Maximize Savings with a Safe Harbor Plan…And Soon

safe harbor

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 at any time.

3 Steps to a Smoother Plan 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

Time to get your house in order! That’s right, we’re talking about plan documents. For many plan sponsors, December 31 marks the end of the year for their 401(k) or other retirement plans. Participants and sponsors will soon receive legally required year-end notices. Yet in the flurry of other year-end activities, sponsors may forget that they, too, have fiduciary obligations to keep these documents.

  1. Plan Documents – These include your Adoption Agreement, base plan document, IRS Advisory Letter, and any plan Make sure everything is signed and dated, especially the Adoption Agreement.
  2. Participant Disclosures – These include the Summary Plan Description (SPD), Summary of Material Modification (SMM), and all fee
  3. Administrative Policies – This refers to documents such as the Loan Policy, QDRO Policy, and Investment Policy
  4. Records of Corporate Meetings – Be sure to gather all resolutions, agendas, minutes, and documents distributed at
  5. Plan Trust/Custodial Agreement – In addition to this agreement, include all contracts with plan service
  6. Fidelity Bond – Sponsors can obtain a copy of the bond from their insurance
  7. Participant Records File – Each file should contain deferral and investment election forms, beneficiary designation forms, distribution requests, loan and hardship requests, and the QDRO and QDRO split
  8. Plan Year Records – Create a file with plan transaction information for the plan year, annual nondiscrimination testing, all notices provided to participants, Form 5500, and the Summary Annual

All records relating to a 401(k) plan must be kept for at least six years after the Form 5500 is filed. Records necessary to a participant’s claim for plan benefits must be kept for “as long as a possibility exists that they might be relevant to a determination of the benefit entitlements of a participant or beneficiary,” which can mean indefinitely.



Top Mistakes Made by 401(k) Plan Sponsors

Join Josh Brown, CEO of Ritholtz Wealth Management, and Aaron Schumm, CEO of Vestwell, as they discuss the top mistakes made by 401(k) plan sponsors.


Josh Brown: Hi, I’m Josh Brown from Ritholtz Wealth Management.

Aaron Schumm: I’m Aaron Schumm, founder & CEO of Vestwell.

Aaron: Alright, great so as we’re talking about the retirement landscape and you’re working with these plan sponsors, what mistakes have you come across that someone may have either made with an advisor or not made if they’ve established a plan on their own?

Josh: So, two very big ones and to some extent they’re connected. The first is not understanding the level of fiduciary responsibility that they’ve taken on, either because the way they initially set up a plan, they just assumed “okay this is all done.” Not really understanding that changes happen and sponsors have to keep up with these changes whether they want to or not. So, I think that’s a big one. But then the other one is a little bit more insidious because it’s hard to see—which is inertia. And it kind of goes along with that—where you know the plan is set, the paperwork arrives on schedule, the point of contact is the point of contact. And the sponsor is just kind of like “Yeah I guess it’s working, everything’s fine.” And as we know, it never works out that way, when in hindsight somebody looks back and says, “You’re telling me for the last 10 years we were in A-shares, paying 150 basis points, when we should have been switched—because we qualified on a breakpoint to the institutional share class. And when you put that in front of a lawyer, the lawyer says, “Do yourself a favor: sell this as quickly as possible. Don’t even waste your time. You are done.” And there are probably 10 issues like that. So, these are things that you come across and they’re really easily avoidable, just by having guidance, having an advisor in the process, letting you know that these things exist and that they are problematic.

Aaron: Yes, people think it’s just running in the background as it should and you’re getting the best advice possible and it’s all there and it’s being invested appropriately, but there is oversight that needs to happen. And we see a broad range of things that come across.

Josh: What’s the craziest thing you’ve seen, without naming names?

Aaron: Crazy…I don’t know if I want to go to the craziest things but some of the things that are kind of eye-catching are: we were converting a plan that hadn’t made a contribution via their payroll in over a year and no one noticed.

Josh: A matching contribution?

Aaron: No-

Josh: Oh, their employees?

Aaron: Their employees. It just wasn’t being deducted and there were supposed to be in this Safe Harbor plan. And you’re looking at it like holy shoot, you guys haven’t done anything.

Josh: And the markets probably gone up 20% that year because that’s just the odds.

Aaron: And it’s tough to convert that, right?

Josh: Right, right.

Aaron: Because you can’t convert it. Because we’re going to assume a lot of this responsibility then if we do so. So you have to work to get that all cleaned up, get the correction, have those conversations, make the actual adjustment there.

Josh: Wait, what’s the solution to that? Is it technical or is it a people skill that would prevent something like that from happening? Or a combination?

Aaron: It’s usually a combination. The technical aspect catches it. You know, if you go back and you’re designing the plan and you’re looking at how the plan was actually put together—the plan adoption agreement. And then tallying it off to the 5500 and so on. Then [realizing] whoa, we got a problem here. So you have to make sure that’s in place.

Josh: Right.

Aaron: We have people not file 5500 for years. So you have to go back and clean that up.

Josh: Yeah, you definitely want to not do that.

Aaron: Yes. It’s not done intentionally, just people don’t know. They assume someone else has got it, the TPA is doing it. Or the TPA may have sent it over and said “sign this,” but it never got signed.

Josh: That’s a good point. One of the things with the nature of these things is that there are so many people involved, there so many chefs. And there can be a tendency when you have an outside person doing this, someone else doing that. There can be a tendency to say, “They’re probably handling that.”

Aaron: Sure.

Josh: Or maybe they are handling it, and they stop, and you’re not double-checking. So it’s like an integrated approach, combined with an advisor, combined with a sponsor who actually gives cares, seems to me like that is the right answer.

Aaron: Absolutely. You have to know where to go and who to talk to. We’ve gotten calls where people are like, “Hey, I’m trying to move this from here, from a previous provider. I don’t know who to call. Can you track them down?” We’ll step in generally and try to help them out as much as possible, but the more you have—that one point of contact, that one person to go to, and say “This is where I can get my questions answered,” and make sure that everything is actually be processed as it should—is important and it eliminates the risk of you not getting sued at some point unbeknownst, till it’s too late.