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

clients

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

nobel prize

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 uncannywith 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

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.

The “Rothification” of the Investment Industry

"rothification"

Even before President Trump’s tax reform legislation was finalized, rumblings of limits to 401(k) contribution amounts gave credence to “Rothification” impacting the investment industry.

If such proposals had passed, this would have reduced the amount of pre-tax money that people could contribute to their 401(k) plans, while freeing up spending money for the government.

But the industry is already seeing a rise in the conversion from some or all traditional defined contribution plans to Roth-like plans, hence the movement being coined Rothification. The results have sparked a debate about the pros and cons of moving in this direction.

Pros

Proponents of the increased reliance on Roth 401(k)s and IRAs point to the tax benefits later in life for retirement savers.

These savers will sacrifice a tax break today, so that they can avoid paying taxes when the money is withdrawn from their savings in retirement.

There are also estate planning benefits, because there are no required minimum distributions (RMDs) on Roth IRAs. Roth 401(k) accounts rolled over to Roth IRAs would also receive such benefits.

Cons

Many financial advisors fear that Rothification would lead to reduced retirement savings at a time when Americans can ill-afford to do so.

The loss of the income tax deduction would cause worker’s take-home pay to be reduced.

This could, in effect, limit the cash-flow available for 401(k) contributions and other retirement savings.

Consider Taxes

Roth accounts certainly offer solid options for retirement saving. While the benefit of tax savings down the road in retirement can seem distant, the reality is that many retirees may find themselves in a higher income tax bracket in the future.

Many also see Roth accounts as a way for retirement savers to diversify their retirement accounts’ tax profiles, in efforts to be prepared no matter what tax rules are passed in the future.

In the Meantime

Financial advisors should consider how Roth accounts can make sense for 401(k) plan sponsors and their employees.

We haven’t seen the last of the Rothification movement, so it’s best to first be educated, and then be prepared for what’s next.

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

 

Vestwell Announces New Advisory Board of Six Industry Leaders including Josh Brown and Lori Hardwick to Provide Strategic Counsel on Company Initiatives

NEW YORK, Nov. 9, 2017 /PRNewswire/ — Vestwell announced today the creation of a new advisory board to provide guidance and advice as the firm experiences significant growth. As of today, the board includes six prestigious industry leaders.

industry leaders

Vestwell’s new advisory board will meet with the firm’s leadership team to provide strategic counsel. Discussions will revolve around best practices, innovative ideas, and sharing feedback on the growing company’s trajectory. The newly appointed Advisory Board members include:

  • Josh Brown, CEO of Ritholtz Wealth Management
  • Lori Hardwick, Founder & President at AI Labs, former Co-Founder & Group President at Envestnet, Inc. and Chief Operating Officer of BNY Mellon’s Pershing
  • Aaron Schildkrout, Global Head of Growth & Driver Product at Uber
  • Lowell Putnam, Co-Founder and CEO of Quovo
  • Jamie Bernardin, Former CTO at Integral Ad Science & Founder/President of DataSynapse (acquired by TIBCO Software)
  • Peter Kennedy, Former Chief Operating Officer TIAA Individual & Institutional Services, LLC. and former Chief Administrative Officer for the Managed Account Business at UBS Financial

Josh Brown, CEO of Ritholtz Wealth Management, is a renowned industry thought leader known for sharing market and industry insights on his blog, The Reformed Broker. “I am thrilled to be selected as an inaugural member of Vestwell’s new Advisory Board,” said Brown. “I’m excited to use my experience as a financial advisor to shed light on industry issues to help propel Vestwell’s effort of providing advisors with best-in-class retirement planning technology to the next level.”

Lori Hardwick, is an entrepreneur at heart, having been a co-Founder of Envestnet as Group President of Advisor Services, and most recently co-founding Advisor Innovation Labs. She has deep working knowledge of what drives advisors and how they can best service their clients. Her proven ability to grow, shape and lead a team in the FinTech & FinServ space is highly-valued. As it pertains to Vestwell, Ms. Hardwick states, “The company’s retirement technology solutions are changing the way advisors interact with their clients. I’m looking forward to providing counsel to the board on how to service advisors on all sides of the table, from technology to customer service perspectives.”

“In just about a year since launching, Vestwell has attracted thousands of financial advisors looking to offer low-cost retirement plan options on a platform that assumes fiduciary responsibility,” said Aaron Schumm, Vestwell founder and CEO. “We are thrilled to announce our new Advisory Board, which will continue to push us to innovate more, allowing us to create efficient and customized solutions for financial advisors – ensuring that plan sponsors have access to high quality, low-cost retirement plan options. It’s a true pleasure to be surrounded by such experts and thought leaders in the industry, as we take Vestwell to new heights.”

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 Recognized Globally for its Innovation by RegTech 100 List

 

Vestwell is excited to be named one of 2018’s most innovative companies in regulatory technology by RegTech 100. The RegTech 100 recognizes companies that are transforming the regulatory technology industry and are quickly becoming important to financial institutions. Vestwell is proud to offer a solution that makes the complexity of regulating retirement planning a simple, streamlined process for financial advisors, companies, and participants.

RegTech
Global RegTech 100 list announced to recognize the FinTech companies changing the landscape for financial institutions

NYC Startup Vestwell Raised $8M To Ensure Your Employer is Offering The Right Retirement Plan

$8M

1/3 of Americans have nothing saved for retirement while half have less than $10K saved.  The outlook for retirement savings has been bleak but it doesn’t need to be.  Vestwell is a digital platform targeted towards financial advisors that can use the platform to ensure their clients can offer retirement plans for their employees.  Pensions have all about disappeared and employers need low cost ways to offer retirement investment options for their employees and employees need the help of their employers to achieve their retirement goals.  Vestwell facilitates this seamlessly and efficiently. No longer are employers forced to adopt out-of-the-box plans that do not meet their and their employees needs.

AlleyWatch spoke with founder Aaron Schumm about the startup, their Series A round of funding, and the state of the retirement industry.

Who were your investors and how much did you raise?

Thank you. We are very excited about closing our Series A. We raised $8M, led by F-Prime Capital. The round was entirely inside, with the same VC firms participating in our Series A. To us at Vestwell, it’s great to have such strong commitment from a highly talented team of investors around us.

Tell us about your product or service.

Vestwell is a turnkey solution for financial advisers providing them with the ability to offer clients a retirement plan without taking on the risk and costs typically associated with creating one. We remove the friction points of confusion, cost and compliance overhead that come with traditional retirement plans. Vestwell’s digital platform allows for seamless plan design, automated onboarding, and low-cost investment strategies, making it easier for employers to offer a retirement plan. Vestwell becomes an extension of the financial advisor’s services, acting in everyone’s best interest while scaling through technology and allowing financial advisors to focus on clients.

What inspired you to start the company?

My own experiences are what drove me to start Vestwell. Being a product person by trade, having cofounded a wealth management platform (FolioDynamix, now owned by Envestnet), I experienced first-hand, the difficulties in offering a retirement plan to our employees there. Being a huge advocate of advisors, with a deep understanding of how to build a scalable FinTech platform for the financial services landscape, I thought it was long overdue that we put a better solution in the hands of advisors to help their clients, the way they want to help them.

How is it different?

The 401k industry has been around for 40 years and sliced a million ways. Our differentiators are centered around how the platform is architected to scale an advisors practice while helping ease the pain, expense, and liability an advisor, plan sponsor and participant may be beholden.

Each user (advisor, company, and employee) has their own dashboard and interface that can sit across multiple record-keepers, custodians and executing brokers, without changing the user experience. Advisors no longer have to either shove a company in a box that doesn’t fit the company or customize a plan through various providers that won’t allow an advisor to scale his or her practice. We’ve figured out how to deliver a custom, white-labeled (e.g., ABC Advisors Retirement Platform), solution at a fraction of the cost, but still allow the advisor to do what s/he wants to do for their client while being compensated for it.

What market you are targeting and how big is it?

We work with RIA’s, independent broker-dealers, asset managers, and bank/trust custodians to equip them with a solution for advisors to services plan sponsors and employees at scale. The target plan sponsor size is $500K-$50M (2-2K employees). Upwards of 90% of this market is serviced through financial advisors, but they need a better solution to help their clients more effectively. The total asset breath in this space is upwards of $25T.

What’s your business model?

Primarily Vestwell charges basis points in an a-la-carte fashion based on the services provided. The solution is a full-service, unbundled turnkey suite. We become an extension of the advisory firm. They do what they do best, and we fill in the rest to compliment the advisor.   For example, if an advisor wants to be the 3(21) or 3(38) investment manager on the plan or hire a sub-advisor, they can do so, and we facilitate the technology, administration, trading, custody, and clearing, in a white-labeled capacity.

What should everyone know about retirement?

EVERY employee in America should have access to a 401k plan. It’s crucial for saving for retirement in one of the most effective ways possible, especially given company matching (free money) and tax deferrals. But, one should be mindful of the plan design, legal liability (as a fiduciary) and the cost, including the investment fees and ongoing administration. Paying too much or exposure to too much liability can be detrimental to a company or employee in the future. Fear or uncertainty shouldn’t stop one from setting up a plan or investing in one. It just needs to be clear, easily consumable and structured in a way that aligns everyone’s best interest.

What was the funding process like?

We were incredibly fortunate in our funding process. We hadn’t, officially decided to raise our Series A, with plenty of runway ahead of us. There was a lot of outside interest in Vestwell. But, our Series Seed investors said: “Listen, we are behind you 100% in whatever you feel is best for the company, and we are happy to do the round ourselves to help take Vestwell to the next level.” The group around the table have been a delight to work with, and added a significant amount of value beyond just capital. So the decision to keep the round internal was easy.

What are the biggest challenges that you faced while raising capital?

It’s a massive distraction from the business to raise capital. My focus was to keep the internal employees involved very small and contained, so the rest of the team could focus on funding while I finished up the funding.

What factors about your business led your investors to write the check?

Our investors are all there for specific reasons. We had an opportunity to be supported by teams that knew FinTech, the retirement industry, advisory practice, and B2B2C scaling better than anyone. They didn’t need much convincing. We all saw the fit and the strategic direction of the company. They were happy to support those efforts and take this to the next level.

What are the milestones you plan to achieve in the next six months?

We’ve already signed over 50+ advisory firms and are onboarding plan sponsors continuously. The next few months are focused on scaling faster and faster, while delivering on a few key strategic platform features we think will delight our users.

What advice can you offer companies in New York that do not have a fresh injection of capital in the bank?

Listen, startup life is hard. There is zero glamor in it. I feel that many people have a skewed perception as to what it means to be an “entrepreneur.” But, I do stand by the notion that if you believe in what you are doing, you love it, and most importantly, you can add real value to this world and society, then it’s worth pursuing. One has to stay highly focused on how to add value a segment of the population with a more significant goal of sustainable benefit for all. If you can do that, while creating a clear path to a viable, sustainable business, you’ll find funding. In the meantime, ignore the fluff. Ignore the distractions. Stay focused.

Where do you see the company going now over the near term?

Generically, growing, scaling and providing value to advisors, companies, and employees. Specifically, I want to position ourselves to equip every financial services provider to create a more meaningful interaction with the American workforce through technology, while being a viable, scalable, profitable business.

Where is your favorite fall destination in the city?

These days, I feel my destinations only include our home, office, and an airport. But, my wife and I love taking our little 11-month old son to nearby Central Park or along Riverside, maximizing as much time together as we can, given our overly hectic schedules. People always say it, but it’s incredible how much joy and renewed perspective children give you.