With almost 500 retirement plans but less than $100 million in AUM, Steve Austin of Apex Financial, who is a former Paychex wholesaler, is proactively reducing provider partners. He said robos like Vestwell are making it easier, particularly with their focus on lower costs and technology, issues that resonate with clients. Mr. Austin also noted that advisers need a business process, especially if they are growing quickly, with consolidation a key component.
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 email@example.com at any time.
July 3, 2019
After being named Chairman of the Riskalyze board, Lori Hardwick is joining the Board of Directors at Vestwell, said Aaron Schumm, founder and CEO of the firm. Schumm announced the move at the Next Gen Retirement event in New York City. The firm also announced the addition of Rana Yared, partner at Goldman Sachs, to the company’s board.
July 2, 2019
Aaron Schumm reluctantly took a hard-stop 30-minute meeting with a friend-of-a-friend in February. It changed the Vestwell CEO’s destiny and that of his midtown New York City company, as well…
July 3, 2019
Following our series B, Vestwell earns a spot in the top 15 NYC startups in terms of capital raised.
Rana Yared, Principal Strategic Investments, Goldman Sachs
Lori Hardwick, CEO Wealth Tech, RedRock Strategic Partners
Goldman Sachs’ Rana Yared and industry veteran Lori Hardwick join the board following Vestwell’s $30 million Series B
New York – July 2, 2019 – Vestwell, a digital retirement platform, announced the appointment of two new members to the company’s Board of Directors, Rana Yared, Partner and Managing Director of Goldman Sachs, and Lori Hardwick, CEO of Wealth Tech at RedRock Strategic Partners and Chairman of Riskalyze. The two executives join Vestwell’s board on the back of the company’s recent $30 million Series B funding round, which will be used to fuel innovation and scale the company’s retirement technology platform.
“We’re very excited to have Rana and Lori join our Board to lend their expertise in financial services and technology and help guide our next phase of growth,” said Aaron Schumm, Co-Founder and CEO of Vestwell. “Rana is a clear visionary with deep insight into how fintech companies can successfully navigate and disrupt traditional financial services, while Lori is a renowned and dynamic industry executive with decades of experience leveraging technologies to scale platform businesses at pivotal junctures. Their contributions will certainly help make our future vision a reality.”
“I was drawn to Vestwell because it has developed a modern and intuitive interface that empowers advisors to more efficiently manage customized retirement plans,” said Yared. “I’m looking forward to working alongside the team to continue reimagining retirement through technology.”
Rana Yared joins the Board of Directors as a representative from Goldman Sachs, which led Vestwell’s Series B funding round in April 2019. At Goldman, Yared plays a leading role in the company’s financial technology investment arm and helps lead the commercialization of the bank’s technologies. She was recently named one of Goldman Sachs’ “Most Powerful Women” and has been recognized by Fortune’s 40 Under 40 list.
“Vestwell is filling an important gap that has prevented so many retirement advisors from not only scaling their businesses, but also improving their client experience,” said Hardwick. “I’m thrilled to join the board to help fuel a much needed transformation in how retirement plans are administered, managed, and experienced by all stakeholders.”
Lori Hardwick is a renowned industry veteran, with specific expertise in investment, technology, and advisory solutions. In addition to her current position, Hardwick serves as a member of the Board of Directors for AI Labs, a company she co-founded in 2017. Previously, she was one of the original partners at Envestnet, as well as Chief Operating Officer of Pershing. Hardwick has been named to the “Women to Watch” list by InvestmentNews, listed as one of the “50 Most Influential Women in Private Wealth” by Private Asset Management magazine, and included in Investment Advisor’s 25 list, among other accolades.
About Vestwell Holdings, Inc.
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.
Thank you Wealth Management! Vestwell is ecstatic to share we have been recognized twice as a finalist for the 401(k) Retirement Plan Support category for technology! Congratulations to our industry friends who were also listed and we look forward to hearing the final results in September.
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.
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By Allison Brecher, General Counsel, Vestwell
More than 100 lawsuits were filed in the last two years against plan sponsors and advisors, claiming that fees charged to them by their 401(k) plans were excessive. This litigation has resulted in hundreds of millions of dollars in settlements, significant reputational damage, and countless hours spent on defending litigation instead of servicing clients. Worse yet, when the stock market declines, we can expect more filings like these. In addition to litigation over failures to make reasonable decisions for plans, the Department of Labor restored over $1.6 billion to benefit plans to correct each plan sponsors’ failure to follow its own internal procedures.
Fortunately, many of these types of claims are preventable. With a little time and preparation, advisors, plan sponsors, and other fiduciaries can take steps to minimize their risk and even eliminate it almost completely.
Create internal policies and follow them.
Every plan sponsor and fiduciary should have a written guide – even if it’s just one page – that lists who the plan service providers are, what each one does, who makes decisions for the plan about investments and other plan features, and how often those get decisions reviewed. Courts have repeatedly dismissed claims where the plan sponsors provided evidence that their plan has internal procedures about plan-related decisions and that they were followed. There are many free online resources to help sponsors conduct fiduciary training, vet their service providers, and assess conflicts of interest that might impair their obligation to serve their participants’ best interests. Don’t wait for litigation to jump into action.
Benchmark the plan’s costs to make sure they are reasonable.
One of the most often litigated claims against plan sponsors and advisors is that they permitted the plan to incur unreasonably high costs. The regulations are clear that the plan does not need to engage the least expensive provider and cost is not the only criteria to determine whether a provider’s or investment’s fees are “reasonable.” The plan sponsor or advisor should take stock of each service provider’s services, evaluate them, and document the review of them.
Identify and disclose all actual or potential conflicts of interest.
Service providers should disclose their conflicts of interest to the plan sponsor so that the sponsor can make an informed decision that aligns with their participants’ best interests. Sadly, not all providers do. If the same company that serves as the plan’s recordkeeper is also providing the investment options available to plan sponsors or receiving other indirect compensation from the investments offered by the plan, there may be a conflict of interest. Conflicts can only be managed if they are disclosed.
Give participants clear and complete information about the plan.
It is astonishing how many claims could have been avoided had plan fiduciaries been more transparent in giving plan participants information. This could be as simple as giving them materials about joining the plan and how to invest through an email blast or mailing. Tell participants in “plain English” what they need to know about the investment options, eligibility requirements, employer match, and other basic plan features.
Complacency about proper retirement plan management is a significant business risk, but there are easy ways to manage it. Advisors and plan fiduciaries can use these lessons of litigation to help plan sponsors ensure they are properly setting up their plans and keep them out of trouble.