4.20.2022 | Benefits of Moving Your 401(k) to a Pooled Employer Plan | Recording

4.20.2022 | Benefits of Moving Your 401(k) to a Pooled Employer Plan | Recording

 

LUTZ BUSINESS INSIGHTS

 

AM I READY TO SELL MY BUSINESS?

Benefits of moving your 401(k) to a pooled employer plan

4.20.22 | Recording

Is your business looking to reduce its time-consuming administrative duties, fiduciary liability and expenses related to its employee retirement plan? A Pooled Employer Plan (PEP) offers the flexibility to implement plan features that fit your organization while limiting your risk and cost associated with an individual custom plan. In this webinar, Chris Wagner of Lutz Financial and Mike Lyons and David Lipscomb of Newport help companies understand the benefits of moving to a pooled employer plan.

Key Takeaways:

  • Overview of a PEP
  • Benefits of a PEP
  • Is a PEP Right for You?

Seminar Level: GENERAL EMPLOYEE BENEFIT PLAN KNOWLEDGE AND UP

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April Retirement Plan Newsletter 2022

April Retirement Plan Newsletter 2022

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: APRIL 12, 2022

APRIL RETIREMENT PLAN NEWSLETTER

THE RISK OF 401(K) LAWSUITS: IF IT CAN HAPPEN TO THEM...

When a giant organization with extensive resources gets sued for alleged ERISA compliance failures — especially if the organization’s own service offerings include reviewing for such violations — that could very well be the canary in the coalmine for all other, lesser endowed firms. And that’s perhaps the key takeaway for plan sponsors in light of a complaint filed late last year against KPMG for an alleged fiduciary breach.

The lawsuit, filed by former KPMG 401(k) plan participants, names the firm’s fiduciaries — including its Board of Directors and Pension Strategy and Investment Committee — as defendants. Noting established requirements, it points to the high level of diligence and care imposed by ERISA on fiduciaries and their responsibility to establish a prudent process for choosing service providers and investment options. It also cites their responsibility for ensuring these selections are appropriate on an ongoing basis. “Prudent and impartial plan sponsors thus should be monitoring both the performance and cost of the investments selected for their retirement plans,” the complaint states, “as well as investigating alternatives in the marketplace to ensure that well-performing, low-cost investment options are being made available to plan participants.”

The plaintiffs allege that KPMG, by failing to reduce its plan’s expenses or appropriately scrutinizing investment options, failed to meet the required standard of care. The complaint states the plan’s considerable assets under management should have given it substantial bargaining power to negotiate more competitive service rates. The plaintiffs allege excessive recordkeeping and administration fees, accusing KPMG of wasting plan and participants’ assets due to unnecessary costs. The suit alleges that the firm failed to conduct RFPs “at reasonable intervals … to determine whether the plan could obtain better record-keeping and administrative fee pricing from other service providers.”.

The complaint alleges that KPMG’s plan costs were more than twice that of its peers and that certain funds were maintained despite other available investment options that had lower costs and a history of better performance. Plaintiff’s counsel adds, “[d]efendants’ mismanagement of the Plan, to the detriment of participants and beneficiaries, constitutes a breach of the fiduciary duties of prudence and loyalty, in violation of 29 U.S.C. § 1104. Their actions were contrary to actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.”

In arguing that plan costs were excessive, the complaint also states that the record-keeping market is highly competitive and that numerous vendors are “equally capable of providing high-level service.” The plaintiffs are seeking class-action status.

It is important to be aware that the number of ERISA lawsuits are growing.  Litigation is expensive, even if fiduciaries have a spotless record of taking care of their ERISA responsibilities.  It behooves the prudent fiduciary to explore every avenue to protect themselves whilst acting in the best interests of their participants.

 

Please note, this article is based solely on the plaintiff’s counsel filed complaint which is purposefully crafted towards an intended end.  It does not include independently investigated facts, the defendants’ perspective on the allegations, or any opinion of the author.  It is always important to hear both sides of any argument and view the evidence before taking away any substantive opinion of the facts in issue.

 

Sources:

https://s32566.pcdn.co/wp-content/uploads/2021/10/401k-lawsuit-roundup-102921.pdf

https://www.plansponsor.com/familiar-erisa-complaint-filed-kpmg/

https://www.pionline.com/defined-contribution/kpmg-fiduciaries-face-erisa-lawsuit-former-401k-participants

FINANCIAL HYPOCHONDRIA: WHEN INVESTMENT VIGILANCE BECOMES A PROBLEM

Plan sponsors invest much time and effort in improving employee financial literacy. They offer educational content, provide opportunities for group and individual consultation, and encourage participants to approach retirement planning proactively by staying on top of their investments. But what happens when workers go overboard with well-intended advice?

Today, stock market data is available 24/7 with just a few clicks on links. And this development, in many ways, has been a double-edged sword. While it has made investing a lot more accessible for many, it’s become all too easy to fall into a pattern of checking portfolio performance daily — or even multiple times a day — especially after doom scrolling clickbait financial headlines during periods of heightened market volatility.

And this isn’t helpful.

According to Frank Murtha, Ph.D., cofounder of MarketPsych, such behavior can create a myopic focus that may blur an investor’s long-term perspective. It could also lead to a state of heightened anxiety and the kind of cognitive errors that may result in faulty short-term financial decision making. When a health coach is working with a client, they motivate healthy behaviors, but not in the extreme. For example, the coach might recommend working out a several times a week, though not several times each day. Similarly, participants should be encouraged to have a healthy amount of investment awareness, while avoiding extreme hypervigilance.

On the other hand, prescriptively dictating how frequently participants should check their 401(k) or 403(b) or governmental plan balances without addressing their underlying fears is shortsighted. It’s also unlikely to be effective, as such financial fears rarely stem from a mere lack of information. When an investor acknowledges and comes to terms with their uncomfortable emotions, they’re often better positioned to find healthier coping mechanisms for the uncertainty and risks that inherently come with investing.

At that point, things like providing a broader historical context for stock market performance and explaining how asset allocation and dollar cost averaging can mitigate risk become much more helpful. And it goes without saying that so long as investment strategy does not match up with investor risk tolerance, such work can remain a stubbornly uphill climb. But once participants accept that a certain amount of risk and uncertainty is necessary to reach financial goals, it becomes much easier to put a plan in place to better manage financial stress — whether that includes meditation, taking a walk or turning to a trusted friend or advisor.

In the end, it’s important to remember that investing decisions are ultimately emotional ones — centered on hopes and dreams for the future. And any financial discussion that fails to take that fundamental truth into account risks missing the forest for the trees.

 

Source: https://www.apa.org/news/podcasts/speaking-of-psychology/stock-market-anxiety

IRS/DOL AUDITS ARE INCREASING DRAMATICALLY ARE YOU READY?

Facts you should know

If your plan has not been recently audited, it is likely only a matter of time before the Internal Revenue Service (IRS) or the Department of Labor (DOL) comes knocking. If/when you are notified of an audit, early preparation can help streamline the process, keep the investigation narrow, as well as potentially avoid financial costs of potential penalties and interest.

DOL and IRS audits focus on different issues guided by their specific jurisdictions.

The DOL is responsible for the enforcement of labor laws set forth in the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry in order to provide protection for individuals covered by these plans. The DOL can enforce penalties for breaches of ERISA fiduciary conduct and can even sue fiduciaries for these breaches on behalf of a plan and its participants. In cases of the most egregious misconduct, the DOL can initiate criminal proceedings that may result in jail time for plan fiduciaries based on investigations dealing with fiduciary conduct breaches and prohibited transactions.

The IRS audit focuses on taxation issues and the IRS can enforce infractions under the Internal Revenue Code (Code). Infractions can result in additional taxes plus penalties, and interest. The IRS is concerned with compliance with the Code as it impacts on the plan’s tax qualified status. This can take the form of review of plan provisions, testing, controlled group issues, etc.

Both the DOL and the IRS select plans for audit primarily by random selection; but can also be initiated as a result of responses (or lack thereof) to certain questions on the Form 5500, failure to transmit participant contributions to their selected investments in a “timely manner,” participant complaints and other breaches of fiduciary or administrative duties. Current litigation activity, bankruptcy filings and media reports can also trigger DOL investigations. Also, the DOL may refer a case to the IRS if it discovers compliance infractions under the Code and vice versa if the IRS discovers what it believes to be potential fiduciary breaches impacting the plan under investigation.

The number of IRS/DOL audits are increasing dramatically as DC plans become more complex and statutes and regulations evolve.

Failure to respond to an IRS questionnaire or a DOL audit investigation or Information Request Letter is comparable to sending an invitation for the regulator to crack your plan open, make themselves comfortable, and spend weeks exploring all actions impacting the plan.

The DOL and the IRS will initiate an audit by sending an Information Request Letter indicating the date of its on-site visit to review documents and conduct interviews with individuals who have responsibilities in the administration of the plan. The letter will detail the information to be made available to for auditor – typically in advance of the on-site visit.

Currently, the most litigated fiduciary issue is the “reasonableness” of plan fees. As a result, not surprisingly, fees have also come under the scrutiny of the DOL. Evidencing (documenting) the reasonableness of fees paid by plan participants is quickly becoming the most frequently investigated fiduciary issue.

The following is a partial list indicating common items for potential review.

  • Corporate or plan committee minutes
  • Documentation of fees and expenses and of their reasonableness
  • Fiduciary training
  • Service agreements and engagement letters
  • Fee disclosure statements – 408(b)(2)
  • List of parties-in-interest and plan fiduciaries
  • List of plan fiduciaries and delegation of responsibilities
  • Trustee and/or investment committee minutes
  • Plan documents, SPD, trust agreements, investment policy statements, Committee Charter
  • Summary annual reports
  • Participant statement samples
  • Evidence of fidelity bond, fiduciary liability insurance policy, if any

Auditors are likely to ask if the plan fiduciaries are participating in ongoing fiduciary education programs.

 

Preparing for the audit

Upon receipt of an IRS or DOL Information Request Letter it would be beneficial to begin preparing early for the audit event in order to achieve the best and most efficient outcome.

The more cooperative and efficiently the audit progresses the more positive the experience is likely to be. Being defensive or uncooperative would be counterproductive and would likely alienate the auditor. Proper planning for the audit will leave you better prepared for questions and typically helps to avoid any further potential inquiries.

One important suggestion is to not seat the auditor in front of your plan filing cabinet and let them find whatever they may need. The auditor will be looking for specific items as indicated in their Information Request Letter. Providing the auditor exactly what they’ve requested, but only what they’ve requested, is your best course of compliance whilst simultaneously keeping the investigation narrow in scope. Suggesting they look through your files, in addition to being less efficient, can lead to the auditor uncovering issues that could result in more negative outcomes than those which they originally intended to review.

Consider adjusting your schedule to be available during the audit in the event of questions the auditor may have. You may want to delegate another team member to oversee the audit and deferring final decision-making to you. Notify other members of your plan administration team that your plan is being audited so they can be available to assist. Definitely notify your ERISA attorney, plan consultant, administrator, recordkeeper and investment advisor in the event that they may be helpful.

If the Information Request Letter identifies a significant potential concern a team meeting, prior to the audit, with appropriate attendees (internal or external) may be helpful to review the Information Request Letter, review plan provisions and procedures, and prepare for any questions.

Know that if you need more time to be fully prepared for the audit it is common for plan sponsors to request, and receive, a reasonable delay of the visit after providing an explanation as to why it may take more time to be fully prepared. Auditors recognize that it is not unusual to request additional time to obtain data that may not be immediately accessible.

Most DOL/IRS plan audits result in minimal issues or minor administrative errors that can be easily remedied. If a more substantial issue is found, know that it is probably much better to remedy it now than at some later date when it becomes more cumbersome administratively and/or more financially impactful to remedy.

PARTICIPANT CORNER: TAX SAVER'S CREDIT: GET THE "CREDIT" YOU DESERVE!

You may be eligible for a valuable incentive, which could reduce your federal income tax liability, for contributing to your company’s 401(k) or 403(b) plan. If you qualify, you may receive a Tax Saver’s Credit of up to $1,000 ($2,000 for married couples filing jointly) if you made eligible contributions to an employer sponsored retirement savings plan. The deduction is claimed in the form of a non-refundable tax credit, ranging from 10% to 50% of your annual contribution.

Remember, when you contribute a portion of each paycheck into the plan on a pre-tax basis, you are reducing the amount of your income subject to federal taxation. And those assets grow tax-deferred until you receive a distribution. If you qualify for the Tax Saver’s Credit, you may even further reduce your taxes.

Your eligibility depends on your adjusted gross income (AGI), your tax filing status, and your retirement contributions. To qualify for the credit, you must be age 18 or older and cannot be a full-time student or claimed as a dependent on someone else’s tax return.

Use this chart to calculate your credit for the tax year 2022. First, determine your AGI – your total income minus all qualified deductions. Then refer to the chart below to see how much you can claim as a tax credit if you qualify.

 

Filing Status/Adjusted Gross Income for 2022

Amount of Credit

Joint

Head of Household

Single/Others

50% of amount deferred

$0 to $41,000

$0 to $30,750

$0 to $20,500

20% of amount deferred

$41,001 to $43,000

$30,751 to $33,000

$20,501 to $22,000

10% of amount deferred

$43,001 to $68,000

$33,001 to $51,000

$21,501 to $34,000

Source: IRS Form 8880

For example:

  • A single employee whose AGI is $17,000 defers $2,000 to their retirement plan will qualify for a tax credit equal to 50% of their total contribution. That’s a tax savings of $1,000.
  • A married couple, filing jointly, with a combined AGI of $42,000 each contributes $1,000 to their respective retirement plans, for a total contribution of $2,000. They will receive a 20% credit that reduces their tax bill by $400.

With the Tax Saver’s Credit, you may owe less in federal taxes the next time you file by contributing to your retirement plan today!

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

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April Retirement Plan Newsletter 2022

March Retirement Plan Newsletter 2022

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: MARCH 17, 2022

MARCH RETIREMENT PLAN NEWSLETTER

SURVEY SAYS... WHAT'S YOUR TAKE ON FINANCIAL WELLNESS PROGRAMS?

A recent comprehensive TIAA survey of financial wellness plan participant perceptions may be helpful to plan sponsors who have, or are considering implementing, a wellness plan for their employees.

Employees’ definition of financial wellness varies considerably: “having the means to take care of your family and others” (53%), “not worrying about money or debts” (51%), and “feeling protected financially from life’s unexpected events” (51%), well ahead of retirement financial security (36%). Also, they rank the “ability to pay monthly bills without difficulty” (38%) and “having a reliable source of income” (38%) ahead of being on track with retirement savings (16%) when asked about their current priorities for securing financial wellness.

Interestingly, the TIAA survey found most people don’t consider retirement planning as a component of their financial wellness. However, 57% of respondents are interested in learning more about retirement planning through an employer financial wellness program. Many employees feel that it is difficult to focus on their retirement when there are more immediate pressing needs. “The most impactful financial wellness programs help address both short-term and long-term goals since they are linked together.” according to Snezana Zlatar, senior managing director and head of financial wellness advice and innovation at TIAA.

Employees who have participated in a wellness program appear to be much more confident about their progress on key markers of good retirement planning in areas of being able to retire when they want to (54% vs. 32%), afford the retirement lifestyle they want (54% vs. 29%), and live comfortably in retirement without running out of money (50% vs. 29%).

Some obstacles to employees who choose not to engage with a financial wellness program include:

Worried about hidden costs or fees – 27%; Don’t want to disclose finances/issues to employer – 25%; Wouldn’t be as effective as offerings you could find on own – 20%, Don’t think offerings would make a difference – 17%.

These impediments can be mitigated through targeted, ongoing education about the benefits, confidentiality of financial information, explicit cost reporting and recognition of a diverse employee population.

Zlatar says, “Whether employees are interested in guaranteed income for life or help managing their federal student loans, we’ve seen that increased flexibility in benefits, more financial education and personalized advice ultimately lead to better outcomes and increased feelings of financial wellness,”

The TIAA “Financial Wellness Survey” was conducted online from October 22 to November 3, surveying 3,008 Americans ages 18 and older on a broad range of financial management issues and topics.

 

Link to Teachers Insurance and Annuity Association of America (TIAA) survey: https://www.tiaa.org/public/pdf/2022_financial_wellness_survey_final_results.pdf

EVERY PLAN SHOULD HAVE A COMMITTEE CHARTER AND HERE'S WHY

Although not legally required by ERISA, a retirement plan committee charter is a very important document for plan governance that may help fiduciaries avoid potential liabilities. Committee Charters are one effective way to “evidence” intent of prudent plan management. Having a charter is a “best practice” that all plan sponsors should seriously consider.

Your committee charter is the road map for fiduciary oversight of the plan. They document the delegation of responsibilities to co-fiduciaries from the plan’s named fiduciary (oftentimes the organization itself, as represented by the board of directors, owner, or other controlling individual or entity). In turn, it is a best practice to have these fiduciaries acknowledge in writing that they formally accept the responsibilities delegated to them. This documentation helps to properly bracket which individuals are responsible for which fiduciary responsibilities and the timeframe for which they are responsible.

An investment committee charter should reference the design, adoption, and regular review of a plan’s investment policy statement, which sets forth processes and guidelines for how plan fiduciaries will select and monitor investments.

A retirement “steering committee” charter would delineate the administrative responsibilities required of the plan administrator in overseeing the plan. If the plan does not have a separate investment committee, the steering committee should also include investment responsibilities. A retirement steering committee charter will typically encompasses additional responsibilities for the plan oversight of testing, oversight of service providers, and determination of reasonableness of fees.

The Retirement Learning Center says the charter should cover the following points:

  • What authority does the committee have?
  • What is the committee’s purpose?
  • How is the committee structured?
  • Who may serve on the committee?
  • How are committee members replaced?
  • How will the committee delegate authority?
  • How will the committee assign responsibilities and duties?
  • How frequently will the committee meet?
  • What procedures will the committee follow?
  • What are the standing agenda items and how are new topics introduced?
  • What is the process for selecting and managing plan service providers?
  • What reporting will the committee do and to whom?
  • What are the procedures for protecting committee members financially?

Charters are very helpful for ensuring that all committee members understand their responsibilities and that nothing slips through the cracks.

Our RPAG prototype Committee Charter is designed to be flexible, comprehensive, and easy to use.

RETIREES' RETIREMENT ASSET WITHDRAWL RATE: WILL YOUR MONEY LAST?

For many years the investment advisory community has proposed that if retirees withdrew their retirement assets at the rate of 4% annually there is a high probability that assets would last to normal life expectancy.

The 4% “rule” is not a one-size-fits-all solution, and there are several variables to consider, but it could at least provide a starting point to be adjusted based on individual circumstance.

This starting point is based on actuarial tables and thousands of return based scenarios. The rule determined that a 65-year-old retiree withdrawing at the rate of 4% annually (inflation adjusted) had a high likelihood of not outliving their retirement assets based on current life expectancy, assuming no portfolio changes.

However, in previous generations retirees could live off bond portfolios that yielded 4% to 5%. Currently, 10-year bond yields are closer to 1.5%, producing potential negative returns after inflation. As we begin 2022, we see annual inflation is close to 7% annually for 2021. As a result, it becomes appropriate to review these basic assumptions.

Based on Morningstar’s research, the projected starting safe withdrawal rate for the next 30 years is 2.7% for assets in a cash account. The highest safe withdrawal rate is 3.3% for portfolios with 40% to 60% in stocks. But even so, if you retire soon, this fixed withdrawal rate is not certain as there is much uncertainty about inflation and potential market volatility.

Any current projection should assume potential variability in income from year to year. One approach worthy of consideration and that can lead to a higher rate gives retirees an opportunity to increase the subsequent year’s withdrawal when the portfolio has done better than projected and to reduce withdrawals when underperforming.

Certainly, this is a difficult time to project long range withdrawal rates and the current bond market is not as reliable as in the past, but the S&P 500 in 2021 did end up 26.9%, which virtually no one projected.

Bottom line…don’t simply assume the “old law” of 4% withdrawal rates going forward. Assess your retirement income needs and adjust as appropriate going forward. Consider current portfolio alterations, acknowledge fixed vs. discretionary expenses, and be flexible but diligent in your retirement planning. You may want to seek professional advice if you are close to retirement. An error in planning, at this stage, can be more costly than this potentially transitory inflation and bond yield environment.

If you are not near retirement…. save more so you can withstand future unexpected financial events and have a wonderful retirement experience.

PARTICIPANT CORNER: PLANNING FINANCIAL FUTURES

Do you spend more time planning your annual vacation than you do thinking about your personal finances? If so, you’re not alone. A lot of people put off financial planning or avoid it altogether.

Personal financial planning is an ongoing, lifelong process. If we break it down into small, achievable tasks, it’s a lot less daunting and can pay huge dividends to you and your family.

Resolve to make yourself financially fit in 2022:

The following personal finance calendar may help you get started.

JANUARY

JULY

  • Manage your debt. Start by paying off all high-cost and consider establishing an emergency fund.
  • Create a cash flow statement of prior year income minus expenses. Calculate personal net worth.
  • Consider if your portfolio’s original target asset allocation needs rebalancing.
  • Take full advantage of any available employer match.
  • Consider reading one book on personal finance or investing.

FEBRUARY

AUGUST

  • Review your insurance policies to be sure they are reflecting current needs
  • Compute if your vacation spending is as you projected.

MARCH

SEPTEMBER

  • Consider using any bonus or similar windfall to pay down debt and/or build an emergency fund.
  • Check your credit report as improvements may allow lower loan costs.
  • Consider establishing a Christmas/Holiday spending budget.

APRIL

OCTOBER

  • File your income tax return by April 15 (unless extensions are available).
  • April 15 is the last day to make an IRA or Education Savings Account for the prior year.
  • Consider beginning year-end tax planning.
  • Consider upcoming open enrollment season and any changes with your health insurance coverage and other employer benefits.

MAY

NOVEMBER

  • Create an inventory of your home and personal property for insurance or estate planning. Record a phone video of your valuable possessions and store the video in a secure, remote location.
  • Review your estate plan.
  • Keep your holiday budget in mind. Plan for any charitable giving and tax-deductible gifts.

JUNE

DECEMBER

  • Consider a mid-year review of your finances to confirm you are on track year-to-date income and expenses.
  • Consider rebalancing your portfolio allocations and contributions for the New Year.
  • Employers who are looking to help their employees in the new year might consider reminding employees of the benefits and resources that are available to them at the workplace, whether that may be an employee assistance program, an Employee Wellness Program, or maximizing their benefits to achieve enhanced results in the New Year.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

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Toll-Free: 866.577.0780Privacy Policy | All Content © Lutz & Company, PC 2021

April Retirement Plan Newsletter 2022

February Retirement Plan Newsletter 2022

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: FEBRUARY 11, 2022

FEBRUARY RETIREMENT PLAN NEWSLETTER

ERISA 3(38) FIDUCIARY SERVICES

Most companies and organizations’ human resources departments and C-suites are seeking efficiencies and risk mitigation for their entities. For those, and a myriad of other, reasons 3(38) fiduciary discretionary investment management services are getting a closer look by plan sponsors.

In exploring these 3(38) services it is important to understand that when you hear “3(38)” or “3(21)” it is understood that these are sections of ERISA that provide definitions for certain types of fiduciaries. As a result, it is important to understand there are significant differences between an ERISA 3(21) and 3(38) advisor in terms of investment services provided to the plan.

Simply stated, the ERISA 3(21) advisor makes investment recommendations to the plan fiduciaries (committee), but the decision to implement the recommendations and attendant legal responsibility still fall on the plan fiduciaries (oftentimes an authorized committee). “You can’t blindly follow the recommendations of the 3(21) advisor. You have to make an independent decision, and though that’s usually what the advisor recommends, you’re not excused from making an informed decision just because the advisor recommended it,” says Carol Buckmann, Esq.1

Buckmann cautions, “You don’t get told about the tremendous level of risk that you take on as the plan fiduciary when you start a 401(k)” …. Carol’s insight revealed “…a litigation landscape littered with the lawsuits of plan sponsors who didn’t do their due diligence.” … (in a 3(21) environment)1

The ERISA 3(38) advisor encompasses the 3(21) responsibilities plus makes the actual investment selections and decisions based on plan needs and goals as conveyed to him by plan fiduciaries, so the 3(38) advisor is responsible for its own mistakes or mismanagement including reasonableness of performance and expenses. The plan fiduciaries are responsible for prudently selecting a good 3(38) and monitoring performance. But in terms of financial liability, if an ERISA 3(38) advisor is prudently appointed and monitored by the authorized fiduciary, the plan sponsor should not be liable under ERISA for the acts or omissions of the investment manager and will not be required to invest or otherwise manage any asset of the plan which is subject to the authority of the investment manager.2

A 3(38) Fiduciary may be a better choice for you if you want to maximize fiduciary liability protection for selection and monitoring plan investments, and/or have no internal plan fiduciary with the requisite expertise & credentialing to assume investment decisions and liabilities. Note that even a 3(38) cannot completely remove plan fiduciaries from all investment liability, as they retain the responsibility of monitoring the 3(38) advisor with regards to their suitability for the plan. However, the outsourcing of investment-related fiduciary responsibilities should also lessen the amount of time and attention that plan sponsors need spend administering their plan.

A 3(21) Fiduciary may be a better choice if you have the time, interest and investment expertise needed to monitor investment performance regularly, evaluate the 3(21)’s recommendations, and evidence that your investment decisions are in best interest of your plan participants while assuming the liability for determining reasonableness of investment costs and performance. The 3(21) advisor’s job is to identify investments that are appropriate for the purposes of the plan and make appropriate recommendations to the plan’s fiduciaries. The plan’s investment committee is responsible for determining suitability for their plan from cost/benefit, risk/reward perspectives as well as appropriateness for your participants and plan goals.

Newly available pooled employer plans (you may have heard them referred to as PEPs) often incorporate a 3(38) investment advisor and other elements/entities meant to help plan sponsors offload even greater fiduciary responsibilities, potentially lower costs and streamline administration. If you are interested in learning more, ask your NFP/RPAG advisor about either 3(38) services or PEPs as an alternative.

 

1. Carol Buckmann is a founding partner at Cohen & Buckmann PC, a boutique law firm practicing exclusively in the areas of employee benefits, executive compensation and investment adviser law. https://www.forusall.com/401k-blog/3-21-fiduciary-vs-3-38/

2. ERISA Section 405(d)(1) https://advisor.morganstanley.com/the-trc-group/documents/field/t/tr/trc-group/Understanding_3_21_v_3_38_Fiduciary.pdf

WHAT IS AN APPROPRIATE INTEREST RATE FOR PLAN LOANS

Both, ERISA and the IRS requires that DC plan loans reflect a “reasonable rate of interest”.

DOL Reg Section 2550.408b-1 states that “a loan will be considered to bear a reasonable rate of interest if such loan provides the plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances.” A pre-existing DOL Advisory Opinion, 81-12A, suggests that plan sponsors should align their plan interest rate with the interest rate banks utilize.

The IRS has a similar requirement where they informally state that the Prime Rate plus 2% would be considered to be a reasonable rate. Some plans use the Prime Rate plus 1%, or a rate based on the Moody’s Corporate Bond Yield Average.

Plan sponsors should document justification for the plan loan interest rate selected.

THANKS FOR THE MEMORIES: GRATITUDE AND FINANCIAL WELLNESS

So much about financial wellness has to do with cultivating a mindset that favors delayed versus immediate gratification. In the language of behavioral economics, the tendency to prefer short-term rewards is called hyperbolic discounting. This often leads to more impulsive decision-making, and it can feed excessive personal debt and hamper retirement readiness over time, whereas those (typically in the minority) who will wait for a larger reward are frequently described as “present-based.”

So how do you help your employees resist the “urge to splurge” and prioritize saving for retirement instead? It certainly seems like a tall order, given that it runs counter to tenets of fundamental human psychology. But what if the answer could be as simple as a little well-timed gratitude?

Interestingly, research out of the University of California, Riverside, Harvard Kennedy School and Northeastern University suggests that may just be the case. In a revealing experiment, subjects were offered either $54 immediately or $80 in a month. The participants were randomly divided into two groups and asked to write about an event from their past that elicited either happy, neutral or grateful feelings. Depending on what they wrote about, the researchers found that the subjects made quite different money decisions.

Those directed to write about a “grateful” memory were more likely to wait for the larger, delayed payout. Interestingly, subjects in the happy memory group were just as impatient as the neutral memory group. These findings are striking, especially given that that the recalled memory didn’t have to be spending- or even money-related.

But how do these findings relate to financial decision making in the real world?

 

The Price of Impatience

While in this study the “cost” of impatience was limited to $26, employees that struggle with delaying gratification and prioritizing saving for the future will no doubt pay a much higher price. They may need to remain in the workforce longer. They’ll also likely experience higher levels of stress, especially as they approach the date they hoped to retire by. They may also accrue excessive debt, which may adversely impact their standard of living — especially during their golden years.

 

How Employers Can Help

According to Forbes, building a culture of gratitude in the workplace has a tremendous upside — for both workers and employers. Employees tend to find working in a more grateful environment a more positive and rewarding experience. And being appreciated by people other than one’s supervisor can provide a boost in morale. Teamwork is encouraged even as it exists alongside healthy competition. And while all of these organizational benefits take hold, it turns out that you may also be helping workers with their long-term financial decision making.

Companies are creating ecosystems of gratitude in a variety of ways. Some have instituted “Thankful Thursdays,” where employees have the chance to publicly show appreciation for coworkers who’ve gone above and beyond with an award or small prize, followed by snacks for all as a tangible show of thanks on behalf of the company.

Fostering a culture of gratitude is like financial wellness programming “with benefits” — ones that can enhance your entire organization.

 

Sources

https://cos.northeastern.edu/news/can-gratitude-reduce-costly-impatience/

https://www.forbes.com/sites/adriangostick/2021/07/22/thank-you-thursdays-even-once-a-week-gratitude-can-help-build-a-culture/?sh=332bf50127b3

PARTICIPANT CORNER: KEY DATES AS YOU APPROACH RETIREMENT

At what age can retirement plan distributions begin? When can a person begin to receive Social Security? As you get closer to your retirement date you may start to wonder about your eligibility for certain withdrawals and programs you are entitled to. Refer to this timeline to remember important dates as you get closer to retirement.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

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PUBLISHED: JANUARY 14, 2022

JANUARY RETIREMENT PLAN NEWSLETTER

WHEN DOES A PARTICIPANT LOAN BECOME A DEEMED DISTRIBUTION?

A recent IRS Issue Snapshot (link below) affirms that a participant loan is a legally enforceable agreement and terms of the loan agreement must comply with Internal Revenue Code (IRC Section 72(p)(2) and Treasury Regulation Section 1.72(p)-1). The terms of the loan agreement must be explicit in writing or deliverable electronically.

A loan in default is considered to be a deemed distribution. But plans may offer a cure period during the quarter following the quarter in which the missed loan repayment occurred.

A deemed distribution can occur at the date the loan is made if:

  • participant loans exceed the maximum dollar amount of $50,000
  • payment schedules do not comport with time or payment amortization requirements, or
  • the loan agreement is either not legally enforceable or does not exist.

If any of the above requirements are not met, the loan would be determined to be in default and will be considered a deemed distribution. A deemed distribution is accompanied by immediate tax consequences to the participant. The complete IRS Issue Snapshot is at www.irs.gov/retirement-plans/deemed-distributions-participant-loans.

FINANCIAL WELLNESS NEEDS A LONG AND SHORT GAME TO WORK FOR BOTH PARTICIPANTS AND ORGANIZATIONS

In the retirement plan industry, all too often we tend to conflate financial wellness with retirement readiness — whether that means confidence in obtaining retirement goals or being on track to reach post-employment financial targets. However, that limited view may fail to paint a complete picture for many participants.

For example, the New York Life Wealth Watch survey, released in July, highlights generational differences with respect to near- and long-term financial concerns and points to areas of disconnect among respondents’ financial self-assessments. Millennials (45%) report more confidence than both Gen X (35%) and Gen Z (33%) that their retirement savings will last the rest of their lives and express greater confidence than Gen Xers in their ability to retire when they want.

At the same time, Millennials indicate lower levels of confidence in their post-pandemic finances, with nearly one-third predicting that resuming pre-pandemic spending would have a negative impact on their household budget. Additionally, only 41% report feeling confident about their ability to make a down payment on a home. While emerging COVID-19 variants call into question the timing of “post-pandemic” assessments in general, these findings highlight the need for broad-based financial wellness assessments and programming nonetheless.

Near-term financial concerns are likely contributors to employee stress and can weigh on productivity. In fact, 42% of full-time employees find it difficult to meet monthly household expenses, according to PwC’s 2021 Employee Financial Wellness Survey. Student loans, housing expenses, food costs, and health insurance rates contribute to employee insecurity, and more employees have considered filing for bankruptcy protection than ever before in the survey’s decade-long history. If organizations fail to address worker financial wellness, PwC says, the additional psychological stress will likely continue to impact productivity and employee well-being.

Ideally, financial wellness should comprise a comprehensive and wholistic approach that’s easy for companies to implement, provides targeted interventions — and taps both long- and short-term financial concerns. Moreover, your financial wellness program should offer proactive employee engagement with online education, group content and individual sessions. This is critical because it can be difficult for participants to focus on achieving long-term financial objectives when they have more immediate unmet needs and concerns such as being unprepared for financial emergencies or managing crippling levels of personal debt.

With pandemic uncertainties lingering a year and a half into the global crisis, financial wellness has become more important than ever. Retirement-focused education and programming is necessary, but not sufficient to meet all participants’ and employers’ needs in an increasingly complex world. Be sure your financial wellness program can help your employees and organization plan and prepare for today and tomorrow.

 

Sources

https://www.newyorklife.com/newsroom/2021/wealth-watch-covid-financial-confidence 

https://www.pwc.com/us/en/services/consulting/workforce-of-the-future/library/employee-financial-wellness-survey.html

THE AUDITORS ARE COMING - ARE YOU READY?

No one wants to be caught flat-footed when the auditors come calling. And with a new standard issued by the American Institute of Certified Public Accountants (AICPA), both the auditors and plan sponsors will be subject to new responsibilities.

The AICPA’s Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, raises the bar on benefit plan audits. Issued in 2019, the standard was originally scheduled to go into effect in 2020 but was delayed due to the pandemic. It is now effective for audits of ERISA plan financial statements for periods ending on or after Dec. 15, 2021.

SAS 136 impacts all ERISA plan audit phases and makes significant changes to the content of audit reports in an effort to promote greater transparency. But in addition to the impact on accounting professionals who conduct the audit, the new standard introduces new requirements for plan sponsors. For example, when receiving a “limited scope audit” — a term the new standard replaces with “ERISA Section 103(a)(3)(C) audit” — auditors will no longer issue a disclaimer of opinion and will instead provide an audit report. But before the auditor can accept the audit, the plan sponsor must indicate in writing that he or she permits the engagement and that it will meet ERISA requirements.

Plan sponsors are also now required to acknowledge responsibility for administering the plan in the audit engagement letter. What’s more, at the end of the audit, they need to acknowledge additional responsibilities such as maintaining a copy of the plan document, ensuring transactions conform to the plan’s provisions, and maintaining sufficient participant records to determine benefits due to them.

Further changes in the standard come from new provisions regarding completion of Form 5500. Before the audit engagement, plan sponsors will need to provide the auditor with a substantially completed copy of the form, as well as its schedules. The auditor will then compare the form against the financial statements to determine if there are any material discrepancies and indicate whether either the form or the statements require any corrections.

Compliance with SAS 136 will result in a much more thorough audit, and a more revealing report on the organization’s compliance with ERISA requirements. With that in mind, plan sponsors should note the potential for additional exposure to legal risk. According to ERISA expert Timothy Verrall in a recent PlanSponsor.com article, the audit report, which may disclose noncompliance issues, is attached to Form 5500 and then becomes publicly available.

“Anyone can look at it,” Verrall says in the article. “One way lawsuits get started is people doing searches on Form 5500 data filings. This could potentially provide a new source of ammunition to plaintiffs’ lawyers.”

“That said, from a pragmatic perspective most issues reported in annual auditors reports are of a limited, and even individual, nature,” says Joel Shapiro, SVP ERISA of NFP “and they are often immediately remedied, thereby leaving little real ‘meat on the bone” for class action plaintiffs attorneys as the result.”

With so much change being introduced, sponsors will want to ensure they’re adequately prepared to meet the new requirements and thoroughly understand their responsibilities. That way, when the auditors come knocking, you won’t be caught unawares. To see the full AICPA revision, download SAS 136 from the institute’s website (PDF).

 

Sources

https://www.plansponsor.com/in-depth/new-financial-audit-rule-increases-requirements-plan-sponsors/

https://www.eisneramper.com/employee-benefit-plan-audit-standards-sas-136-0621/

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/new-audit-standard-affects-employee-benefits-plan-sponsors.aspx

https://us.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/sas-136.pdf

PARTICIPANT CORNER: TEN THINGS TO KNOW ABOUT YOUR EMPLOYER'S RETIREMENT PLAN

1. What it is?

Your employer’s retirement plan is a defined contribution plan designed to help you finance your retirement. Federal and sometimes state taxes on your contributions and investment earnings are deferred until you receive a distribution from the plan (typically at retirement).

2. Why do they call it a 401(k)?

The 401(k) plan was born over 40 years ago, under Section 401(k) of the Internal Revenue Code, hence, 401(k).

3. You decide

You decide how much to contribute and how to allocate your investments. This gives you the advantages of easy diversification – a well balanced mix of investment choices, and dollar-cost averaging by making regular investments over time.

4. It’s easy

You contribute your pre-tax dollars and lower your taxable income by making automatic payroll deductions. It’s a simple method of disciplined saving!

5. Know your limits

In 2022 you can save up to $20,500 of your pre-tax dollars. If you are age 50 or older, you can save an additional $6,500.

6. Incentives

It’s tax-deferred to contribute to your retirement plan! Also, many employers will match some of your contributions. This is FREE money and a great incentive to contribute to your plan. Does your company offer early retirement incentives (ERI)? Check with your Human Resources department!

7. Vesting

Should your employer make a matching contribution; vesting refers to the percent of your employer contributions that you have the right to take with you when you leave the company.

8. Borrowing

Some plans allow you to borrow a percentage of your account value. Keep in mind that you have to make regular payments plus interest on the loan.

9. Early withdrawals

You may be able to take a distribution before you retire, for instance for certain emergencies (hardships). Understand that it may have a 10% early penalty in terms of Federal and/or state income taxes. While this may be good for emergency situations, your retirement plan is a retirement savings fund, not meant to be a rainy-day fund!

10. Leaving the company

When you leave your job, you can roll over your retirement plan savings to either an individual retirement account or a new employer’s retirement plan. This way, you stay on track for your retirement savings goals, without having to start over each time you change jobs.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

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PUBLISHED: DECEMBER 13, 2021

DECEMBER RETIREMENT PLAN NEWSLETTER

HAPPY HOLIDAYS

2021 has been a challenging year for many of us but as we reflect on it, we realize how important you have been to our company. We want to thank you for the opportunity to serve you. We are grateful not only for your continued partnership, but for your friendship as well. Our success is incomplete without your contribution. As a loyal client you motivate us to excel and grow. It is our fervent intent to make your experience a satisfying and enriching one in 2022 and beyond. We wish you all the best for your goals, plans, and resolutions as we enter the New Year.

 

Happy holidays to you and your loved ones.

CYBERSECURITY BEST PRACTICES FOR PLAN SPONSORS

Participant data and financial accounts comprise some of the most sensitive and potentially vulnerable information under a company’s care. These highly valuable assets can be an attractive target for cybercriminals and therefore present considerable security risk. Breaches to this information can be devastating to plan participants and to the reputation of the organization.

For plan sponsors, ensuring protections around participant data and investment assets is a key fiduciary responsibility. In fact, as law firm Hodgson Russ noted recently, “The causation standard under Section 409(a) of ERISA is an issue that could lead to more litigation as cyberattacks on employee benefit plans increase.” The provision states that plan fiduciaries who breach their fiduciary responsibilities are personally liable for any losses that result from the breach. The law firm continues: “Outside of the ERISA context, however, courts have looked at similar questions … [and] found that proximate cause was sufficiently alleged when a complaint contended that the defendant’s failure to establish industry-standard information security safeguards was the proximate cause of the stolen personal information.”

Sponsors should consider their potential exposure under Section 409(a), in the event of a failure to adhere to a prudent process for mitigating risk (upholding the higher prudent man standard). Earlier this year, the U.S. Department of Labor (DOL) issued guidance aimed at plan sponsors, plan fiduciaries, recordkeepers and plan participants, offering best practices for maintaining cybersecurity. The guidance is structured along three main areas of focus: service provider selection, establishment of a cybersecurity program and participant protection.

 

Hiring a Provider

Per the DOL, plan sponsors should perform a series of due diligence checks prior to engaging a provider. The department’s advice includes inquiring about the provider’s information security standards, practices and policies, and audit results, as well as comparing them to the industry standards adopted by other financial institutions. The DOL also recommends examining the provider’s track record in the industry — including a public records search of information security incidents and litigation related to its services — and asking about the level of security it has met and implemented, how it has responded to past security breaches and whether it carries insurance that would cover losses due to a cybersecurity incident.

 

Implementing a Cybersecurity Program

For establishing and maintaining an effective program, the DOL points to best practices prepared by the Employee Benefits Security Administration (EBSA). The agency’s advice includes having strong access control procedures as well as an effective business resiliency program addressing business continuity, disaster recovery and incident response. It also recommends conducting periodical cybersecurity awareness training and an annual third-party assessment of security controls.

 

Participant Cyber-safety

Because participants and beneficiaries can fall directly within cybercriminals’ attack vector, DOL’s guidance also offers tips aimed at helping retirement account holders reduce the risk of fraud and loss. For example, the DOL advises that participants routinely monitor their online account, create strong passwords and use multi-factor authentication. Other recommended precautions include signing up for account activity notifications and exercising caution with regard to use of free, publicly available Wi-Fi networks.

 

Defending Against Cyberthreats

Cybersecurity breaches have become increasingly prevalent in the modern world and have added another layer of complexity for plan sponsors. Given the current regulatory and legal climate, it’s more important than ever to stay abreast of changes in a dynamic

risk landscape — and partner with an advisor and service providers who can help mitigate the risks and keep plan participants’ data and assets safe from cyberthreats.

To view the full DOL guidance, visit the department’s website [https://www.dol.gov/agencies/ebsa/key-topics/retirement-benefits/cybersecurity]

 

Sources

https://www.jdsupra.com/legalnews/causation-under-erisa-in-a-4086713/

https://www.dol.gov/agencies/ebsa/key-topics/retirement-benefits/cybersecurity

WHEN IT COMES TO PLANNING FOR RETIREMENT, PARTICIPANTS WANT TO HIT THE EASY BUTTON

According to J.P. Morgan’s 2021 Defined Contribution Plan Participant Survey findings, more than half of the 1,281 respondents indicate that they:

  • Are presented with more plan information than they can absorb.
  • Don’t read investment information provided to them.
  • Are willing to spend time planning for retirement but just don’t know where to start.

Nearly three-fourths of participants under 30 think employers should provide access to financial professionals and coaching to help them. Even more telling, 62% wish they could push an “easy button” and completely turn over retirement planning to someone else. This figure is up from 55% in 2016.

What’s fueling these worrisome trends? Perhaps the added complexity of living during a global pandemic has left workers less time and energy to focus on managing retirement planning. Moreover, 24/7 financial reporting on every market twist and turn may make navigating financial landscapes even more daunting. With seemingly endless media coverage of bitcoin surges and day trader-generated run-ups on stocks like GameStop — more may have come to believe that investment decisions are simply best left to professionals.

Financial wellness is arguably a “must-have” benefit for plan sponsors and participants alike. And WellCents™ (a financial wellness solution designed to educate and assist individuals with a myriad of financial issues and goals including but not limited to retirement savings, debt solutions, emergency funds, etc.) provides multiple access points for investing information and guidance. But sponsors can give employees an additional tool for the assistance they’re looking for — target date funds (TDFs), which can alleviate workers from many burdens of investment-making decisions.

Nonetheless, easing that burden can come at the expense of a certain degree of customizability. After all, just because two employees have the same planned retirement date, it does not guarantee they’ll have similar risk tolerance.

A solution to this problem is adding a TDF with a multiple glidepath construction to your investment menu: one that offers aggressive, moderate and conservative options. This allows participants to enjoy the simplification of retirement plan decision-making while maintaining more control over their level of investment risk — all within a single TDF.

A TDF with multiple glidepaths solves the “once-size-fits-all” limitations of traditional TDFs. Participants simply select the closest year in which they expect to retire and then choose the glidepath that most closely aligns with their personal risk tolerance — as well as the amount of risk needed to accomplish their retirement goals.

RETIREMENT INCOME PARTICIPANT INTEREST SURVEYS: A CONTRARIAN VIEW

Retirement income products can serve an important purpose as a participant investment option for retirement plans. Surveys gauging participant interest in these options may be open to interpretation, especially when the survey is conducted by a retirement income vendor.

A survey conducted by the well-known and respected JP Morgan gauged participant interest for a retirement income product that could be meaningful to many retirement plan participants. Retirement income vendors have increased marketing efforts for their retirement income product bolstered in part by employee surveys affirming interest. It is prudent for plan sponsors to look critically at survey conclusions when evaluating potential benefits of any new product for your retirement plan participants.

The JP Morgan survey conclusions are similar to those of others.1

  1. “There is notable variability in participants’ expected retirement age and style. The mean age when respondents expect to retire is 64.7, with 51% planning a gradual move into full retirement.”

“Notable variability” in participant expected retirement ages is not surprising. Many plans have average employee age well under 40. Younger employees may often hope to retire early without careful evaluation of financial planning targets. Some may have done considerable research while others may just be hoping or guessing. Plan sponsors may not find this particularly helpful. The mean expected retirement age of 64.7 is not surprising and not specifically supportive of annuitization.

  1. “Most are concerned about outliving their money and unsure about how much they need to save for retirement. Nearly 7 out of 10 respondents are concerned about outliving their money in retirement.”

Again, this conclusion is expected and understandable as 7 out of 10 (at least) should be concerned about outliving their retirement. Also, there is little difference between uncertainty of how much they need to save for retirement in lump sum or lifetime income as an annuity can always be purchased at point of retirement, if they so choose. “Dollar cost averaging” into annuities (rather than a single sum purchase) however may be beneficial as annuity rates change over time as does life expectancy.

  1. “Many would welcome a post-retirement income option in their plan. A large majority of respondents (85%) say that they would likely leave their balances in their plans post retirement if there was an option to help generate monthly retirement income.”

Again, no surprise here. Most participants would probably agree that a lifelong retirement income would be a good thing. Even assuming a relatively significant $1 million account balance, the typical retirement income fund would only generate $23,800 in annual income. (https://www.morningstar.com/articles/958275/what-are-retirement-income-funds-do-you-need-one)

At first glance the above survey conclusions may reflect an implied interest by participants for a retirement income option, however evidence of impending substantial deferral commitments is uncertain.

The question becomes how many participants would actually select to defer into a retirement income option, and at what percentage of their total deferral amount? Considering the proliferation of articles on plan interest in adopting retirement income options the actual adoption rate is not as high as expected, and little is available substantiating the significant utilization of these options by participants.

This does not mean that these options may not thrive in the future. On the contrary, they may certainly be appropriate for retirement plans. Consider the similarity with auto-enrollment, when first offered, was met with less than tepid acceptance and now it is ubiquitous among retirement plans. And for very good reason.

 

Sources

1. Additional JP Morgan survey information can be found at https://am.jpmorgan.com/us/en/asset-management/adv/insights/retirement-insights/defined-contribution/plan-participant-survey/post-retirement-plans

 

PARTICIPANT CORNER: TIME FOR A FINANCIAL CHECKUP

With the season changing and life ever pulling us forward, you may want to take into account life changes that may affect your financial goals.

Account for Changes in Your Personal Life

Have there been any changes this past year with your family, personal, or financial life? If life changes have occurred, you may want to conduct the following:

  • A beneficiary designation review (qualified plans, IRAs, life insurance, etc.)
  • Reviewing the titling of assets (bank accounts, brokerage accounts, property, etc.)
  • Update estate planning documents (wills, trusts, power of attorney, guardianship, etc.)
  • Update insurance coverage (life, health, long-term care, disability, etc.)

 

Updating Your Goals

Review the following list to see what adjustments may need to be made:

  • Have your long-term savings goals changed (e.g., target retirement income, target retirement date)?
  • Have your intermediate-term savings goals changed (e.g., vacation home, college savings, etc.)?
  • Has your ability to save changed (e.g., change in income or expenses)?
  • Have you set any new financial goals?

 

Prepare for the Unexpected

It’s highly recommended to have an emergency fund that can cover your expenses for at least three to six months. These assets can be cash, a savings account, a money market fund, or other assets that can be accessed quickly.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

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