Leveraging Technology to Scale Fiduciary Processes

People throw out a lot of buzz words (cloud computing, big data, etc.) in talking about financial technologies. We focused on pragmatic application of technology to financial advisor workflows; allowing them to serve more clients with the same resources.

Leveraging Technology to Scale Fiduciary Processes

technology

What Does Being a “Fiduciary” Mean, Exactly?

fiduciary insights
Any individual or organization that exercises discretion regarding their plan or any plan assets is a fiduciary, which is one of the highest standards in the law. So what does this mean in practice?

OVERSEEING SERVICE PROVIDERS

While plan sponsors can delegate many responsibilities of managing a retirement plan to service providers such as recordkeepers, investment advisors, and others, a plan sponsor cannot completely wash their hands of all fiduciary duty. A plan sponsor must carefully select and monitor their service providers, and is ultimately liable for ensuring the providers are doing right by their employees.

ACTING IN EMPLOYEES’ BEST INTERESTS

A fiduciary must exercise a duty of loyalty by operating the plan in the best interests of participants. After all, the plan sponsor is caring for their employees’ retirement assets. Proceed with caution when considering hiring plan providers that also do work for the company or individual owners. The plan sponsor should not receive any kind of compensation or anything of value from operating the plan. Consider the “smell test.”

SELECTING APPROPRIATE INVESTMENT OPTIONS

Plan sponsors should make sure that participants are offered a diversified set of investment options at reasonable cost, though that doesn’t mean they need to have the lowest fees. However, selecting  the initial plan lineup is not a “set it and forget it” exercise. Sponsors should continue to monitor the investment options available to participants to ensure they are offered investment options that will balance their risk and help meet their retirement goals.

FOLLOWING THE PLAN DOCUMENT

Plan sponsors must operate the plan in accordance with the terms of the plan document. Disconnects are common and usually arise in connection with administering loans, using the wrong definition of “compensation” for purposes of calculating benefits, and with submitting late remittances. Failure to comply can  become an issue, but fortunately, corrective actions are well spelled out by regulators and easy to fix.

MAINTAINING RECORDS

The best protection of all is for plan sponsors to know their plan documents, know what their service providers are doing to support the plan, and make careful decisions – and document them – about all activities relating to the plan. Have on hand all documents that show the plan sponsor’s decision-making process and actions  taken for the benefit of participants as well as how decisions are implemented consistent with terms of the plan. Keep all of those records permanently.

PROTECTING AGAINST LOSSES

Fiduciaries must have an ERISA bond and should consider obtaining fiduciary insurance to cover any losses to the plan caused by a fiduciary breach.

The rules are complicated and the waters are muddied. But there are many resources available to you for more education about your fiduciary duties. Vestwell and Goodwin Procter offer regular webinars on this topic, and we also recommend free programs offered by the Department of Labor.

3 Steps to a Smoother Plan Audit

audit

By Allison Brecher, General Counsel, Vestwell 

If your plan has 100 or more participants, it’s time to prepare for an annual plan audit. A typical audit examines two things: compliance with various tax and regulatory requirements and the accuracy of financial reporting on the plan’s Form 5500. Whether your plan already has 100 participants or you anticipate growing to this size in the future, there are steps you can take now to make the audit process go more smoothly – and save you some headaches along the way.

1. Collect Important documents

Every audit is different, depending on the nature and complexity of your plan, but one thing is certain: the auditors will want to see documentation. These documents must substantiate the amounts selected for processing contributions, benefit payments, deferral changes, and all other employee and employer contributions. As a best practice, keep the following documents in an easily accessible place:

  • Adoption agreements and amendments
  • Payroll files
  • Benefit selection forms
  • Contracts with plan service providers
  • Meeting notes from plan sponsor’s benefit committees, if applicable
  • All other plan-related documentation

As a best practice, work with your recordkeeper to store and coordinate the delivery of these documents to the auditor.

 

2. Make sure your plan’s operations follow the plan document

Once you have collected relevant documents, ensure your plan’s operations are running as outlined. You can save considerable time by reviewing the plan documents for ambiguous provisions as well as by making sure the plan is being administered in a way that’s consistent with the your intentions. This includes looking at things such as the effective date of plan amendments and current loan policy statements. Make sure the plan’s service providers also have the current plan documents and confirm they are following them.

One particular area to focus on is defining what “compensation” is eligible for deferrals and employer matches. Some plans define compensation as “all compensation reported for W-2 purposes” which would include salary, tips, and bonuses and exclude moving expenses and deferred compensation. A mismatch can occur when the payroll system is set up without aligning with the plan’s definitions, resulting in overpayments to participants. This can be a time consuming and expensive issue to correct down the road.

 

3. Automate processes where possible

Manual procedures are prone to error, so evaluate areas where administration can be automated. For example, auto-enrollment and auto-escalation are effective ways to ensure that all eligible employees are aware of your retirement plan offering and have the opportunity to participate or opt-out. Another good automation is around payroll integration. Ask your recordkeeper if it can obtain payroll files and data fees directly from your payroll provider so that you don’t have to spend time following up with your employees. This will minimize the risk of denying eligible employees access to the plan.

Going through a plan audit can seem like a daunting task, but taking the time to prepare in advance will make  managing your fiduciary responsibilities much easier. Between collecting plan documents, ensuring you and service providers are aligned, and automating processes, you’ll establish habits that help keep your plan compliant this year and for years to come.

Not Knowing Your Plan’s Fees Can Cost You Plenty

By Allison Brecher, General Counsel, Vestwell

In order to make good investment decisions, it’s important to be informed. Yet one of the more impactful components of any retirement plan is also the area where employers and participants tend to feel least clear: plan fees. While fees are not the only consideration when creating your portfolio or selecting service providers to the plan, high fees can erode retirement savings for participants and can create fiduciary – ie: personal – liability for you, the plan sponsors.

Despite the risks, many sponsors don’t take the time to carefully examine their plan fees or, worse yet, needlessly increase their risk by overpaying service providers who may be charging “hidden” fees. What you don’t see can hurt you, but what questions should you ask to prevent these pitfalls?

First, let’s understand what services are being provided to a typical retirement plan. There are three general categories:

Investment advisory – investment advisors select the investment lineup that they believe is suitable for the plan.

Administration  – recordkeepers and other service providers keep track of the transactions in your account, such as payroll deductions and employer contributions, and make sure the plan is operated in compliance with legal and regulatory requirements.

Direct charges – participants and sponsors are charged for services specifically provided to them, such as for loans, hardship withdrawals, or amending the plan.

All of these services are necessary to successfully operate a qualified retirement plan and, while there is nothing wrong with getting paid, the challenge is to understand how these service providers get paid, the reasonableness of the fee in light of the value of the services, and whether the fee has been disclosed. Unfortunately, it is often not as simple as just asking the service providers because these fees can be embedded in the expense ratios of the mutual funds offered in the investment lineup.

Given all this, how can you get to the bottom of what you’re actually paying and what you’re getting in exchange for those fees?

1. Start with the documents

You should have just received year-end fee disclosures that list all of the expenses paid by the plan. Those notices and the plan’s benefits statements will help you understand the total plan-related fees charged to their account. The plan administrator should be able to provide a list of all direct service charges. All of the expenses paid by the plan or individual participants should be clearly itemized; if they are not, you should probably ask why.

2. Understand share class

Very large employers get the benefit of being able to invest in institutional share classes, which often have lower costs. Some mutual funds create a share class specifically for smaller retirement plans, called Sub-TA fees, which include the fees paid to recordkeepers, plan administrators, or other providers. In other words, the providers’ fees are aggregated with the mutual funds’ expenses and therefore make it impossible for plan sponsors to separately identify and benchmark them. However, you can ask for them to be itemized separately. If you don’t know or understand your share class, you should find out. If you are in one with a high cost, you can insist that your plan be placed in one with lower expenses.

3. Understand conflicts of interest

If your plan provider is an insurance company, there is a good chance your plan’s investments are variable annuities and not mutual funds. Variable annuities are mutual funds owned by an insurance company “wrapped” or protected by an insurance policy, thus increasing expenses with “wrap fees,” surrender charges, or sales commissions in the process. Those fees can turn a low cost mutual fund into an expensive and illiquid investment. The same could be true for plans supported by a mutual fund provider, which has a built-in incentive to use its own funds as part of the investment lineup. Conflicts of interest are not inherently wrong; they just must be disclosed so that the plan sponsor can make informed decisions.

4. Ask about revenue sharing

While the word “kickback” could make you cringe, revenue sharing is just that—a payment made by a mutual fund to compensate service providers that use their funds. Salespeople, brokers, and insurance agents may receive finders’ fees for bringing new business to the mutual funds or negotiated loyalty incentive compensation. Regardless of the type of fee, they are all revenue sharing and they increase the investment’s expenses and reduce investor returns. Sometimes these fees are disclosed as 12(b)-1 fees, but sometimes fund companies pay different levels of fees through multiple share classes. You should ask your investment advisor or read the prospectus. Don’t overlook footnotes about how your plan expenses “may notinclude any contract-level or participant recordkeeping charges. Such charges, if applicable, will reduce the value of a participant’s account.” That is likely a red flag telling you there may be hidden fees.Ask your investment advisor whether it is receiving 12(b)-1 fees, the annual value of those fees, and whether your same mutual funds can be purchased for a different share class with lower revenue sharing fees.

5. Investigate transaction fees

These fees can be especially difficult to understand, yet they are one of the largest expenses that a participant can bear. Every time a mutual fund manager buys or sells the underlying securities within a mutual fund, there is a cost to the trade. Actively managed funds have higher transaction costs than passive funds, like index-based funds, and the participants’ investment returns are reduced by the cost of those trades. While transaction costs cannot be avoided entirely in actively managed funds, they can include brokerage commissions and other compensation paid to the service provider that should be scrutinized. Transaction fees can be found (often with some difficulty) in a fund’s Statement of Additional Information and annual report.

So how are the fees justified? There is nothing wrong with compensating service providers; again, they perform necessary services to successfully operate a qualified retirement plan. But sponsors must ask what services justify these fees and whether the provider yielded material results for participants and beneficiaries. In short, the question fiduciaries should be asking is:  Do these fees exist to pay for reasonable, legitimate, and valuable services that benefit participants of qualified retirement plans and enhance their retirement security?  Or do they exist to support the financial services industry at the expense of participants?

You can largely avoid these issues altogether by investing in lower cost mutual funds, like Exchange Traded Funds or Target Date Funds, and consider using service providers that are not financially incentivized to use certain mutual funds as plan investments. You should be asking yourself the ultimate question regularly:  Have I properly investigated and paid only those fees that were appropriate and reasonable? Hopefully after addressing the questions above, your answer will be “yes”.

 

Plan Sponsor Record Retention Guide

retention guide

Between hiring, benefits, meetings, and day-to-day management, employers have a lot to do in addition to being fiduciaries. As several sponsors approach year end for their plans, help them prepare by sharing this simplified record retention guide.

Regulatory Year in Review

regulatory

By Peter Kennedy, Special ERISA Advisor, Vestwell

2018 continues to be a year of change – – on the regulatory and legislative fronts. From the now-abandoned DOL fiduciary rule to several other bills making their way through Congress, plan sponsors and advisors should understand how these legislative updates affect them and their qualified retirement plans.

The DOL Fiduciary Rule

Among all of the changes in the retirement industry this year, perhaps the most significant was the DOL’s Fiduciary Advice Rule (A.K.A., “the Rule”).  After much debate, the Fifth Circuit Court of Appeals vacated the Rule in its entirety. And, at least for the time being, advisors are once again subject to the pre-existing rules as to what constitutes “investment advice” under ERISA.

What exactly are these pre-existing rules and what do they mean for advisors and their retirement business? We’re glad you asked. Many advisors under the old 5-part test for investment advice regularly helped clients with 401(k) plan design, investment menus, plan education, and other matters – all without the assumption that they were fiduciaries to the plan. The Rule was meant to alter that assumption by characterizing most types of advice to retirement plans and IRAs as “fiduciary advice.” That meant an advisor would have been subject to significant fiduciary liability, but since the Rule has been vacated, advisors are once again free to offer plan advice with less concern for legal ramifications.

Although not directly related to retirement plan assets like the Rule, the SEC recently proposed the Regulation Best Interest (a.k.a. “RBI”) which would impose a higher standard of conduct for broker/dealers and their associated persons who give securities advice to “retail customers.” RBI is not a replacement of the Rule and is generally considered less stringent. With the DOL’s recently announced plan to re-propose its Fiduciary Advice Rule in 2019, there is more coming from the regulators that will likely affect how to advise retirement plans, their participants, and investors.

Other Legislative Matters

Several other bills could change various rules under the Internal Revenue Code and ERISA. Below are some highlights:

Retirement Enhancement and Security Act (“RESA”)

Probably the most far-reaching – and recipient of the most media attention – RESA would make it easier for small employers to participate in Multiple Employer Plans (MEPs). Other features of the bill would affect rules pertaining to auto-enrollment, nonelective contributions, plan loans, certain nondiscrimination rules, and process for selecting lifetime income providers, all of which are intended to encourage small businesses to offer retirement plans to their employees.

Retirement Lost and Found Act

This act also minimizes the administrative burdens on plan sponsors by easing the requirements on them to locate former employees with small, unclaimed distributions. Locating these so-called “missing participants” can be a tedious and costly process for small businesses and the Act would require the government to create an online resource to find these individuals.

In addition to the legislative matters above, other bills have been proposed that cover a variety of topics including increasing the amount that could be distributed to a former participant without consent, simplifying the complex rules related to offering annuities in qualified retirement plans, and changing the default option for delivering plan information to electronic delivery. Stay tuned in 2019 as we continue to monitor new rules that will impact advisors and their firms…and navigate them together.

ERISA Bond vs. Fiduciary Insurance

ERISA bond

By Allison Brecher, General Counsel, Vestwell

With so much attention lately on fiduciary duty, as well as the surge of fiduciary litigation this past year, plan sponsors would be wise to explore their insurance options. While the ERISA fidelity bond (also referred to as a “fidelity bond” or “ERISA bond”), is required for all plans, there are other options as well. By understanding the difference – and the scenarios in which different types of insurance are used – you can help ensure your plan sponsors are properly protected.

The fidelity bond, required by ERISA, protects the plan against losses due to theft and embezzlement. Here’s an easy example: if someone steals money from the 401(k) plan, the ERISA bond compensates the plan for the damages. However, this provides no protection to the plan sponsor because the plan, not the sponsor, is the named insured. Not to mention how limited the application of this bond might be, given the unlikely scenario.

Still, the bond is legally required for anyone who “handles plan assets” (whether a fiduciary or not), and not having one can delay your plan’s Form 5500 filing and potentially result in disqualification, penalties, and personal liability for fiduciaries. Investment managers must have one, but advisors are not required to be bonded unless they make financial decisions about the plan assets or property.

An ERISA bond is easy and relatively inexpensive to obtain; sponsors using Vestwell can apply for one directly from our platform. However, it’s worth noting that the bond must be in an amount of at least 10% of the plan’s assets, and, since it’s been a good year for investment performance, sponsors should make sure their bond amount has kept pace with the plan’s growth in assets.

Some sponsors mistakenly believe they are protected on all fronts by the ERISA fidelity bond, but further protection may be needed. Fiduciary insurance, unlike an ERISA bond, is not included in a typical errors and omissions or directors and officers policy. Fiduciary insurance, as the name suggests, protects the fiduciary from damages that result from a fiduciary breach. Read the fine print on the insurance before moving forward because a fiduciary policy can cover litigation costs, foreign plans that are subject to laws similar to ERISA, and the cost of correcting plan compliance errors resulting from a fiduciary breach. Although fiduciary insurance is technically “optional,” we don’t believe a sponsor should leave anything to chance in the current litigation climate.

Mostly, it’s important for plan sponsors to know the coverage that exists to protect them and their participants, understand the liability they’re taking on, and be comfortable with the decisions they’re making. They’ll be looking to you for help.

“A” Solution, But Not Quite “The” Solution

solutionBy Allison Brecher, General Counsel, Vestwell

As speculation mounts over President Trump’s planned appearance in Charlotte tomorrow, the expectation is that the Retirement Enhancement and Savings Act of 2018 (RESA) will soon be signed into law. While Vestwell believes strongly in the spirit of the bill and what it’s trying to accomplish – making good retirement plans affordable and accessible to companies of all sizes – the bill fails to solve many retirement plan challenges.

Small businesses haven’t historically embraced 401(k)’s out of concerns for fiduciary liability exposure, litigation, fees, and administrative burdens, amongst others. RESA turns to Multiple Employer Plans (MEPs) as a solution because MEPs allow small employers to pool together to share expenses. The belief is that small businesses will be more likely to offer retirement plans once they can offload some fiduciary responsibility and enjoy traditionally “large plan” costs.

Unfortunately, there are still some shortcomings in the bill that lead to missed opportunities and confusion. The main ones we’ve identified are around:

Fiduciary responsibility. While the bill states that fiduciary responsibility can be offloaded, some would argue that is already the case today with a 3(38) offering. It is unclear whether the new bill would offload liability of all responsibilities – such as the responsibility of the plan sponsor to select an un-conflicted provider – but doing so would require a re-write of ERISA laws rather than just a notation in a new provision. In addition, it is not clear who – if not the plan sponsor – is responsible for protecting the plan against conflicts of interest, prohibited transactions, and other such obligations.

Lead participant employer role. What exactly is the role of the lead participant employer? How do they get selected and evaluated? Are they compensated and, if so, how much and who decides? And how does insurance account for this unique role? Without a clear outline of the lead participant role, it is hard to envision the way companies decide to – and continue to – work together.

General retirement plan shortcomings. Unfortunately, a more “fair” cost doesn’t give plan sponsors a better understanding of what they’re getting with a retirement plan. In many cases, fees are buried, service offerings unclear, and administrative burdens cumbersome. The bill does not address any of these challenges.

The good news is, options exist to better support small plan sponsors even without RESA. The advent of tech-forward retirement platforms (like Vestwell) bring solutions to the issues of cost, fiduciary responsibility, administrative burden, and transparency. They also address many of the challenges of RESA. Because a modern-day retirement platform doesn’t require the pooling of resources, a plan sponsor can enjoy custom plan designs and pricing, tailored to its workforce, rather than having to compromise based off the collective needs of the MEP. And since technology automates many expensive processes, plan sponsors are afforded economies of scale comparable to (if not better than) what an MEP would bring. As a result, a company can benefit from the personalization, strong customer service, competitive pricing, fiduciary oversight, and transparency that all plan sponsors and participants deserve.

So, while it is our mission to support the healthy retirement of all Americans, we want to ensure they don’t just have access to a plan… but that they have access to the right one.

Keeping your clients compliant amidst tax code changes

tax code

Mid-year is a great time to review your company’s retirement plan to make sure it complies with all legal and operational requirements. This is especially true given the Tax Cuts and Jobs Act (TCJA) that was signed into law in late 2017, which changed the tax code in several ways that may impact your plan. We’ve identified a few key areas we believe deserve a second look.

Ensure you’re complying with new fringe benefit provisions

Usually plan sponsors have a generous remedial period in which to make any necessary plan amendments to comply with changes to the tax code, but not so in the case of employer-provided transportation fringe benefits and loans. Several of TCJA’s changes took effect January 1, 2018.

* Employees must include moving expenses paid for by the employer in gross income unless the employee is a member of the Armed Forces on active duty or needs to move pursuant to military order.

* Employer-sponsored commuting benefits must now be included in gross income, except for some “de minimis” fringe benefits like transit pass or parking benefits of $21 or less. This may be an especially important issue for employers in Washington, DC, New York, or other states that require employers to offer these benefits. Employees can exclude from gross income occasional overtime transportation and some transportation costs for safety concerns that are paid by the employer.

* The TCJA also expands the time period for an employee who terminates employment or separates from service with an outstanding loan to repay the loan or roll over any distribution to the due date for filing the employee’s tax return for that year (including extensions).

* For employers based in Puerto Rico and other hurricane-affected areas, the TCJA also includes disaster relief on plan distributions.

Make necessary plan amendments now to avoid operational errors in the future

The TCJA changes may necessitate plan amendments so that plans align with current legal requirements. For instance, if your plan defines compensation to exclude employer provided transportation benefits in gross income, those provisions need to be changed to comply with the TCJA. Retirement plans that do not provide hurricane relief will also need to be amended by December 31st. You may need to make similar changes to any loan provisions of your plan.

Once you’ve made the necessary changes, it’s important to ensure your payroll system is coded consistently with the plan document. If not, the result is an operational error that could be very expensive and time consuming for the employer to fix. It is also a common finding in a DOL or IRS audit, which could have other implications for your plan.

Consider reviewing plan design to best support employees

With the TCJA bringing corporate tax rates to unprecedented low levels, some employers are using their windfalls to reward employees with salary increases, matches, and bonuses. This is great news for retirement plans since these benefits translate into more efficient retirement savings.

Now that the TCJA has been in effect for about six months, it may be a good time for sponsors to review their plan designs to make sure the plan serves your goals such as helping employees boost their retirement savings, attracting and retaining talent, or maximizing tax savings. Now may be the right time to implement automatic enrollment or escalation features, start or increase the default savings rate, or allow Roth contributions. Sponsors should also consider revising the plan’s eligibility rules to encourage employees to start saving sooner. Employers can also reduce turnover through an attractive employer match programs.  You can benchmark your matching program against peers and evaluate whether the match or the scope of employee deferrals matched needs to be changed to meet your financial or cash flow needs.

There will be more legislative activity in the coming year that could affect your retirement plan, with everything from requiring after-tax contributions to expanding availability of multiple employer plans.  It is a good idea to get into the habit now of making sure your plan is ready for even more changes ahead.

Understanding the Risks of Being a 3(38) Fiduciary

3(38) fiduciary

Retirement plan sponsors often turn to their financial advisors to help them handle key responsibilities. Since navigating the legalities and complexities of retirement plans is typically not their core competency, it’s natural for plan sponsors to offload many of the associated tasks required for proper plan administration.

Enter your role as a 3(38) fiduciary.

While you may welcome the business relationship of being assigned as the 3(38) fiduciary, it’s also important to understand the legal implications and risks involved with performing the role.

What’s a 3(38)?

In a retirement plan, 3(38) fiduciaries are given discretion over most decisions regarding investment choices, such as implementing the lineup of suitable and appropriate investment options to be offered in the plan. While plan sponsors are still responsible for overseeing these fiduciaries, they generally transfer much of the risk and responsibility associated with plan monitoring and selection over to a 3(38) fiduciary.

This is unlike the role of a 3(21) fiduciary, also known as a “co-fiduciary,” who has less authority when it comes to plan decisions. While plan sponsors may rely on the advice of a 3(21) fiduciary’s investment analyses and recommendations, it is ultimately the plan sponsor’s role to make major investment plan selections.

Today, the latter relationship is more common, with 82% of retirement plan advisors serving as 3(21) fiduciaries, despite the the number of 3(38) offerings doubling since 2011, likely due to the rise in litigation targeting 401(k) plan sponsors.

With great power, comes great responsibility

While you may charge a premium for performing the 3(38) role, you may not wish to take on the added risk of fulfilling much of the ERISA plan sponsor’s legal requirements. This is especially true for smaller plans where you may not be able to make the business case for the services involved. It’s worth considering the amount of business you’ll be providing in relation to the responsibility that comes with it.

As a 3(38) fiduciary, you are committing to serve as the formal investment manager for an employer’s plan. As such, you will be required to provide regular fiduciary reports to the plan sponsor, and document your rationale for investment and fund change recommendations as well as any time you execute on said recommendations.

Adherence to IPS

With the addition of full investment discretion, you must document that you are adhering to the plan’s Investment Policy Statement (IPS), and that all investment decisions are made in the plan participants’ best interests. You may even be asked to help develop an IPS. Importantly, as a 3(38) fiduciary, your processes and methods must be that much more detailed and circumspect than those of a 3(21) fiduciary.

Expertise Required

Being a 3(38) fiduciary is a specialized role that requires specialized expertise. Advisors who dabble in the 401(k) space and advise only a few plans may not wish to take on the responsibility – and liability – required. Fortunately, that’s where external providers can help with the heavy lifting. Integrated solutions now offer you the option to offload the certain levels of fiduciary liability while still putting the power in the advisor’s hands to personally guide clients with their retirement decisions. We recommend exploring how these options ease the fiduciary liability you carry while giving your sponsors and participants the customized plans and advice they value most from their trusted advisor.