the most significant overhaul of the U.S. tax system in more than 30 years.

While there was no direct impact on 401(k) plans, there could be a number of indirect hits ahead. Earlier tax plan proposals would have capped the pre-tax contribution amount to 401(k) plans, but thankfully rumors of this change didn’t materialize in the final version.

The DOL Fiduciary Rule

The fiduciary rule was rolled out in April of 2016, with final implementation – originally scheduled to commence on April 10, 2017 – to be finalized by January 1, 2018.

In early 2017, the Trump administration issued an executive memo instructing that the DOL review the rule. The applicability (or the commencement of the final implementation process) of the rule was moved to June 9, 2017, with full implementation now set for July 1, 2019.

Financial advisors who provide advice to 401(k) plan sponsors (and other retirement plans) already had a fiduciary responsibility predating the new rule. Much of this is rooted in the DOL’s ERISA statutes. There are a number of provisions in the new rule which effect  small 401(k) plans. Moreover, there are provisions in the rule concerning rollovers from 401(k) plans to IRAs.

401(k) plans and Roth IRAs

While there were no new rules regarding 401(k) plans in 2017, the participant contribution levels for 2018 increased to $18,500 for those under 50 years old, and up to $24,500 for those 50 or over in 2018.

Also of note, the IRS increased income limits for those wishing to participate in Roth IRAs.  Income limits increased to $135,000 in 2018 for individuals (up from $133,000 in 2017) and up to $199,000 (from $196,000) for those married and filing jointly.

The total amount that can be contributed begins to phase out at $120,000 for single filers and at $189,000 for those married filing jointly. Maximum contributions remain at $5,500 and $6,500 for those 50 and over.

The impact of the activity from 2017 will require even more attention for your clients in the coming year. Be sure to familiarize yourself with last year’s biggest changes and how they will impact the coming year.

 

About Vestwell Holdings, Inc.
Vestwell Advisors, LLC is a SEC registered investment advisor, a wholly owned subsidiary of Vestwell Holdings, Inc., specializing in 401(k), 403(b) and other defined contribution and benefit retirement investment management services. Built by an experienced team led by CEO Aaron Schumm, Vestwell assumes 3(38) investment management and ERISA3(16) fiduciary responsibility on the behalf of advisors and their plan sponsor clients. Learn more at Vestwell.com and on Twitter @Vestwell.

This is not an offer, solicitation, or advice to buy or sell securities in jurisdictions where Vestwell Advisors is not registered. An investor should consider investment objectives, risks and expenses before investing. More information is available within Vestwell Advisors’ ADV. There are risks involved with investing. Investors should consider all of their assets, income and investments. Portfolios are subject to change. All opinions and results included in this publication constitute Vestwell Advisors’ judgment as of the date of this publication and are subject to change without notice.

SOURCE Vestwell Holdings, Inc.

Related Links

http://www.vestwell.com

Vestwell Visits D.C. to talk 401(k) and Tax Reform with Congress

Vestwell Team arriving in D.C. Left to right: Aaron Schumm, Mike Shuckerow, Peter Kennedy

As the tax reform conversation gained steam in October, some lawmakers began discussing limits on individual 401(k) deductions as a way to raise government revenues.

At Vestwell, we were concerned about this development, given that Americans are already not saving enough for retirement.

The proposed legislation would worsen the problem known as the retirement savings gap, which is the difference between a person’s income and actual expenses during retirement.

The Retirement Gap is Getting Worse, and We Want to Help Fix it

The retirement gap threatens the long-term financial security of nearly all Americans, outside of what formal lobbying committees say.

That’s why we traveled to Washington D.C.  to speak with representatives about this savings crisis.

Along with our Special SEC Adviser and Chief Compliance Officer, Mike Shuckerow, and Special ERISA Adviser, Peter Kennedy, the Vestwell team met with 22 Senators, Congressional House members and their staff within the banking, finance, and technology committees.

Our goal was to educate the representatives on the ways that we can work together to help close the retirement gap.

Americans Aren’t Saving Enough (Or At All) for Retirement

The statistics are staggering; only 8% of people in all working households have enough saved for retirement, given their ages and income.

The median retirement savings for individuals aged 25 to 64 is shockingly low at only $3,000, and a mere $12,000 for those nearing retirement aged 55 to 64.

Left to right: Aaron Schumm, Perre Smalls

Defined Contribution Plans and Accounts Can Close this Gap

We already know that 75% of Americans rely on defined benefit plans and defined contribution plans, such as 401(k)s and 403(b)s, as their only sources of invested assets.

Social security is also an elephant in the room that no one is addressing; its uncertain future places even more importance on saving and investing during one’s working years.

More Than Ever, Financial Advisors Can Help Companies Facilitate and Administer the Right Retirement Plans

During my time in D.C., I underlined the importance of 401(k) plans to address savings deficiencies.

I also talked about the key role that financial advisors, empowered by technology, play in the administration of and access to retirement plans.

This is revolutionizing the way plans are administered today, as well as providing access and opportunities for companies who previously did not offer a 401(k) or 403(b) plan to their employees. In fact, up to 90% of plans with less than $50 million AUM are managed by financial professionals.

What’s more, according to the Department of Labor & Bureau of Labor Statistics, more than 500,000 companies in America do not offer retirement plans for principals and employees.

Fortunately, with technology, financial advisors are paving the way for SMBs to help their employees and principals save for retirement.


(Top) Left to Right: Peter Kennedy, Aaron Schumm, Rep. Bill Foster, Mike Shuckerow; (Left) Meeting with Congressman Huizenga, Left to right: Aaron Schumm, Bill Huizenga, Marliss McManus

“Rothification” Threatens Long-Term Savings

Finally, we discussed the long-term pitfalls of the trend toward “Rothification,” which replaces tax-deferred 401(k) plans with accounts funded by after-tax money.

Moving tax revenue up within the 10-year budget window via a Roth-type account would end up further widening the savings shortfall across the hard working Americans that need the tax benefit most to retire securely.

Our goal was not to lobby for 401(k)s, but rather to remind lawmakers about the significant impact these proposed changes would have in further weakening American retirement readiness.

 

 (Top) Meeting at Cannon House Office Building; Left to right: Aaron Schumm, Congressman Ted Budd, Peter Kennedy, Mike Shuckerow; (Bottom) Left to Right: Aaron Schumm, Congressman Ted Budd 

Real Change Takes Partnership

Since my trip, I’ve continued to communicate with lawmakers and their staffers about these issues.

We have even invited them to meet us in our New York offices so that they can learn more about what Vestwell is doing.

Congressman Ted Budd, R-NC, took us up on the offer. The passion that Congressman Budd and his Chief of Staff showed us toward helping businesses, as well as learning more about how Vestwell services the retirement landscape, was truly invigorating.

On a personal level, I found it reassuring that our elected officials see saving for retirement as a non-partisan concern. Everyone I talked to was very willing to help others. They were ready to think deeply about the issues we raised and engage with us and others, to create solutions.

Our government is not just listening, they are acting. Vestwell is mobilizing financial advisors with technology to propel retirement savings forward, and we remain hopeful the regulators remain informed and are on a path to help.

I’m excited about the potential for change and proud of our role in it.

Wishing you all a very happy holiday season and the warmest wishes for a happy New Year!

Kind Regards,

Aaron Schumm

3 year-end must-dos for your clients’ 401(k) plans

Before the busy holiday season kicks in for you and your clients, make time to add even more value as their trusted investment advisor.

Show—don’t just tell—your clients about these three simple actions to take before year-end, which can help them: 1) reduce their tax burden, 2) increase their chances of retiring comfortably, and 3) make sure their investments remain on track.

Over the long haul, these three moves will be their holiday gifts that keep on giving, and they’ll be grateful that you checked in with them.

1. Make an extra contribution to save on taxes

Your clients have until the end of the year to make an additional contribution to their 401(k)s—which will not only boost their account balances, but also help them save on taxes for the year.

In 2017, the maximum 401(k) contribution for individuals is $18,000. You can advise them to add up their contributions to date, and then figure out how close their are to reaching that limit.

If your clients are over 50-years-old, they can make additional catch-up contributions of $6000, for a total of $24,000.

2. Increase contributions for next year

Many people take a “set it and forget it” approach to retirement savings, but it’s smart to revisit the amount deferred to retirement savings at least once a year.

Ask your clients if they received salary raises this year, and inform them that they may wish to raise their 401(k) contribution by the same percentage increase.

If a company offers an automatic escalation feature, advise them on the benefits for signing up, and their contributions will rise every year to get them closer to savings goals.

3. Check on investment performance, fees, and allocations

Advise your clients to review their investment strategies at least once a year to make sure they are on track. You can help them review all the various parts of their investments:

Performance

Show them how and where to check on performance of their investments—find out if they are happy with their investment performance relative to averages and/or benchmarks.

Fees

You should also ensure that your clients know how much they are in paying investment fees. For example, a large cap stock fund should charge no more than about 1.25% in fees; small cap funds charge a little more, averaging 1.4%.* And fees on ETFs or exchange traded funds can be even lower, around 0.53% on average.**

Help them make sure their funds aren’t eating up their returns with unnecessarily high expenses.

Allocations

You can also help your clients review their portfolios against their target asset allocations.

The stock market has done well this year, and they may have more than they expected in their stock funds. If so, help them to transfer some of the money into other asset classes to diversify and rebalance back to their target.

Helping your clients with their year-end check-up should be part of your regular annual service. Most importantly, doing so will help keep your clients’ retirement savings plans on track.

That’s one way to increase the chances that they (and you) will enjoy financially secure holidays for many years to come.

 

*Thuna, K. (2017, February 14).  Average Expense Ratios for Mutual Funds.  Retrieved from https://www.thebalance.com/average-expense-ratios-for-mutual-funds-2466612

**Why Are ETFs So Cheap? Retrieved from http://www.etf.com/etf-education-center/21012-why-are-etfs-so-cheap.html?nopaging=1

What the Nobel Prize and 401(k) Plans Have in Common

Left to their own devices, many people wouldn’t save enough (or at all) for retirement, no matter how attractive the 401(k) plan.

Statistically speaking, most Americans in their forties have saved an average of $63,000. But according to Fidelity, this may present a dangerous retirement savings gap if held to the conservative benchmark that a nest egg be three times a person’s annual salary.

Look closely, however, and you might notice participation and savings rates slowly creeping upward.

This may be due to the work of Richard Thaler, an economist and professor at the University of Chicago. He’s also the 2017 Nobel Prize winner for Economic Sciences.

Thaler is a pioneer in a field of study called behavioral economics. His research looks at the ways we, as human beings, are our own worst enemies when it comes to acting rationally and in our personal best interests. This is particularly true when it comes to saving and investing for the future.

For instance, a company may offer an employee the chance to participate in a tax-deferred retirement benefit, such as a 401(k) program. As an extra incentive to sign up and begin building financial security, the company may even offer to match the employee’s plan contributions up to a certain amount.

While you’d think that most employees would be jumping for joy and running to sign up, plan sponsors would likely tell you that this is not the case, and that getting people to participate in retirement savings programs is quite difficult, akin to pulling teeth.

Regardless of the reasons why people wouldn’t participate (Laziness? Lack of awareness or education? Misinformation?), the good news is that people can be influenced to act more rationally through mechanisms that Thaler calls “nudges.”  

Opt Out, Not In

An example of a nudge is when an employer automatically enrolls its employees into 401(k) plans from the start, and puts the onus on people to opt out rather than opt in. The results are uncanny, with a much higher number of employees saving for retirement.

This insight kicked off an industry-wide trend toward auto-enrollment. The Plan Sponsor Council of America (PSCA) found that in 2016, 58% of plans were automatically signing up workers, up from just 8.1% in 2000.

Just getting people to participate was a big step forward, but Thaler also looked for ways to influence participants to save more.

Auto-escalation locks in higher contributions   

In his paper, “Save More Tomorrow,” Thaler proposed another “nudge” to increase contributions, called auto-escalation.

Participants would start at first by allocating 3% of income to retirement. Then, with every salary raise, their investment contributions would automatically increase.

Auto-escalation has taken hold among larger plan sponsors. Callan’s 2017 Defined Contribution Trends survey found that 63% of large and mega plans offer an auto-escalation feature, up from 46% in 2015.

Thaler’s insight into why people don’t save and how to get them to do better laid the foundation for a more stable, secure retirement system—and all it took was a little nudge.  

How Tax Reform May Impact the Investment Industry

 

How Tax Reform May Impact the Investment Industry

The Senate recently passed its version of the GOP’s tax reform legislation.

The legislation isn’t final, however, as the House and the Senate must hammer out a final version of the bill that reconciles their differences.

Until that happens, you should be aware of the major changes proposed, and how they may impact your clients.

Exemptions and deductions

Under both proposals, personal exemptions would be eliminated. Both proposals would also eliminate the state and local income tax or sales tax deduction for individual taxpayers, though the standard deduction will nearly double.

The deduction for property taxes will now be capped at $10,000 (as there was no federal cap before).

While the impact on individuals will vary by situation, this could result in many investors having less cash flow to invest in their 401(k) plans and elsewhere.

No changes to 401(k) deferrals

One provision that was discussed early on in the process was limiting employee pre-tax contributions to 401(k) retirement plans.

This ultimately was not part of the package, and the IRS has increased 401(k) contribution limits to $18,500 (with $24,500 for those 50 and over) in 2018.

For those who lose the ability to itemize deductions via the changes in the tax bill, such as the increase in the standard deduction, the ability to make pre-tax retirement contributions becomes even more valuable.

It is important to remind your clients and prospects to max out their contributions if they aren’t already doing so, if this is an appropriate strategy for their situation.

For small business owners who were on the fence about starting a small business retirement plan, the ability to contribute to one for themselves might be an even better incentive under the new tax rules.

Impact on the markets

While trying to predict the direction of the stock market is always a fool’s errand at best, part of the premise of the plan is to lower corporate tax rates in an effort to spur growth.

This could well be a stimulus for the markets, but of course there are many factors that come into play here.

Be a resource

Even if you aren’t a tax expert, become knowledgeable about the features of these new rules that will impact your clients and prospects. Incorporate more knowledge into your advice to existing clients and your marketing to prospects.

Vestwell does not offer tax advice, please consult your tax professional, as necessary, related to any tax-related topics.