Aaron Schumm, Vestwell’s founder and CEO, sits down with Josh Brown (Ritholtz Wealth, CEO), to discuss the $28 trillion opportunity in retirement and why advisors now have the tools to take advantage of it.
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.
Sound Strategies for Moving from Accumulating Assets to Withdrawing Them
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.
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.
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.
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”.
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.
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.
When it comes to selecting a retirement plan, you can’t depend on a “one size fits all” approach. Leverage this guide to help sponsors get the right type of plan based on their unique goals and business structure.
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.
By 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.