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 info@vestwell.com at any time.

Featured Webinars

 

According to Vestwell’s 2019 retirement trends survey, plan specialists’ number one concern when it comes to growing their retirement business is managing scale. In this webinar, we lay out practical strategies for effectively growing your practice by tapping into centers of influence to form lasting partnerships. Alongside industry experts, you’ll learn about best practices for:

  • Putting the right infrastructure in place to support strategic relationships
  • Identifying and building partnerships with COIs
  • Demonstrating your value prop to clients (including successful case studies!)


PREVIOUS WEBINARS

 

4 Steps All Companies Should Take to Protect Themselves from Retirement Plan Litigation

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.

  1.  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.

  1. 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.

  1. 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.

  1. 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.

 

 

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.

Saving For Retirement Is Important: What Happens Next?

Sound Strategies for Moving from Accumulating Assets to Withdrawing Them

retirement

A 401(k) plan has long been considered the entryway to investing for retirement. Over time, hard-earned money has been saved, compounded, and grown. But what happens when investors are nearing retirement age, and it’s time to take the money out?

At that point, doing the right thing for their nest egg is more crucial than ever. Unfortunately, for those plan participants who are approaching retirement, there’s no clear-cut “soft landing” for their 401(k) investments. The accumulation phase — the long road of disciplined savings — now seems like a walk in the park compared to new worries about turning that savings into income in retirement.

Wanted: A Post-401(k) Retirement Strategy

The marketplace needs better strategies and workplace systems when it comes to post-401(k) money management options. Unfortunately, many employers don’t have the tools or incentive to assist their employees with “nearing-retirement” stage strategies. For those employers who do understand the need to help employees at this stage, they may feel handcuffed as there are no clear-cut fiduciary safe harbor protections, similar to the kind offered during accumulation, to incentivize employers to start rethinking this near-retirement conundrum. Therefore, plan sponsors generally offer little, if any, help when it comes to managing balances around retirement time.

Introducing the Managed Outcome Plan

A “managed outcome” plan is one solution that could provide a sufficient lead-up to garnering income in one’s retirement years. Just like with managed investments such as Target Date Funds (TDFs) that are geared towards savings, a managed outcome plan option for those nearing or entering retirement could meet criteria based on a person’s age, years in retirement, and desired lifestyle. Managed outcome plans seek to achieve specific objectives, such as target returns, risk mitigation, protection of asset values while nearing retirement, and guaranteed levels of income while in retirement with the ability to customize by individual participant designed to meet their own needs.

Worthy Mention: The “Negative” Enrollment Option

Another possible solution could be to offer a “reverse” enrollment option for those nearing retirement. Under this option, some percentage of current funds and future contributions would be automatically invested in managed outcome plans geared towards protecting the accumulation that has been built while still offering the potential upside of market participation and the benefits this can provide to avoid sequence of returns risk. This is the risk to sustain a fixed standard of retirement income if the investment portfolio experiences large negative returns near retirement. And, plans could be tailored to include an auto-enroll function rather than wait on the participant to choose. Analysis Paralysis shows that when presented with a confusing option versus doing nothing at all, most will often do nothing; this behavior could jeopardize a participant’s retirement savings and future income.

Employers Can Get Onboard

One overriding solution is to provide employers with a level of fiduciary protection in providing these solutions. For example, fiduciary relief could be extended to sponsors if they offer auto- enrollment systems like the ones we find in the accumulation phase. Participants could elect for plan managers to oversee a certain percentage of their 401(k) balances via a managed outcome solution; plan sponsors may like this option, too, as it absolves them of certain fiduciary obligations. Plan sponsor protection, in addition to participant guidance, would focus on participants’ options based on their time until retirement and could help them make better choices when it comes to spending and earning during those years.

Congress Can Get Involved, Too

These solutions won’t be mandatory unless retirement plan providers, plan sponsors, record keepers, and investors demand more choices and opportunities to better manage their 401(k) funds in retirement. And what better way to enforce the solutions that are available to the majority of investors than by making it law? Back in 1978, Congress passed the Revenue Act, which created the ability for employees to avoid being taxed on deferred compensation. Since then, Congress also passed the Pension Protection Act in 2006 to ensure that employees receive their full pension payouts. Now, it’s time for Congress to enact rules that can assist individuals as they transition their 401(k) assets into retirement.

What’s Next

According to AARP, from now until 2030, an estimated 10,000 baby boomers will reach retirement age every day — that’s seven baby boomers hitting age 65 per minute. They must be prepared to make the critical transition from accumulating assets to withdrawing them. And those withdrawn funds may need to last for ten, 20, or even 30 or more years. As a result, our industry — including investment companies, insurance companies, financial professionals, plan sponsors, and regulators — must help create more sound withdrawal strategies to match our retirement strategies. Managed outcome plans and negative enrollment options can be simple, practical ways to help participants manage withdrawals and prepare for their lives beyond retirement.

This content is for general educational purposes only. It is not, however, intended to provide fiduciary, tax or legal advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give fiduciary, tax or legal advice. Clients are encouraged to consult their tax advisor or attorney.

Guarantees are backed by the financial strength and claims-paying ability of the issuing company

Investments will fluctuate and when redeemed may be worth more or less than originally invested.

How to Know When It’s Time to Switch Your Service Provider

service provider

By Allison Brecher, General Counsel, Vestwell

The new year is a great time to take stock of your company offerings and, for plan sponsors, that should include a thorough review of your retirement plan. With fiduciary duty on the line, not taking the time to carefully review and make any changes can be a costly mistake. But how do you know when it may be time to pull the plug and switch your service provider, rather than just make tweaks to your plan? Here are some things to keep an eye out for.

Your service provider is not proactive about compliance and/or charges extra to keep your plan compliant

Tax savings is often a main driver for offering a retirement plan, but your plan can lose its tax qualified status and fiduciaries can become liable for potentially significant penalties if your service provider falls short on compliance. Is your recordkeeper proactively monitoring your plan and complying with the legal and regulatory requirements? Or does it only get involved after an issue arises, which can be years later and typically more time consuming and costly to correct? Does your provider review your plan documents for compliance with changing regulations and prepare any necessary amendments?  Or do they alert you to regulatory changes and leave the rest in your hands?

Your service provider does not have adequate data security protections

Think about the kind of data your service provider has on your employees and then think about what can happen if that data gets into the wrong hands. A data breach can put your employees’ personal information at risk, create strained relationships with your workforce, and expose company fiduciaries to liability. It’s important to know how your service provider protects your employees’ information and what it will do when something goes wrong. Most importantly, your provider should:

Have information security protocols in place that have been independently tested and verified by outside experts. In particular, your provider should encrypt all of your employees’ data and store it securely at all times.

Stand behind its procedures by agreeing to pay for and handle instances when data becomes compromised.

Be willing to report any data security incidents to you within 24 hours.

Have cyber coverage to make sure your company is protected and that the amount of coverage is sufficient.

Always be able to restore employees’ data and accounts with minimal or no downtime and disruption. Especially in the current volatile market, your employees should be able to access their accounts 24/7.

Your provider’s fees are unreasonable

It is critical to dig into the details of your recordkeeper’s fees, especially in light of the numerous class actions where plan sponsors and fiduciaries are being sued for operating a plan with allegedly excessive fees. You do not need to select the least expensive provider, but you do need to make sure the fees are reasonable for the services provided. Some things to look out for include:

Fees that are disguised by being included with mutual fund expenses  – – sometimes in the proprietary funds offered by affiliates of your recordkeeper – – that are then kicked back to the recordkeeper. Make sure your provider has disclosed all such conflicts of interest.

Services that cost extra, since some providers will charge sponsors for things such as compliance activities and plan document reviews.

Fees that are reasonable in comparison with others. However, you  cannot know for sure whether a service provider’s fees are reasonable until you ask and shop around. You can do that by getting proposals from other providers or benchmarking their fees. If you determine that your provider’s fees are excessive, you have no choice but to get them reduced and, if your provider refuses, you must terminate them in order to avoid violating your fiduciary duties.

Advisors have a golden opportunity to help sponsor clients understand what they’re getting and the reasonableness of the charges. While some plan sponsors may want to avoid change due to the change management associated with switching providers, the implications of staying with the wrong provider are far greater.

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”.